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U.K.’s Fiber Ambitions Stoke Growing Conflict With BT Group

  • New government funding gives lift to emerging broadband rivals
  • Review of former telecom monopoly’s Openreach network is next

The U.K. government’s decision to place communications infrastructure at the center of its post-Brexit economic strategy exposes growing strains with BT Group Plc, the former state-owned monopoly that still controls the country’s biggest telecom network.

A big part of the more than 1 billion pounds ($1.24 billion) of digital infrastructure funding announced Wednesday by U.K. Chancellor of the Exchequer Philip Hammond will go to BT competitors like TalkTalk Telecom Group and CityFibre Infrastructure Holdings Plc that are building their own fiber-optic networks. The government will contribute 400 million pounds in matching funds for emerging fiber-broadband providers wanting to scale up.

Those efforts would further Hammond’s vision of making the U.K. “a world leader” in next-generation digital communications, including so-called 5G networks. But they contrast sharply with the plans of BT and its Openreach network division to continue relying primarily on existing copper wires to connect homes and businesses to its fiber backbone. The new plan is negative for BT because it adds competition and puts pressure on the company to respond, according to Guy Peddy, an analyst with Macquarie in London.

“BT are going down a copper evolutionary path and the government seems to be wanting to stimulate a fiber long-term solution,” Peddy said in a phone interview. “So it might require BT to rework its plans and have more of a fiber strategy rather than a copper strategy.”

The U.K. lags most other European Union countries in deploying fiber access all the way to people’s homes. BT is relying on a cheaper solution called that squeezes more out of its existing copper lines.

BT Openreach gave no indication it’s planning to change its investment decisions. In a statement, the company said it’s important that fast broadband be deployed in as many areas as possible, and its current plans will bring faster service to 12 million homes and businesses by 2020.

“We support others who wish to roll out their own networks,” BT said. “Such activity is very capital intensive and this fund may be helpful in ensuring smaller players can build sustainable businesses.”

BT’s regulatory issues don’t end there. The U.K. communications regulator Ofcom has already put limits on BT’s ability to buy new airwaves for its mobile-phone unit EE, and is threatening to put more roadblocks in its way. 

Ofcom is set to complete a review of the structure and governance of Openreach by mid-December, amid calls by competitors like TalkTalk and Sky Plc that BT be broken up. Ofcom is also looking at giving competitors greater physical access to Openreach and is pressuring BT to extend service to rural areas it hasn’t yet reached.

Sky, Openreach’s biggest external customer, has complained of under-investment by BT leading to unacceptable levels of faults and service problems affecting its customers.

BT continues to spar with Ofcom over whether it will be able to appoint its own directors to Openreach, and whether the unit should be incorporated as a stand-alone company with separate assets from BT Group.

“We need to have sufficient control over the business through the appointing of directors, which the Ofcom model didn’t allow us to do,” Chief Executive Officer Gavin Patterson said at a Morgan Stanley conference last week in Barcelona. Fully separating the assets would create added pension costs that neither side wants, he said. “We are not keen to do that.”

A structural or accounting separation of Openreach would have implications on BT’s dividend and its underfunded pension, Peddy said. He also expects the company to spend an additional 200 million pounds on fiber networks from the 2017-2018 fiscal year -- items that will weigh on the stock price along with the added competition.

“In our view BT is a lower-return business going forward than in the past,” Peddy said.

Ofcom plans a separate review next year evaluating access by BT rivals to the Openreach duct-and-pole network. Though they’ve been able to pay for access since 2009, rivals have complained about service and say BT’s unwillingness to share digital maps has effectively blocked them from utilizing the service.

A trial this year through an industry working group has improved things, though not as much as the upstarts would like.

“The proof-of-concept creates a better process, but it doesn’t give a real-time view of what access is available,” said Dana Tobak, CEO of U.K. fiber-optic provider Hyperoptic. “There’s no information about whether particular ducts are used or filled, for example.”

Ofcom has said previously that granting rivals greater access to BT’s duct-and-pole network could help the U.K. create a third fiber provider that covers 40 percent of the U.K.

If that wasn’t enough, BT and Ofcom disagree over how to wire the nooks and crannies of the U.K. that don’t yet have access to broadband Internet. BT has offered to deliver a minimum speed of 10 megabits-per-second to all premises by 2020 with no further public subsidies, while the government wants faster speeds. But the offer has strings.

BT is “working with the government and Ofcom on how best to achieve this,” the company said. “New technologies will need to be approved and we will also need the right regulatory support to make such a commitment commercially viable.”

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