Amid altnet woes, BT eyes dominance of full-fiber future

Across vast stretches of the UK, BT's full-fiber lines are as empty of traffic as a motorway in a zombie flick. The apparent dead-eyed reaction to the rollout of higher-speed broadband means only 29% of homes "passed" were using a service at the end of last year, giving BT's Openreach unit about 2.7 million retail and wholesale customers. Outside another 6.8 million premises, fiber lies unlit and ignored, except by the technicians unfurling it.

This 29% take-up rate is better than it sounds. Nokia, one of Openreach's equipment suppliers, cites 30% as the minimum needed for acceptable long-term payback, and BT's take-up rate has continued to rise, ticking up from 27% at the end of September. "Customer demand is extremely strong with orders up a staggering 51% compared with last year," insisted CEO Philip Jansen on a call with analysts this morning. "We are building like fury and connecting like fury."

Nevertheless, take-up is well below the 63% rate for Openreach's part-fiber, part-copper network (connections, stripping out "non-fiber," as a percentage of homes passed by "superfast" broadband). BT's prospects in a full-fiber future depend on closing that gap as much as possible.

A BT technician fiddles with fiber. (Source: BT)
A BT technician fiddles with fiber.
(Source: BT)

It is why the UK telecom incumbent is setting records on the pace of fiber deployment, passing 810,000 homes in the last three months of 2022. In the old broadband days, Openreach was the only serious option bar Virgin Media, a cable operator with Swiss-cheese coverage. But in recent years dozens of "altnets" have started laying their own fiber lines, backed by private-equity funds. Unless it is first to arrive in the neighborhood, BT risks losing out.

Jansen is upbeat, and not without some justification. Despite the take-up delta between full-fiber and overall broadband, there is little sign of market share loss. "We've always said that over the longer term our base will be broadly flat," he said. "We see a few losses but that is offset by market growth and new build." For the most recent quarter, full-fiber connections at Openreach soared by 324,000, equal to 40% of the increase in homes passed.

Altnet turmoil

Meanwhile, parts of the altnet market are in turmoil amid tough economic conditions. Sources predict a wave of consolidation among sub-scale players. With backing from Goldman Sachs, CityFibre, the biggest, may reportedly cut 400 of 2,000 full-time jobs, endangering its plans to reach 8 million premises by the end of 2025.

To make life even harder for its infrastructure rivals, BT proposes to cut wholesale charges for companies using the Openreach network. This "Equinox 2" plan requires sign-off by regulatory authorities, but it has been welcomed, unsurprisingly, by numerous Openreach clients, said Jansen today. CityFibre CEO Greg Mesch slammed the proposals in December, saying: "BT Openreach must not be allowed to strangle competition before the fiber market reaches maturity."

The stock market reaction to the latest investor news was quite positive, with BT's share price up nearly 3% this morning. Its fiber effort, however, has left BT's financials in a ropey state. For the first nine months of the current fiscal year, it splurged nearly £3.9 billion (US$4.8 billion) on capital expenditure, about a quarter of what it made in sales. This capital intensity is several percentage points higher than the average at its peer group of European telco incumbents. Yet BT's sales are not growing.

BT's five-year share price (pence sterling)
(Source: Google Finance)
(Source: Google Finance)

At a group level, revenues dipped 1% year-on-year for the first nine months, to less than £15.6 billion ($19.2 billion). Free cash flow tumbled 88%, to just £106 million ($131 million), and BT's net debt soared by nearly £1.5 billion ($1.9 billion). At £19.2 billion ($24.7 billion), it is about 2.4 times what BT expects to generate in earnings this fiscal year. BT's share price has dropped a third since July and by nearly three quarters since early 2016.

Jansen has made cost cutting a priority, recently lifting BT's target for annualized savings to £3 billion ($3.7 billion) by the end of 2025, from a previous £2.5 billion ($3.1 billion). But this will not be easy. As Jansen himself notes, energy costs are high, inflation is rampant and BT has just awarded a £1,500 ($1,850) annual pay increase to 85% of its UK employees. After previous layoffs, its workforce has also grown, from 98,175 employees last March to 99,803 by September. Cutting jobs might hinder network rollout and marketing efforts.

Cuts and rises

Still, cuts seem likely at BT's underperforming enterprise and global divisions, which are being combined in the latest restructuring to form a single BT business unit. BT also continues to work on switching off increasingly redundant technology platforms and automating whatever it can. Howard Watson, its chief technology officer, reckons it can save £500 million ($616 million) just by modernizing networks and retiring old systems.

Elsewhere, Jansen hopes to offset higher costs through controversial price rises, including a 14.4% increase that BT's residential customers will have to bear. This is based on a formula that adds 3.9 percentage points to the current rate of inflation, and it has met with a predictable backlash in parts of the mainstream press.

"The value for money we offer is exceptional," Jansen told analysts in defending the move. "It is unlimited usage and not gas or electricity on a meter. People can use as much data as they want for a pound a day." Without increases, BT would struggle to build the full-fiber network so vital to the country's future economy, is the underlying message.

It is not an unreasonable assertion. The question for market analysts and government officials is whether the ongoing fiber splurge is producing a more competitive broadband market, one much less dependent on single private-sector player for its infrastructure needs. Because if Jansen is right, BT could emerge from the fiber maelstrom looking as dominant as ever.

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— Iain Morris, International Editor, Light Reading

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