Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

BT Group's pledge to connect 12 million homes and businesses in Britain to faster broadband by 2020 is too little and too late. Regulators weighing whether to force BT to hive off the unit that operates the country's Internet infrastructure shouldn't be satisfied.

BT is playing a cat-and-mouse game with Ofcom chief Sharon White, who wants it to invest more to replace old copper lines to homes and businesses with fiber ones. Fiber is more reliable and faster with speeds of up to 1 gigabit per second. But BT prefers a technology called G.fast, which offers speeds of up to 300 megabits on the old copper lines, because it's cheaper since it doesn't require digging up streets.

The promises BT made on Thursday are to build 2 million fiber lines to homes and 10 million using G.fast. BT was evasive on how much this would cost, lumping the broadband investment into spending at its newly acquired EE mobile division. About 6 billion pounds ($8.7 billion) will be spent at both through 2020.

The seemingly arcane technology debate is actually really important. BT's Openreach division is supposed to rent out access to rivals like Vodafone, Talk Talk, and Sky on the same terms as to its own retail arm, and is tasked with ensuring the quality of Britain's connectivity.

Slow Lane
BT lags on building fibre lines to homes and businesses compared to European peers
Source: Company filings

The setup is a holdover from when BT -- then British Telecom -- was a national monopoly operating the nation's phone lines. Openreach is basically a utility sitting inside BT, and much of what it can do and how much it charges competitors is determined by the government.

Oddly, this utility-like unit also makes a ton of money for BT, accounting for 40 percent of Ebitda for the fiscal year ending March 31 and 46 percent of free cash flow. But rivals such as Vodafone and Sky, who have lobbied for the Openreach split, contend BT doesn't invest enough or treat them equally.

The regulator's decisions have a clear link to BT's bottom line. Since White said in February that Openreach may need to be spun off and that BT must improve rivals' physical access to its network, the shares lost some 7 billion pounds in market value . They're second-worst telecom performer in Europe. BT's price to earnings ratio is at 15.1 times right now, the lowest level since early 2015.

Off the Boil
BT has underperformed peers since Ofcom turned up the regulatory pressure on Openreach
Source: Bloomberg

Tellingly, BT today said the entire network investment proposal would only go forward if regulators didn't impose rules that sapped the return it could earn. If Ofcom is too harsh -- meaning if it pushes for the split of Openreach or imposes other changes -- then BT reserves the right to down tools.

Beyond the politics, the numbers tell the real story. Even with BT's wishy-washy promises today, Britain would still be far behind other European countries on fiber. (Don't even look at Japan or Korea, where fiber is ubiquitous -- it's just depressing.)

Europe's fiber leader is Telefonica, which spent heavily to build the network in Spain despite a deep recession. France's Orange is also no slouch.

BT should do more -- capital expenditures need to rise and its obsession with G.fast abandoned. If not, regulators will have a solid argument that it's a poor steward of such a key piece of national infrastructure. BT could then lose control over the cash cow that is Openreach.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net