BT needs to go the extra mile, to keep the last mile

Imagine this. It’s the early years of the 20th century. While many people still get around using a horse and trap, cars have become affordable and more and more people are buying them. It’s clear to everyone that cars are going to replace horses in the next decade. And it’s equally obvious that people will want bigger, faster, higher performance cars too.

The company that looks after the roads is very proud of itself. It has recently spent a huge amount on laying tarmac between all the major towns, and on the popular roads within cities. But for most people – and most businesses – the road that leads to their front door is unmade and rough; fine for the horses, but unsuitable for cars.

Not surprisingly, car owners are up in arms. But the company, let’s call it British Tarmacadam or BT for short, loudly points out that the UK now has more miles of tarmac road than every major European rival – an argument repeated by the government. BT adds that it is committed to exploring other ways of helping drivers reach their houses – finer-grained stones, for example, or bigger lawnmowers to cut back the grass. But it insists there is no need for tarmac on all the roads up to drivers’ front doors.

But everyone else knows that in 10 years or maybe less, you need tarmac to the premises to cope with the greater use of cars and the bigger, more powerful vehicles that will be available.

Of course, in that imaginary situation, other companies would step forward and offer to tarmac the local roads and before long BT would be only responsible for the highways and major roads. But imagine if British Tarmacadam also owned the land upon which those local roads ran – and thereby controlled who was allowed to lay fresh tarmac.

Imagine too that wealthy homeowners were already paying for a faster unmade route for the horse and trap to reach their house, and that BT made more profit from maintaining that fast route than it would by laying tarmac instead.

And of course, let’s not forget all the people in the countryside, where British Tarmacadam has no incentive to improve the roads at all, no matter how many rural people own cars. Although sometimes, if the locals all chip in and buy some tarmac themselves, they suddenly find that BT has laid tarmac itself before they get a chance to use theirs.

This never happened, of course – and if it did, there would naturally be protests and things would change very quickly. But it’s not far off the way broadband works in the UK today.

Slowly, slowly, pressure has built up on BT – British Telecommunications, that is – about its last mile, the final stretch of almost exclusively copper cable to the premises, the part of the network operated by Openreach.

Now, finally, BT has been forced by regulator Ofcom to increase the degree of separation between BT Group and Openreach – forced, or “volunteered” in BT’s corporate speak – after Ofcom and a committee of MPs (and many others) concluded that the way Openreach is currently managed is anti-competitive, and that BT makes investment decisions for Openreach that favour the Group, not its customers.

To be fair to BT, all it does is follow the rules. As a publicly traded company, it is legally bound to put the needs of its shareholders first, while adhering to the appropriate regulations set by Ofcom. The telco has become a master at complying with the letter of the law when it comes to regulation – when most people (rivals, broadband users) have an expectation it will comply with at least the spirit of the law, if not more.

All of BT’s critics want it to go the extra mile, for the last mile – and therein lies the flaw in the UK’s telecoms regulatory regime.

We all know that fibre to the premises is the future, and that we should look to world leaders like Japan and South Korea for inspiration, and not to Euro-laggards like France or Italy for comparison. But BT has copper assets it needs to sweat for its shareholders.

The changes that will now see Openreach given greater independence with its own board and independent non-executive directors will move us closer to that goal – and BT will abide by the letter of that regulation until it is forced to go further again.

Based on the current regulatory trajectory, it is inevitable that Openreach will eventually become a separate company – but it will only happen when blockers like the BT pension liabilities and the complications of wayleave agreements have become manageable hurdles to overcome.

I still believe that BT – privately, quietly, in the long-term – wants to rid itself of Openreach, even if it would never admit it. One day, someone is going to have to bear the cost of replacing the copper last mile with fibre, and BT (or rather, its shareholders) won’t want to spend those billions. In the meantime, profits from Openreach help to support its move into new markets – subscriber TV, live sport, mobile by buying EE – until those new sources of income are enough to replace the profitability from sweaty copper. If BT wants to keep Openreach in perpetuity, however, it needs to go the extra mile.

The broadband debate isn’t going away soon, no matter what happens next to Openreach. But the opposing sides will never agree because they are not arguing the same point. BT will continue to argue that it invests in the latest technologies, and compare itself with other large EU economies. Critics will expect BT to go the extra mile and build a digital infrastructure for the next 50 years, not the next five.

Unless and until the government – directly or via Ofcom – bridges that gap in perception, the arguments will continue.

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