Which is more important to the future of BT? Quadplay or a Converged Utility with EE?

BT may be resisting the forced separation of Openreach but its wider business strategy is unclear and it is unlikely to be able to fund both its quadplay ambitions and the investment needed to provide the reliability, resilience and security, not just response times, its customers are increasingly demanding.   Its content advertising has begun to converge with that of EE  while its largest shareholder, Deutsche Telekom is planning for a similarly converged 5G world.

DT has a market capitalisation of around £71 billion. Vodafone has one of around £61. Telefonica (parent of O2) has one of £43 billion (and is seeking to merge with Three, who backers are capitalised at over $1,150 billion). All are looking to provide converged services for a 5G (and beyond) world. None is trying to grow an in-house content operation, as opposed to providing access to content provided by others. The only other Telco trying to do both is Verizon, which has a capitalisation of  £224 billion: although there are allegations that its content play is “merely” to strengthen its bargaining position vis a vis Amazon, Google, Microsoft, Netflix and the “Net Neutrality” lobby.

BT with a capitalisation of £41 billion is planning to restart investment in its utility operations (not just Openreach, but also Wholesale), at the same time as continuing to take on Sky, Liberty, Netflix and the new content operations of Amazon. That restart, to head off a forced break-up at the hands of Ofcom, can also be seen to have been triggered by complaints from Sky, Talk Talk and its other resellers over the quality of service they and their customers receive from Openreach. It is not just consumers who are having a summer of discontent. Information from the performance monitoring services of, for example, Sky or Virgin, remains confidential. But the threat of legal, not just regulatory, action almost certainly lies behind BT’s appointment of  its top engineer to turn round Openreach, the subsequent doubling of his preventive maintenance budgets and the restoration of capital spend to levels not seen since before the original appointment of Tony Chanmugan as finance director to cut Capex and Opex by 25% and save BT from bleeding to death after Local Loop unbundling.

Bryan Glick has recently repeated his belief that BT secretly wants rid of Openreach, a low risk, low reward, “boring”, regulated utility. I suspect its largest shareholder would rather get rid of content operations which have failed to deliver targeted profits and are running into increasing competition from its largest customers – some of whom are now looking elsewhere for more reliable, cheaper, all-fibre service. Either way, the difference between what Ofcom has demanded, a separate Broad for a wholly owned subsidiary, and what BT has offered, a sub-committee of the main Board is significant.

Recent events (e.g. service failures taking the customers of other ISPs, not just its own, off air for hours on end) have shown the importance of resilience and competition in the backhaul and Internet services provided by BT wholesale – not “just” the local loop services provided by Openreach.  But BT is, in turn, reliant on its own subcontractors and partners and their failures (from the power supplies for the former telephone exchanges in no longer owns to internet exchange and hosting  operations it never did) reveal just how vulnerable our access to the Internet really is. Running Openreach at arms length will not help address such failures. Returning both Openreach and BT wholesale to pre-2008 levels of investment may also not be enough.

History lessons are boring – but before taking some of the most recent statements from the CEO of BT, a marketing man, at face value it would be as well to compare the analyses in the CMS Select Committee Broadband Connectivity Report report  with Mike Keily’s most recent analyses and the summary of the reasons for BT’s past strategies contained in the Dirty Digest I blogged at the time Ofcom was calling for inputs to its strategic review.

Sir Michael Rake and Ian Livingston“stopped the bleeding” and saved BT from going broke after Local Loop unbundling and a series of Ofcom decisions had rescued the Cable Companies but destroyed the business case behind Ben Vervaayen‘s investment strategy. BT lived off the back of those investments for a decade and persuaded the coalition government to co-fund some of the gaps. But the consequences of the failure to complete the programme (e.g halting the replacement of 1970s cabling whose aluminum content means FTTC and G-Fast do not work) are now becoming apparent.

The quality of service problems with a “monopoly” are not, however, confined to BT. Internet peering, alias connectivity, is uniquely centralised  in the UK.  France , for example has 24 peering exchanges and most of its traffic routed through large regional centres – not Paris. The UK has only 9, including the new startup Internet exchanges in Manchester, Edinburgh, Cardiff and Leeds. Almost all traffic is still routed through the London operations of LINX.  But LINX is a mutual, owned by members who are not happy with vulnerability that results from such centralisation. It is helping lead the drive for devolution to local Internet exchanges and I have promised to help provide political platforms for its Chief Executive to brief politicians on why and how they should support plans for every aspiring “smart city” to have at least one exchange of its own.

Meanwhile the rest of the world, and Ofcom, have moved on. Hence Clive Selley‘s most recent comments on restarting investment in “pure fibre” and “fibre by default” for new connections, while trying to wind up speeds over those parts of the copper network where FTTC and G-Fast will work. Hence also BT’s support for some of the new local Internet exchanges, including to reduce latency (signal delay) for its largest customers.

So what will the new BT strategy be?

One obvious component will be an increased willingness to enter into local partnership with new build operators where it is uneconomic to upgrade its own network without public subsidies. Another, announced but not fully appreciated by analysts, is a massive investment (staff retraining and apprenticeships not just recruitment) in growing its security operations, including to serve its partners and customers. Similarly the scale, impact and consequences of BT plans to retrain and multi-skill its engineers, take on many more apprentices and bring functions (particularly those where it has experienced embarrassing leaks and other service and quality problems) back in-house have been largely ignored. In short, BT may already have decided that  rebuilding a boringly efficient utility operation is more attractive to more shareholders than trying to “eat the lunch” of “customers” like Sky, Netflix and Amazon. I am holding on to my shares accordingly – although I expect those in some of the “fibre infrastructure pureplays” to do rather better over the next few years.