BT: Caring corporate or vampire death squid?

MPs on Parliamentary select committees do enjoy starting a good meme.

Thanks to Bernard Jenkin MP, chair of the Public Administration Select Committee, it is commonplace to describe the group of large suppliers that dominate government IT spending as an oligopoly.

Margaret Hodge MP, chair of the Public Accounts Committee (PAC), has donated to us all Google, Amazon, Starbucks and others as “immoral” tax avoiders.

But the MPs on yesterday’s PAC hearing into rural broadband roll-out must have been quite jealous of Malcolm Corbett, CEO of the Independent Networks Co-operative Association (Inca), a representative body for small and community broadband providers.

Giving evidence to the committee, Corbett labelled BT as “a vampire death squid” – a quote widely picked up in the press subsequently.

So there we have it – henceforth, if you talk about BT, it is officially OK to call the telecoms giant a vampire death squid. How the MPs would have loved to coin that phrase.

BT, of course, denied the accusation, citing “unfounded allegations” (the lack of victims with blood spurting from holes in their necks, or covered in squid ink, perhaps), but the hearing and the recent National Audit Office (NAO) report on rural broadband funding has highlighted the depth of the divisions over BT and broadband in the UK.

The argument goes something like this:

On one side, BT says it has voluntarily put over £2.5bn into the roll-out of fibre-based broadband across the UK, targeting coverage of more than 80% of the nation’s homes and businesses. All along, it has said that with further public funding, it could extend that to 90% or even 95% of the country, to ensure that most rural communities can get access to the digital revolution.

The telecoms giant points to the UK having one of the most competitive markets for consumer broadband in the world, enabled by its backbone network, financial largesse and technical nous.

On the other side stands a range of small providers and community broadband groups, who see BT as a greedy, malevolent corporation, desperate to hang onto its monopoly at all costs, unwilling to make the investment necessary to replace its ageing copper infrastructure, and ignorant of rural needs until it detects the slightest hint of competition which it promptly snuffs out.

The arguments have come to a head over the £1.2bn in public money offered to local authorities through the BDUK quango and local authorities, to roll-out superfast broadband to the 20% of the country that BT and Virgin Media deem as uneconomic for fibre.

The complexity that overlays such arguments is that, in many cases, both sides are correct.

Critics have all along predicted that BT would win all of that public money, claiming the rules were set so far in its favour that no other operator could possibly compete. They have been proved absolutely right – despite a brief but fruitless play by Fujitsu to take on BT, it looks like all of that cash is going into BT’s coffers.

BT insists it has won every bid in a fair competition and can’t be blamed for the fact that, erm, nobody else decided to compete. “BT has stayed the course and invested significant sums in rural Britain,” claims the telco.

Like any publicly quoted company, BT is answerable to its shareholders first and not its customers – such is the reality of capitalist economies. There are not many companies that would commit £1bn-plus to long-term infrastructure development unless forced by regulators (look at the leaking pipes of the water companies for comparison) – shareholders would not accept the hit on short-term profit.

The critics will respond that BT’s infrastructure owes its existence to the public purse, funded as it was by taxpayers in the days BT was a state-owned monopoly. That infrastructure upon which BT depends, and upon which it makes the profits its shareholders expect, means BT has a moral duty to invest for the greater good of the UK economy.

Community broadband groups point to BT’s intransigence and “bullying tactics” in rural areas.

There are numerous – in BT’s eyes unproven and unfounded – allegations that after a community broadband provider spends time and effort to fibre up rural areas excluded from BT’s roll-out, BT suddenly decides to include them after all, so killing the community initiative before it has a chance to become a genuine local rival.

This is the source of Malcolm Corbett’s vampire death squid – along with allegations (equally unproven, says BT) of discouraging local councils from supporting such community schemes.

BT, in response, says that as its roll-out continues and it learns from customer uptake of superfast services, it is constantly re-assessing its financial models, which allows it to include rural areas previously thought out of reach.

