Openreach Cuts Prices to Fend Off Infrastructure Challenge

Sharp cuts to wholesale rates could sap enthusiasm for investment in fiber networks that provide an alternative to Openreach.

Iain Morris, International Editor

July 24, 2018

5 Min Read
Openreach Cuts Prices to Fend Off Infrastructure Challenge

BT's Openreach division is making sharp cuts to the price of its fiber-based wholesale services in what critics might see as an attempt to undermine the business case for investment in competing fiber networks.

The UK's fixed-line incumbent said it would cut wholesale pricing by up to 40% for service providers who commit to certain levels of customer growth on the BT Group plc (NYSE: BT; London: BTA) network.

The pricing cuts will affect BT's existing range of fiber-to-the-cabinet (FTTC) and all-fiber services, as well as wholesale products on its future all-fiber networks.

A government report earlier this week said all-fiber networks are available to just 4% of UK premises, compared with 89% in Portugal and 71% in Spain. (See UK Bumpkins Told Not to Expect Fiber in Their Lifetimes.)

However, Openreach is working to extend all-fiber networks to 3 million premises, about 11% of the total, by 2020. If regulatory and business conditions prove acceptable, it has a mid-term ambition to build out these networks for 10 million premises by 2025.

In a statement released today, the operator said only 10 million homes have upgraded to what it calls superfast broadband -- meaning connection speeds of at least 24 Mbit/s -- even though services are available to nearly 28 million properties. It reckons about 4 million of these homes could upgrade from older copper technologies to superfast broadband for the same price or less.

"We've invested more than £11 billion [US$14.4 billion] into our network over the last decade and whilst that's helped the UK become a global digital leader, there are still millions more homes and businesses that could benefit from the better broadband infrastructure we've built," said Clive Selley, Openreach's CEO, in the statement.

"This offer… will incentivize our wholesale customers to participate in our long-term investment in digital infrastructure by upgrading more of their customers to superfast and ultrafast services," he added.

But the price cuts, besides raising questions about the return on investment for Openreach, could also sap enthusiasm for investment in alternative high-speed infrastructure that can challenge Openreach's dominance.

Cable giant Virgin Media Inc. (Nasdaq: VMED), whose network covers about two thirds of the UK population, is also investing in higher-speed broadband services, while CityFibre has emerged as the most prominent of several smaller companies rolling out all-fiber UK networks. (See Vodafone Gets Set for Gigafast Assault on BT.)

Through a wholesale partnership with CityFibre, Vodafone, which operates one of the UK's four mobile networks, aims to provide all-fiber services for about 1 million properties by the end of 2021. Four years from then, CityFibre and Vodafone Group plc (NYSE: VOD) hope to have covered about 5 million premises.

While Vodafone has not disclosed details of the wholesale rates it will pay CityFibre, it plans to be extremely price-competitive, executives told reporters during a demonstration of the network technology in Milton Keynes last week.

CityFibre's exclusivity deal with Vodafone will run out after about three years, at which point CityFibre will be able to look for additional wholesale customers. Openreach's price cuts threaten to make that task much harder.

Asked to comment on today's announcement from Openreach, a Vodafone spokesperson said: "We're still studying Openreach's new pricing proposals. We believe Ofcom needs to take care to ensure that volume-based commitments of this nature do not deter investment in FTTH [fiber-to-the-home] and alternative infrastructure platforms."

For more fixed broadband market coverage and insights, check out our dedicated Broadband content channel here on Light Reading.

In European markets such as Portugal and Spain, infrastructure-based competition has spurred the rollout of all-fiber networks and ensured that ultra-fast broadband services -- delivering speeds of at least 100 Mbit/s, according to BT's definition -- are widely available, as the UK government recognized in its report this week.

"The most effective way to deliver nationwide full fiber connectivity at pace is to promote competition and commercial investment where possible," said that report.

UK authorities went on to say that at least a third of UK premises -- or roughly 9 million properties -- are "likely" to be able to support three or more competing gigabit-capable networks. It reckons up to 13.5 million properties are in areas that could support competition between two such networks.

Prospective infrastructure investors have long complained about regulations that make it difficult to access Openreach's ducts and poles to lay fiber. The alternative approach of digging fresh ducts would be much costlier.

Despite efforts by regulatory authority Ofcom to improve access to Openreach's "passive" infrastructure, Vodafone's Guilhem Poussot, who heads up the "gigafast" program with CityFibre, says gaining entry to the incumbent's ducts is still much harder in the UK than in Portugal.

Operators have also complained about Ofcom's policy of treating business markets differently from residential ones. While Openreach must provide access to its ducts and poles for operators targeting the residential broadband market, it has not been forced to open this infrastructure in the business sector. As a consequence, Openreach's ducts and poles have not been available to companies that want to roll out fiber for mobile backhaul -- providing connectivity between basestations and core networks.

After government authorities criticized Ofcom's approach in this week's report, the regulator today said it would start regulating business and residential markets together. It has promised a consultation on the use of Openreach infrastructure in business markets including mobile backhaul.

However, any new measures are unlikely to be in place before 2020, Ofcom said. That could potentially delay investment in next-generation 5G networks, which may need lower-cost fiber services for backhaul purposes.

— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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