BT announced a commitment to begin a £1.5bn programme, to provide fibre-based broadband services for up to ten million UK homes by 2012. The plan is subject to BT being assured that the regulatory regime for the new services will be satisfactory and predictable. The company also announced an end to its current share-buyback programme, reportedly to provide the financial flexibility for projects such as the fibre rollout.

In its announcement on the plan, BT said it could offer broadband speeds of up to 100Mbps, and alluded to future developments that could see that top speed multiplied ten-times.

Broadband has boosted the UK economy and is now an essential part of our customers’ lives. We now want to make a step-change in broadband provision, which will offer faster speeds than ever before. This marks the beginning of a new chapter in Britain’s broadband story. ”

This is a bold step by BT and we need others to be just as bold. We are keen to partner with people who share our vision for the next phase of the broadband revolution. We want to work with local and regional bodies to decide where and when we should focus the deployment. Our aim is that urban and rural areas alike will benefit from our investment. ”
— Ian Livingston, BT Group Chief Executive.

BT called for the regulator Ofcom to provide support, and to remove what BT considers to be barriers to investment, and also to confirm that it can achieve a fair rate of return on its investment.

BT stressed that it would make the new fibre-based services available on a wholesale basis, but also called for all next-generation networks to be open to other companies — suggesting that it would want Virgin Media’s cable network to also be available to other service providers, presumably including BT. This already looks likely to be a regulatory sticking point.

The cost of the new services

The £1.5bn figure cited by BT would feature £1bn of incremental expenditure on top of existing expected levels of spending on fibre deployment at BT. In the coming two years, around £100m of this additional spend will be added to total capital expenditure, with the remaining £800m spread over the subsequent three years.

BT is stopping its share-buyback programme to give it the flexibility to spend the proposed sums. The programme, which was expected to see the company spend £2.5bn on buying its shares, will be stopped at the end of July 2008, and is likely to be £700m short of its intended target. BT said the new investment would not affect dividend plans.

BTwatch notes that the £1.5bn figure seems remarkably low, compared to previously reported BT estimates for the delivery of fibre. In late-2007, BT had been linked to a figure of £7bn for fibre-to-the-cabinet (FTTC), and potentially twice that for taking fibre-to-the-doorstep (BTwatch, 2007.10). This would appear to suggest that either BT was using exaggeratedly high figures to build its case against the need for fibre, or it could be expecting government money to meet the shortfall. Another possibility is that this investment is a stop-gap designed to maintain BT’s competitiveness at a time when the economy is uncertain and the company’s finances are already looking strained — as such, the move essentially just shores-up capital investment and cash resources for the next two years, with the real cost far enough away for BT to change its plans should it deem the regulatory or economic environment unfavourable.

BT converted to the need for speed…

While BT has in the past questioned the need for broadband speeds above those that could be offered by ADSL2+ over copper (realistically in the low double-digit Mbps range), it is now highlighting the benefits of substantially higher speeds delivering multiple streams of high-definition television over broadband, with potential for online gaming, and the prospects of uploading video and participating in video-conferencing as the kind of services that will require the investment. This belated revelation is perhaps stimulated by a combination of threats and opportunities from: Virgin Media’s currently more capable fibre network; the advent of mobile broadband strengthening the case for fixed-mobile substitution; the potential for bandwidth-hungry Internet Protocol television (IPTV); and the need to maximise return from 21CN core network investment.

It should be noted, however, that BT’s predictions of up to 100Mbps will only be available in areas where it deploys fibre-to-the-home (FTTH), while speeds will top out at (an admittedly still high) 40Mbps in areas served by FTTC, which is likely to be the predominant form of fibre deployment introduced under the current plans. Of course, this investment might also only be stage-one in a more ambitious BT roadmap.

Onus put on the regulator, and government, to deliver

With the announcement of this commitment, BT has in the public eye moved pressure around the subject of deployment of fibre to build next-generation networks onto the regulator. Ofcom welcomed the proposals in a statement, and the regulator’s initial response was very positive.

Indeed, for Ofcom, the BT announcement was unlikely to have contained many surprises, with the rollout of FTTC already the subject of discussions between BT, the regulator, and the industry through an Office of the Telecommunications Adjudicator group looking at sub-loop unbundling. This would allow communications providers to work with Openreach to introduce services such as VDSL, which would enable up to 50Mbps broadband using fibre. BT was previously of the view that VDSL rollout, and presumably FTTC, would not be subject to regulation.

