BT Unit Woos Rivals With Fiber Plan to Target Liberty Global

  • Openreach to consult with Vodafone, Sky on network structure
  • Plan to test Openreach independence with legal split from BT

BT Group Plc was accused of dragging its feet for years as competitors using its network demanded the former U.K. phone monopoly run more fiber-optic lines to homes and businesses. Now BT’s wholesale division has seen the benefits of installing the faster connections, and is trying to coax its rivals into helping out.

Under a regulatory compromise reached in March, BT’s Openreach unit is becoming semi-independent, opening the door for more collaboration with customers like Sky Plc, Vodafone Group Plc and TalkTalk Telecom Group Plc. The companies have long maintained that BT didn’t invest enough in the nation’s largest telecom network and gave its own phone and internet services an advantage.

With the separation, Openreach Chief Executive Officer Clive Selley wants the company to be seen as an industry ally. While the new structure won’t fully take effect until April 2018, Openreach is already preparing to consult with its rivals about how to accelerate the deployment of so-called fiber-to-the-premises, which can deliver data at much faster speeds than the copper upgrades BT has favored.

“I want to collaborate and that is very new,” Selley said. “It’s now time to get around a table and figure out how we do it.”

Part of the reason for the shift toward fiber is cost, which BT has managed to more than halve by using new equipment and techniques. Openreach thinks it can reach 10 million connections by the mid-2020s, up from a current goal of 2 million by 2020. Still, the effort is expected to cost billions of pounds. Openreach wants communication providers to commit to switching over to the new fiber, allowing the old copper to be ripped out and sold to help fund the expansion.

There’s not much precedent for cooperation. Mistrust lingers, over everything from prices to technology choices to duct-and-pole access and the speed of repairs. The separation agreement comes with a raft of conditions -- Openreach has had its own board in place since January, employees are being moved to a new company, and the government has to extend to Openreach a pension guarantee dating back to when the U.K. owned the network. Even the deadlines for Openreach to remove the BT logo from its service vehicles were committed to writing.

“It’s a big change of mindset for the industry,” said Andrew Millington, the acting head of U.K. equities at Standard Life Investments, a BT shareholder. BT and its customers have often had conflicting priorities, with each camp lobbying communications regulator Ofcom “rather than getting around a table to work for something that benefits everybody.”

But there’s a lot to gain. Consumers are gobbling data using services like video chat, Netflix and online gaming, and that will only increase when ultra high-definition TV, smart homes and virtual reality become more common. The U.K. has put digital infrastructure at the center of its economic strategy as it prepares to leave the European Union, but the country lags far behind Spain and others in full-fiber buildout.

The plan’s importance was underscored on Tuesday when the government introduced a bill that would incentivize investment in full-fiber broadband by scrapping business taxes on new installations for five years.

Openreach has only recently put a focus on laying fiber connections all the way to buildings, after taking the last eight years to upgrade the network with fiber-to-street cabinets. The company has used software upgrades to squeeze faster speeds from older copper, rather than build the more expensive full-fiber connections.

Selley, who has been Openreach CEO since February 2016, sees areas of common cause. Openreach and its customers all compete against Liberty Global Plc’s Virgin Media, which is investing to expand the nation’s only other big telecommunications network. While the other carriers are shut out of Virgin’s network, they could potentially make co-investments in Openreach’s.

“I’ve got a big cable competitor in the U.K. and I want to compete,” Selley said.

Selley is focused on boosting customer service to improve trust. Openreach halved the number of missed engineering appointments in the year ended March 31, and beat Ofcom’s target for on-time performance delivering regulated copper products, according to data from the company.

Operators using the network are giving Openreach a chance, if cautiously. Vodafone CEO Vittorio Colao said in May that he viewed the changes as positive and that the wireless carrier would consider investing. TalkTalk CEO Tristia Harrison cited constructive meetings in an email, “but it’s important Openreach maintains this momentum.” Pay-TV operator Sky said early signs suggest Openreach is headed in the right direction, “but they must now get on with delivering” fiber broadband.

Selley must also woo Ofcom, which regulates prices and Openreach conduct, and his former bosses at BT, who still control Openreach’s capital budget. While the unit generates more than a third of BT’s free cash flow, claims on that cash are mounting.

BT has a 7.6 billion-pound ($9.9 billion) pension deficit that will need topping up and it’s spending more on sports rights as it tries to build a television business to retain customers, said Richard Marwood, a senior fund manager at Royal London Asset Management, a BT shareholder. “There is a lot of cash flow and there are demands on that cash flow.”

BT shares were little changed at 291.70 pence Tuesday in London. The stock is down 20 percent this year, following the company’s January warning that profits would be weaker from its U.K. and international IT outsourcing businesses and after a worse-that-anticipated accounting scandal in Italy.

Openreach is still haggling with Ofcom over fiber-to-the-cabinet pricing proposals. In March, the regulator found Openreach guilty of inadequately compensating customers of its business ethernet service for late installations in 2013 and 2014.

Selley faces a huge challenge to make the legal separation work and avoid a full breakup from BT, said Matthew Howett, an independent telecommunications analyst based in London. “There needs to be a real feeling from everyone that there is a new culture.”

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