BT gets accused of protecting its copper monopoly because it chooses mostly to roll fibre out only to street cabinets, and not direct to premises. The company replies that its copper network is a national asset, and the multi-billions required to upgrade fully to fibre is only economic for its shareholders with enormous public funding.

There are many more arguments about technical issues such as access to BT’s ducts and poles, its “dark fibre” network of unused, spare capacity, the application of business rates to fibre cables, and claims about de-prioritising areas where fibre broadband roll-out would jeopardise its lucrative leased line sales to businesses.

In nearly all of these areas, both sides can make argument and counter argument, neither side can accept the other’s view, and they make claim and counter-claim in blogs and online forums and communities across the country.

It’s a debate that for the vast majority of existing and potential BT broadband customers is arcane, endless, and beyond their understanding. But it does have important national and economic implications.

I’ve had some pretty heated discussions with people on both sides of the argument. And it seems to me that in the middle there are a few undisputed facts.

BT operates in a highly regulated environment, and many – but not all – of its failings can be attributed to a history of sometimes lax and compliant regulation from Ofcom and its predecessors. It is in BT’s interest to make Ofcom look like a tough and ruthless watchdog holding the giant telco to account – few others see the regulator in that way.

Successive governments have realised the need for broadband to enable the internet revolution to be spread as widely as possible, and short-term political priorities dictate that BT is the only provider with sufficient coverage to make that happen. Try explaining to voters that they have to wait for broadband because Whitehall is consulting on re-writing the regulatory rules governing telecoms to open up to greater competition.

And it would be wrong to exclude Virgin Media here – the only other fibre broadband provider with a national network. Virgin has consistently refused to make its network available on a wholesale basis to other ISPs.

And herein lies what seems to me the crux of the matter.

While the government and Ofcom have done a decent job of encouraging retail competition in broadband – look at how many ISPs you can buy from, and the positive effect on price / performance that has had over the last 10 years – they have consistently ignored the fact there is zero competition in the wholesale market.

The furthest they went was forcing BT to separate its network infrastructure into a wholly owned subsidiary, Openreach, with separate accounting and regulations that force Openreach to treat BT’s retail arm on an equal footing with other ISPs.

The obvious solution to the rural broadband issue – and many other of the technical issues hindering fibre roll-out – is to force BT to break up and sell off Openreach; to force Virgin to offer wholesale access to its network; and hence to create some degree of competition in the wholesale market.

It won’t happen, of course, not in the current economic environment. BT’s shareholders would fight all the way to the courts, the government would have to give even further guarantees over BT’s enormous staff pension scheme, and few rival telecoms firms would be willing to take on the investment needed to create genuine wholesale competition in an uncertain environment without public funds.

In the fixed-line world, the opportunity to create wholesale competition was missed 10 or more years ago, before broadband really took off, becoming the fastest spreading consumer technology in history in the UK.

The only chance of real change comes from competition in wireless broadband – 4G mobile services that could bring high-speed internet access to rural as well as urban areas. The 4G spectrum sale earlier this year included one tranche of frequencies that came attached with a commitment to delivering 98% UK coverage, which was won by Telefonica / O2.

BT, to many observers’ surprise, also won a tranche of spectrum at relatively low cost, although it has no current plans to launch a full-blown national 4G network. But you can bet that having a 4G offering will be important for BT in those hard-to-reach rural areas where it won’t deliver fibre.

In the short term, the frustrations of the rural and community broadband advocates will continue, despite the criticism levelled at BT and the government over the rural roll-out.

It would be a welcome victory for their efforts and inspiration if the PAC and NAO investigations recommend the government to offer some form of public support from the remaining BDUK funds for their local initiatives.

But the scale of change needed to achieve wholesale competition is too great for BT, its rivals, or any government to take on. A lot of hopes are riding on a successful 4G roll-out to start to bring a truly competitive broadband supply chain to the UK, and to break the grip of the vampire death squid.