How long before the shareholders break up BT?

The BT share price reached nearly £5 in late 2015 after the Digital Communications Infrastructure Strategy  was announced and BT received clearance to buy EE.  About then Patterson attacked Ofcom for suggesting that Openreach be split off  and I described how DTI and Ofcom had destroyed BT’s previous investment strategy. They had brought about the collapse of its share price from £15 (2000) to under £2 (2002 – 2012).  In March 2016 I suggested the fear of being broken up by Ofcom would cause BT to give better service. But then the share price had begun to slide.  The rights issued planned at the time of the acquisition of EE was abandoned. The slide continued. The share price is once more under £2. This severely limits BT’s borrowing capacity and ability to invest. Its cash flows are committed to addressing a massive backlog in preventive maintenance to make its ducts and poles fit for PIA. Hence also the need to rebuild its in-house training capacity because the necessary legacy skills are no longer available elsewhere. Others are far concerned with the skills to build full fibre and mixed fibre/wireless networks.

Man from Whitehall he speak with forked tongue

For all the talk of level playing fields for investors, the Treasury, which underwrites the BT pension fund, is under pressure to preserve BT’s legacy revenues until such time as it comes up with a strategy that will convince future investors that it is a going concern, not a basket case. An example is the award of the Universal Service monopoly. As a result of its recent crowd funded community bond B4RN could offer full fibre to 5%  of those who BT will be subsidised to provide with up to 10 mbs.  EIS status has been refused because Inland Revenue says the B4RN business model poses no risk of loss of capital to investors. So why does BT need a subsidy?

USO or UFO?

The B4RN model may not be scalable. Community enterprises do not function well above a given size. It is, however, capable of being replicated, with many local variations, to serve those for whom the USO is intended. Indeed there are many successful variations around the world. But for the Ofcom focus on nominal rather than real competition focussed, BT would be incentivised to use B4RN as a USO subcontractor and encourage another 19 clones to deliver a USO that is out of this world. There is a great set of UFOs,  universal fibre opportunities, for which BT could provide the backhaul and global connectivity. The way Telia works with the various community and municipal networks across Sweden and other parts of Scandinavia provides one model.  The way Verizon and AT&T do similarly across the USA, including with the utility networks, provides another.

The sum of the BT black hole is less than the sum of the parts

Openreach is an infrastructure management and service company which owns nothing, not even its training centres. It is relatively easy for it to be spun out. But that would not lead to added investment. It would also require Treasury support for the pensions of those transferred from BT. Meanwhile the BT-owned infrastructure needs massive investment to turn it into an integrated all IP network capable of supporting EE as an ubiquitous 4/5G provider. Then there are the needs of UK business and of Smart Communities (Cities, Countryside, Energy, Transport, Utilities etc.) for resilient, reliable backhaul. Closing down BT’s surplus exchanges will enable cost savings but will not raise funds, they were sold back in 2002. It is unclear how much could be raised by selling off the high risk content and systems operations. Tis would, however, leave a communications utility that, but for regulatory uncertainty, is rather more attractive to global fund managers and institutional investors.

Until then, the BT share price looks set to drift down to a £pound or less. That leaves it unable to invest other than from cash flows and Government subsidies. It is also unsaleable because of the pensions time bomb and the dead hand of Ofcom.

The way forward is co-opetition

BT is seen by most of others in the telecoms industry as a Machiavellian bogeyman. That reputation was well earned by the tactics used to stop others obtaining BDUK funds or pillaging BT’s leased line markets. Even today BT is playing its cards close to its chest. It seeks to hold on to past business, quietly transferring customers to newer, more reliable technologies only when they are close to defecting to other suppliers.

The alternative strategy is for BT to look at the investment models of its peers around the world.  Most of these are based on co-opetition – with players subcontracting to each other to share cost and/or improve resilience at the same time as competing to be lead supplier in multi-source contracts. Unfortunately where BT has set about exploring similar arrangements in the UK it has been threatened by Ofcom with action under its competition powers.

There is  precedent. BT has subcontracted to those running wireless networks in parts of Cornwall where there would otherwise be no service. We need to see many more such deals. In a world where multiple routings are essential for resilience we need, for example,  to see BT routinely contracting to use City Fibre backhaul for hot standby and vice versa.

We need to see all business parks served by at least three local operators with similar hot standby contracted between them – akin to the way the University science parks connected via Janet/JISC have multiple routings. It is worth noting that the Janet/JISC network uses infrastructures owned by a wide variety of players, including BT, the Electricity Utilities, Universities, Local Authorities, Defence Research Establishments and others to provide the UK’s fastest, most powerful, flexible and future proof network. Like LINX, the heart of the UK’s Internet world, it is a mutual.

Question: What is the difference between a Cartel and a Mutual?

Answer: The number of participants

It would be unrealistic to see the infrastructure heart of BT spun off as a mutual. But we should look at the way its peers in other parts of the work with each other and with a variety of  infrastructure partners. This may well be the best way of pulling through investment on the scale needed. We need business and property users and owners working with local authorities to fund and expedite network construction, to international standards (including for inter-operability), using whatever business model fits the community to be served. Those meeting their needs, (City Fibre, Gigaclear, Hyperoptic, Wireless Internet Group et al) are very attractive to the City as soon as they have acquired a track record of delivery.  The “real” competition is akin to that in the 19th Century when Manchester competed and/or co-operated with Liverpool and Leeds with Bradford, while Birmingham co-operated with everyone, to pull through the construction of canals and railways. It did not matter if the company went broke, provided the line was built to common standards so that some-one else could take over the operation. Over time the railways coalesced into regional and national operating networks, even before nationalisation.

The Problem is Ofcom – or rather its terms of reference

Twenty years ago I was part of the team that organised the pre-legislative scrutiny for the Office of Communications Act 2002. The world has moved on. Meanwhile Ofcom has succumbed, as feared,  to many of the temptations that face regulators in times of change. The first is that of trying to predict the future in order to better regulate it. It should, instead, be focussed on acting more rapidly to uncover and address abuses of market power as they emerge.

Ofcom is also too focussed on nominal competition, as with the candy floss competition of local loop unbundling. It is blocking the voluntary co-operation that is essential for a critical infrastructure utility networks to provide hot standby. It should be helping to set and enforce standards for infrastructure and network inter-operability and quality of service, in line with those emerging across the world. These might look anti-competitive but are essential to making it easier for new entrants to attract investment, become established, reach critical mass and provide genuine competition.

Only when such matters are addressed is the UK as a whole likely to benefit when the shareholders break up BT and investors from around the world put in the funds to help turn round its struggling parts.

PS 22nd July – BT has begun its own sell offs

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