BT Gets Boost After Ofcom Raises Broadband Price Cap

Shares in BT received a boost during Friday morning trading in London after UK regulatory authority Ofcom agreed to raise the proposed cap on its wholesale broadband charges.

In a statement published this morning, Ofcom said BT Group plc (NYSE: BT; London: BTA) would be able to charge rivals £11.92 ($16.68) per month for its basic superfast broadband service, having proposed a cap of just £11.23 ($15.71) about a year ago.

Regulators are keen to foment infrastructure-based competition in the UK's fiber broadband market but say the controls are necessary to ensure BT's rivals can still compete for customers as they build out their own networks.

BT's share price was trading up more than 4% in London at the time of publication.

BT issued its own statement to say the ruling would give it "certainty on the pricing of key products for the next three years" and allow it to "get on with the job of making fiber-to-the-premises broadband available to three million homes and businesses by the end of 2020."

But it also noted that caps would chew into annual earnings at Openreach, its infrastructure business, reducing sales and profits by £80-120 million ($112-168 million) in the 2018/19 fiscal year and "in the range of low to mid tens of millions of pounds" in each of the two subsequent years.

The operator made $7.1 billion in revenues and $938 million in pre-tax profit in its recent third quarter. (See BT Consumer Biz Hits Buffers as Q3 Results Disappoint.)

BT also complained that meeting Ofcom's more demanding minimum service levels would drive up costs at Openreach.

Under new rules, BT will by 2021 have to complete at least 88% of fault repairs within one or two working days, up from 80% today. It will have also have to provide an appointment for 90% of new line installations within ten days, compared with a rate of 80% within 12 days currently. Moreover, 95% of connections will need to be installed on the date Openreach agrees with customers, up from 90% now.

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Besides capping wholesale rates, Ofcom said it would stop BT from making targeted wholesale price reductions in areas where rivals are starting to build networks. There is concern the operator could do this in an attempt to stifle competition. "Competing providers will invest in building their own networks only if this is more attractive than buying wholesale services from BT," said Ofcom.

BT said it was considering the implications for competition of restrictions on its ability to vary broadband charges between different geographic regions.

The Ofcom moves follow efforts to legally separate Openreach from the rest of BT Group last year and reflect surging interest in the rollout of full-fiber networks in the UK market. (See Only BT's Dismemberment Will Sate Rivals.)

Under pressure from rivals and competitors, BT has said it will extend full-fiber networks to 3 million premises, up from an earlier commitment of 2 million, if regulatory conditions are satisfactory. (See Eurobites: Openreach Finally Puts 'Fibre First'.)

But other companies are going even further. CityFibre and Vodafone UK have said they will extend fiber networks to about 5 million UK premises by 2025 and have started building infrastructure in the cities of Milton Keynes and Aberdeen. Another fiber investor, Hyperoptic , has the same goals. TalkTalk , Gigaclear , KCOM Group plc and cable giant Virgin Media Inc. (Nasdaq: VMED) are also plotting fiber expansion. (See Eurobites: Vodafone Goes Hand in Glove With CityFibre, Lays Down the Gauntlet to BT.)

While it is unclear what role there is for Openreach in some of these other initiatives, Ofcom's intervention means it will have to make ducts and poles more readily available to companies investing in fiber networks. Ofcom reckons better access to this infrastructure could slash the cost of deploying fiber networks from about £500 ($700) to just £250 ($350) per home passed.

— Iain Morris, News Editor, Light Reading

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