Whatever BT boss thinks, his fiber rivals are going nowhere fast

Pitching his company's fiber plans is a high-wire act for BT boss Philip Jansen and the latest events have put him in a dangerous wobble. It happened after Melanie Dawes, the head of UK regulatory body Ofcom, stumbled on a Financial Times article where Jansen was reported to have said the country's broadband race would "end in tears" for his competition.

Ordinarily, it might have been dismissed as run-of-the-mill fighting talk, but Ofcom is currently assessing a new BT pricing plan dubbed Equinox 2, which would cut the fees broadband retailers pay to use BT's fiber lines. CityFibre, currently BT's biggest full-fiber rival, has effectively criticized it as an example of predatory pricing. "BT Openreach must not be allowed to strangle competition before the fiber market reaches maturity," said CEO Greg Mesch in December.

Suddenly linking the image of a BT fiber monopoly, where infrastructure rivals are trampled at birth, with Equinox 2, Dawes has now forced BT to delay the introduction of the new pricing plan while Ofcom carries out further analysis. The immediate consequence was a 6% drop in BT's share price on March 17. It fell another 1.4% when the London Stock Exchange opened this morning.

Figure 1: BT boss Philip Jansen was reprimanded by Ofcom after comments made to the press.
(Source: BT)

Jansen took aim at irresponsible reporting in a February letter to Dawes that Ofcom subsequently published on its website. Most of his remarks were taken out of context by the Financial Times, he insisted. The intention was partly to show that BT is the only company with nationwide ambitions, not to suggest other fiber builders are doomed to fail.

Yet others would not find the reporting to be inaccurate. Jansen's comments are often inflammatory during the regular quarterly discussions he has with financial analysts, which journalists are invited to attend. Last July, he predicted failure for many of his infrastructure rivals. "Everyone is realizing there will be a lot of trouble for some of the altnets," he said. "If you add up everyone's ambition, their stated aims, the amount of money being raised, it is clear a lot of people won't make it."

Ofcom should be wary of sunsetting Equinox

The UK's fiber frenzy has forced Jansen to perform a tricky balancing act. The sale of some international assets and a pullback from the TV sector – typical of many telcos in developed markets – has left BT highly dependent on its domestic broadband business for sales and profits. Any suggestion it may lose significant market share to infrastructure rivals could be a disaster for the stock. But Jansen also needs to avoid creating the impression BT is carrying its original fixed-line monopoly into the fiber age.

Passing judgement on Equinox 2 is equally tricky for Ofcom. Like it or not, the UK remains heavily reliant on BT's Openreach division for the high-speed networks that could prove so critical to future economic prospects. At the end of last year, the Openreach network "passed" nearly 9.6 million properties, and it aims to reach 25 million by the end of 2026, about 90% of the current total. Virgin Media O2, the UK's other main fixed-line provider, still operates a network based largely on older – albeit gigabit-capable – cable technology. Jansen is not wrong to say dozens of altnets have made little progress and will probably not survive as standalone entities.

The big exception is the Goldman Sachs-backed CityFibre, but even this company does not have national ambitions. Its own target is to reach about 8 million properties by the mid-2020s and it has passed only about 2 million so far, putting it a long way behind the former state-owned monopoly.

A shared concern of both Dawes and Jansen will be the somewhat disappointing customer response to the availability of full-fiber lines. At the end of December, just 29% of properties passed by the new Openreach network were connected to a service. That compared with a take-up rate of about 63% for the overall broadband business, discounting lines where fiber is not used at all.

Figure 2: BT full-fiber rollout ('000s) (Source: BT)

The longer people stick with older broadband products, the harder it will be for BT to earn returns on its multi-billion-dollar full-fiber rollout and retire its older copper-based lines and exchanges. While BT's other prices are rising, Equinox 2 is clearly an attempt to accelerate this transition to full-fiber services.

For Ofcom, worryingly, the UK's other fiber providers fare even worse on this take-up metric. Last year, it reckoned that just 25% of homes passed by full-fiber lines were connected to a service, compared with a take-up rate of 73% for superfast broadband. Based on Ofcom's figure of 12.4 million properties passed by full-fiber networks, this would mean only 3.1 million homes were using services and that only about 370,000 of those were not via Openreach. And this is before BT's rivals have Equinox 2 to blame for the dismal showing.

BT plowed about a quarter of its sales into capital expenditure last year, giving it a substantially higher rate of capital intensity than any other big service provider in Western Europe. But its results for the first nine months of the current fiscal year were alarming, with free cash flow down 88% year-on-year, to just £106 million (US$129 million), after no real change in sales.

Meanwhile, UK authorities seem obsessed with the country's position in broadband league tables, which suffered years ago due to its fiber lag. Recent improvements have been dramatic, but any regulation that makes life even tougher for the country's main fiber investor would risk sending those into reverse.

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— Iain Morris, International Editor, Light Reading