BT warns Ofcom against disincentivising its investments in ultrafast broadband

Coverage of BT's latest quarterly financial results was dominated by an Italian accounting scandal that hit profits. The plan to offer ultrafast broadband to 12m users by 2020 - Ofcom willing - is more important, but still not enough.

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BT Openreach workers installing fibre as part of the government-backed Superfast North Yorkshire BDUK project.

Image: BT

BT's latest quarterly financial results were overshadowed by what's known as "the Italian accounting scandal," which made headlines across both general news and tech outlets. There was very little coverage of the important stuff, which is BT's ongoing mission to install fast broadband throughout the UK.

To settle "the Italian accounting scandal," BT paid £225 million ($295m) to Deutsche Telekom and Orange, who became BT shareholders following its £12.5bn cash-and-shares deal to buy the EE mobile phone company. The one-off payment resulted in a 42 per cent fall in quarterly profits to £418m ($549m) on sales of £5.83bn ($7.66bn).

However, far more money is involved with installing broadband, and the top item in BT's results release was Openreach's consultation with Ofcom "on building the investment case for a large-scale FTTP network."

In its earnings call with financial analysts, BT's CEO, Gavin Patterson, said that when installing superfast broadband, "we've estimated [a] cost of between £300 and £600 per premise past, for the first 10 million premises built." That's £3bn to £6bn ($4-$8bn).

BT's Openreach division has been installing FTTC (fibre to the cabinet), which requires VDSL2 modems on the customer premises. This service, sold as BT Infinity, started at "up to 40Mbps," but many customers - including me - have had a free speed increase to "up to 80Mbps". (I'm getting 74Mbps to 77Mbps.)

This year, Openreach has started to roll out G.fast, which extends the fibre connection closer to the home, and can generally deliver 160Mbps to 300Mbps. BT ran initial trials in September 2014 (BT researchers claim gigabit broadband speeds using G.fast over copper wires) and piloted the system with real customers last autumn.

Patterson said BT's ultrafast broadband now passed 550,000 premises, of which about 100,000 had bought the service. "Between now and 2020 we expect the G.fast roll-out to get to around 10 million," he said, with "another two million on top" on FTTP (fibre to the premises).

Openreach now offers FTTP at three speeds: 330Mbps, 500Mbps and 1Gbps. The 1Gbps service costs £80 per month (wholesale) after a £500 connection fee.

Pricing is a problem because BT's actions may be affected by Ofcom, the government's communications watchdog.

BT says it is concerned that Ofcom won't enable it to make a fair return on its investment in superfast broadband. "The prices that they are proposing for the future really we think will not be good for the market," Patterson said. "We won't be able to make our regulated cost of capital return and also [this] disincentivises investments in next-generation products like FTTP, which I know both the government and Ofcom are keen to encourage."

These infrastructure investments affect other ISPs, too. Most of them buy broadband from Openreach at wholesale prices and retail it to their own customers.

BT is also concerned about Ofcom reducing the wholesale prices it charges for GEA (Generic Ethernet Access). Lower wholesale prices reduce consumer broadband prices, which is good for customers. However, they could also widen the price gap between GEA and ultrafast services or, if prices are reduced to match, make ultrafast services less profitable.

In the words of BT's CFO Simon Lowth, "a point we've made consistently [to Ofcom] is that lowering the price of the GEA product will act as a deterrent to and disincentive to investments in fibre."

Last week, following a BT complaint, the Competition Appeals Tribunal rejected some of Ofcom's rules, which were intended to provide faster broadband speeds to businesses. As a result, BT's Openreach division will not have to launch a "dark fibre" product in October, and the ISPs who buy dark fibre will have to negotiate interim prices with BT.

How much this regulatory process benefits British broadband users is open to discussion. It would clearly be best for the UK if everyone had G.fast broadband or, preferably, full FTTP - fibre to the premises, rather than to a street cabinet. We've known this since the 1980s, but it never gets done.

Governments can often find vast amounts of money for vanity projects with minimal financial benefits. The current Conservative government, for example, is planning to spend £56bn on HS2 high speed rail (which may well rise to £100bn), from £18bn to £30bn on an unnecessary nuclear power plant at Hinkley Point, and £18bn on a third runway at Heathrow.

A rational government would stop using Ofcom to try to micromanage broadband and just install FTTP everywhere. If it really can't find the money, the cost could be covered by cancelling Hinkley Point.

As things stand, much of the UK is accessing the information superhighway via digital cart tracks. In a world where almost everyone depends on internet connectivity, this doesn't make financial sense.

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