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BT Offers to Spend £600M on Rural Broadband

Iain Morris

BT has offered to spend up to £600 million ($787 million) on extending 10Mbit/s services into rural parts of the UK as it looks to meet a government target of providing "universal" broadband connectivity and ward off regulation.

The scheme would ensure that 99% of the UK population could receive a broadband service of at least 10 Mbit/s -- a level that meets the needs of a typical household, according to regulatory authority Ofcom.

About 93% of the UK population can already access a service of at least 24 Mbit/s, according to the UK government, but there has been concern about a growing "digital divide" as rural communities miss out on the broadband revolution.

The government said it was weighing BT's proposal against a regulatory approach. "We warmly welcome BT's offer and now will look at whether this or a regulatory approach works better for homes and businesses," said Culture Secretary Karen Bradley in a weekend statement. "Whichever of the two approaches we go with in the end, the driving force behind our decision making will be making sure we get the best deal for consumers."

The UK's former state-owned telecom monopoly, BT Group plc (NYSE: BT; London: BTA) had previously promised to spend more on rural connectivity if it was not forced to spin off its Openreach networks business as an entirely separate company. Hoping to bolster competition, Ofcom has instead mandated a "legal separation" that will see Openreach managed at arm's length from the rest of BT Group. (See Only BT's Dismemberment Will Sate Rivals.)

Nevertheless, there is bound to be concern that BT would try to pass on the costs of its rural expansion in the form of higher charges for wholesale rivals.

Companies including Sky (NYSE, London: SKY), TalkTalk and Vodafone UK use BT's network to provide their own retail broadband services, effectively renting capacity and space on BT's facilities. An increase in wholesale rates would force those companies to charge consumers higher prices for broadband services or face dwindling profits.

While higher wholesale charges could also hit profitability at BT's own retail business, its Openreach arm would stand to benefit.

BT, however, is subject to "margin squeeze" tests to determine whether the gap between its wholesale and retail prices is too small for rivals to provide services profitably. Legal separation is aimed at making it even harder for BT to engage in such practices or for Openreach to favor BT's retail business over rivals.

In its statement, the government said that BT had proposed to use a mixture of technologies to provide connectivity and believed it could hit the 99% coverage target by the end of 2020 by relying on wireless networks in harder-to-reach places.

Actual network construction is not due to finish until late 2021 or 2022, however, because of work on the rollout of fixed network technologies.

The government said rollout would take longer under a regulatory approach but highlighted the pricing implications of BT's plan for rivals and broadband consumers.

"It is also proposed that BT would fund this investment and recover its costs through the charges for products providing access to its local access networks," it said. "The approach to recovering these costs will be considered in Ofcom's current wholesale local access review."

The rollout of gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.

The entire scheme will cost between £450 million ($590 million) and £600 million ($787 million), according to BT CEO Gavin Patterson, depending on the final mix of technologies. At the top end of this range, the investment would equal about 2.5% of BT's revenues in its last fiscal year (to end-March 2017) and about 17% of overall capital expenditure across the Group.

Capex soared nearly a third at BT last year, to around £3.5 billion ($4.6 billion), largely because of spending on broadband rollout, and the operator is now facing some major investments in the coming years.

Among other things, it plans to extend all-fiber networks to around 2 million UK premises by 2020, and connect another 10 million homes and businesses to a technology called G.fast, which boosts connectivity speeds over last-mile copper loops. (See BT to Cover 2M Homes With FTTP in $8.7B Plan.)

Earlier this month, however, Patterson said he was considering the viability of a much more ambitious fiber rollout that would benefit around 10 million premises by 2025. (See BT Rejigs Consumer Biz as Profits Hit by £225M Italy Payout.)

He has also indicated that BT will participate in an upcoming auction of airwaves that could be used to support new 5G services. Operators made crippling payments for spectrum licenses during previous auctions, although experts do not expect a 5G auction to generate a similar windfall. (See 5G Spectrum to Cost Less Than 4G, Says Expert.)

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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