BT has also been in talks with the regulator and the government regarding fibre rollout, with Stephen Timms, Competitiveness Minister, supposedly committed to driving the development of next-generation networks (BTwatch, 2007.10). Furthermore, Ofcom has been working with the industry on a framework for next-generation network regulation; and, as early as last summer, Sir Christopher Bland in his last days as BT Chairman had intimated that the company could be persuaded as to the merits of FTTC (BTwatch, 2007.06).

With these points in mind, it is highly unlikely that discussions regarding BT’s rollout plan for the public sector are not already advanced.

Half the country to miss out?

BT talked of rollout to ten million households, indicating that more than half the country would not be in a position to benefit from these services.

In its press release, BT pointed to its roll out of ADSL2+ as providing next-generation services that could address most of the needs for customers who might not receive fibre. However, BT is just starting its ADSL2+ rollout, and it is unclear how this is to be co-ordinated with the fibre project. Without considered planning, it would be unsurprising if population density and broadband demand were to see both rollouts building a similar footprint.

BT has said it will aim to make fibre available in both rural and urban areas, but appeared to pass responsibility for less densely populated areas to local authorities and other government bodies, stating that “precise deployment will depend on the engagement of government, and regional and local authorities, but there is no reason why it should not be available in a variety of environments.” It is the view of BTwatch that if BT was expected to pay for the rollout in areas where the economic case for deployment is weak, reasons not to deploy would soon emerge.

Likelihood of widespread FTTH slim

BT stated that the split between investment in FTTH and FTTC will also depend on the interest shown by the government and other local authorities, which BTwatch translates as meaning that BT is only planning to invest in FTTH where it can find partners willing to pay for it.

New sites, such as the Olympic Village and the major new housing development in Ebbsfleet, will see a fibre-to-the-premises (FTTP) rollout, but it appears unlikely in areas where there is extensive existing copper network. However, Openreach has previously indicated that economic factors, such as the rising price of copper, could make FTTP a better-value alternative on new network rollouts (BTwatch, 2007.04).

Many questions yet to be answered

This announcement is clearly a first move in the possible rollout of fibre across the UK, but generates a number of questions.

The timescale for the rollout does not appear particularly rapid, and could be subject to delays — particularly bearing in mind that much of the work could become tied to public money, and its associated bureaucracy. Is it likely that more agile competitors, such as mobile operators leapfrogging the current broadband race to develop 4G or other mobile broadband technologies, could leave BT behind by 2012. This is the situation that BT finds itself in with its ADSL2+ rollout already, so it cannot be ruled out.

Similarly, how does 21CN fit into this plan? BT previously indicated that fibre spending would add significantly to 21CN costs. Will fibre investment complement or supersede 21CN with respect to the residential market?

A change of approach from BT?

This announcement appears to be the first major departure on Livingston’s watch from the official line followed by BT under former Chief Executive Ben Verwaayen.

Up to virtually his last appearance as Chief Executive, Verwaayen was testy and dismissive in the face of questions about the prospect of BT rolling out fibre further, insisting it would not happen unless there was a viable business case, or it would in some way be publicly funded.

Perhaps relevant is Verwaayen’s multinational background (Alcatel-Lucent, KPN, Unisource, and ITT), and his apparent partiality for grand visions that seemed latterly to have become increasingly attached to BT Global Services; while Livingston has a history of retail (DSG, Freeseve, and more recently BT Retail) and finance (CFO roles, and 3i), potentially making him both better attuned to the mass market and a pragmatist (a promising combination, in BTwatch’s opinion), and also possibly giving him greater interest in both the huge sunk investment (BT Wholesale, Openreach, and 21CN) and retail portfolio (BT Retail) of the core UK business.

However, whether this apparent change of heart is more than cosmetic, and with grander goals than grabbing headlines, remains to be seen. Considering the level of proposed spending, and the potential qualifications to the commitment in terms of partnering and regulatory support, there is some way to go before scepticism can be entirely laid to rest.

Despite the uncertainty and some indications that this could be more of a public relations stunt than a genuine attempt to back fibre, BT could finally be starting to address the question of next-generation broadband. Should the plan to roll out high-speed services develop into a genuine programme, thus building momentum for an effective next-generation network — and a successor to BT’s last concerted and successful campaign at the beginning of the decade to roll out ADSL across the country (BTwatch, passim) — Livingston and the BT board will deserve credit for at last moving decisively, assuming this is not too little, too late.

[BT Group, 15 July 2008.]