Ofcom plans to approve BT plans to destroy the case for investment in broadband competition.
Readers have until March 4th to respond to the Ofcom Consultation: Openreach Proposed FTTP Offer starting 1 April 2023 . This announces its intention to allow BT to use predatory lock-in discounts to undermine the investment plans of its competitors. Meanwhile BT has halted spend on extending its network. Instead it will focus on catching up with its backlog of orders and the PSTN switch off. Meanwhile it is unclear when it plans to offer full fibre to those served by “enabled exchanges”, whether they are business or consumer.
Why BT needs to impress its own investors, not just deter those of its rivals.
After warning that the Openreach fibre push will ‘end in tears’ for rivals the CEO of BT is said to have told investment analysts how the Equinox discounts would serve to prevent competitors from funding new network build while BT delayed its own fibre extensions in order to address its order back log and connect those already “passed” before they are tempted to switch. Apparently it has also stopped bidding for BDUK funding to extend fibre cover to new areas.
To understand the BT strategy and the failure of Ofcom to behave like a competition regulator, it is helpful to look at the Motley Fool verdict on BT’s latest results BT shares: a FTSE 100 name to avoid and also the similar view of Invezz: BT Group ia classic value stock: Would Warren Buffett Invest in it?
BT is in a precarious financial position – saddled with massive debt, declining margins and the need to fund a massive exercise in preventive maintenance: the PSTN Switch Off and transition from from increasingly unreliable copper networks (which are expensive to maintain) to more reliable (and lower maintenance cost) full fibre, at a time of inflation and skills shortages.
Hence the reason investors are unenthusastic.
As a long term investor (who currently has more invested in BT stock than in its competitors other than Vodafone), I would prefer to see BT follow the strategy adopted by Telia thirty years ago when faced by a similar problem. Telia became the anchor tenant in other people’s fibre networks (including municipal partnerships like Stockab).
That strategy enabled Telia to lead most of Northern Europe into the on-line world using its own cash flows. I would like to see BT use a similar strategy to enhance the reach of seamless Everything Everywhere services without the need for capital investment on a scale it cannot afford and private investors will not fund because they do not believe its current business model.
BT finances and the PSTN Switch Off
The problem for investors is not just the millstone of the pension fund and current debt mountain.
It is the risk (and cost) of PSTN switch off to a timetable determined by the early termination options in the exchange sale and leaseback deals entered into in 2001 to fund completion of the BT plan to achieve pre-1997 Government-set objective of providing at least two broadcast quality video streaming services (alias broadband) across most of the UK by 2002.
BT’s investment programme was then derailed by Local Loop unbundling – designed to save the Cable Companies from being sold to Sky at knock down prices (their roll out plans having fallen behind schedule). A consequence of the BT share price collapse caused by local loop unbundling was that its conversion to more reliable fibre networks, with their lower maintenance and running costs was delayed by over a decade.
Only now is that conversion gathering pace,- as obsolete equipment becomes ever harder to maintain and repair. This was seen during the aftermath of Storm Arwin, although some of the more spectacular outages were with newer single route (and single point of failure) networks .
The current messaging on the PSTN switch off is to tell customers that none of their current sockets will work but they should do nothing until they are contacted by their current supplier (the 690 resellers of the networks maintained by Openreach) to change their master socket, rather than they should try to switch in advance to a full fibre service – whether or not it is available from BT.
That advice opens up the opportunity for fraudsters to make the first contact, pretending to be from BT, Openreach or whichever reseller is providing the current service. Hence my own concern as convenor of the advisory group for the largest of the Home Office funded network of Cyber Resilience Centres,
The predatory discounts in Equinox 1, let alone those in Equinox 2, can be seen as part of an exercise to expedite conversion to BT fibre in those areas where it is already available and to lock in consumers to existing services where it is not.
One possible reason for Ofcom to support such an exercise is that it would better enable BT to fund the work necessary: including creating services to make it easier for customers to authenticate communications from their supposed supplier.
It should not, however, be the role of a supposed competition regulator to protect the incumbent from competition in order to protect its current business model, any more that it was to protect the US shareholders of the Cable Companies from a distress sale to Sky with local loop unbundling and the destruction of BT’s then investment model.
Hence the reason why you should respond to the Ofcom consultation and write to your MP calling for any legal action against Ofcom for failure to act against Equinox 2 should be supported by the Treasury Solicitor.
The wider consequences of the Ofcom failure to act as a competition regulator
Ofcom’s failure to block Equinox 1 appears to emboldened BT to not only extend the approach with Equinox 2, but to also halt its own investment in new infrastructure in order to handle the backlog of demand among those who had full-fibre broadband available in theory but not practice. The comments of the CEO to analysts also indicate clearly the objective of causing investors to lose faith in the business models of its competitors.
The immediate result has been to enable competitors whose build was delayed by skills shortages to hire the construction contractors laid off by BT to catch up, provided their investors have faith either that they can match BT’s predatory pricing or that Ofcom will be forced to abide by its duties as a competition regulator before it expensively loses the legal action being brought against it.
Meanwhile Ofcom has announced a review of BT’s above inflation price increases to consumers, BT’s share price remains stagnant and the climate for investment in levelling up broadband access across has deteriorated sharply, helping explain at least one thread in the recent Departmental restructuring and the break-up of DCMS to enable a greater focus on digital, including broadband, delivery across the UK.
The mounting pressures on Government to intervene
UK society, from education to employment, not just entertainment, went on-line during the Covid lockdown. A consequence was a massive widening of the divisions (including geographic) between those with full fibre broadband, and/or good mobile cover, and those without.
These have widened since – as employers and service providers (from health and welfare through education and training to retiling and banking) have built on success and withdrawn local physical access.
The result threatens as big a political backlash from those affected as that which led to the Brexit revolt against the political establishment. Over a hundred political constituencies are vulnerable to campaigns by the digitally excluded. Sir Kier Starmer has recognised the political potential, with his embracing of the “take back control” message.
And the problem is not just rural.
My local exchange in South Lambeth was “fibre enabled” over five years ago. But full-fibre is still not on offer locally (unless as an expensive leased line) if I am outside the catchment area for the altnets whose investment model BT is trying to disrupt with Equinox 2. Meanwhile both the local BT FTTC service and Virgin network are creaking, with speeds and reliability dropping as demand rises.
Ministers and MPs need to move rapidly to inform Ofcom that it needs to do its job as a competition regulator or be stripped of that role. Otherwise they risk the UK falling further behind the rest of the world when it comes to broadband speed and reliability at a time when we need to improve connectivity and productivity by levelling up access.
Then there is the question of whether BDUK is any more fit for purpose today than when it was created a decade ago. The case for devolving funding for investment in broadband infrastructure to local authorities, as part of the levelling up agenda, is as strong today as it was then.
A prime reason for the recent Government restructuring was to enable it to demonstrate that it can deliver – and that voters do not need to wait for the next one.
The hundred or so MPs whose seats are at most risk need projects on which they can work with their local councillors and supporters to demonstrate that they are worth re-electing, even if the Westminster government is not.
That might not be enough to win the |Conservatives the next election, but it would give the Labour Party reason to do more to earn their victory than simply talking about devolution and taking back control.
Devolution and levelling up needs to begin with Broadband policy. And one of lessons from the rest of the world is that local access to world class national and international connectivity needs infrastructures built to international inter-operability standards. It does not require those infrastructures to be planned, built, owned or operated by a single entity using a single business model.