Added by Chris Pateman | Wednesday 1st November 2017
Openreach's new Full Fibre Future consultation is precisely that -- an Openreach consultation. So it’s no great surprise it contains a number of Openreach assumptions. Of course business has welcomed Openreach’s ambition to build a large scale FTTP network. Why wouldn’t it? After all, it’s spent the last 10 years bemoaning Openreach’s ambition to sweat the hell out of copper and aluminium.
Business also welcomes City Fibre’s ambition to do something similar. It also welcomes Colt, Gigaclear, Hyperoptic, Metronet and just about anybody else who wants to provide reliable high speed business-grade connectivity. Businesspeople don’t even particularly care if it’s fibre or radio, so long as it’s reliable and delivers high speeds consistently. If Openreach don’t build it and somebody else does, they will buy from somebody else. Connectivity is what people want. Openreach maintains the legacy of what, less than 30 years ago, was a monopoly player. The market has moved on. And it is market demand, not philanthropic central planning, which motivates Openreach to deliver more FTTP. Specifically, it is the real possibility that if Openreach doesn’t do it, somebody else might.
The consultation is aimed at seeing if there is ‘enough demand for a network that could deliver gigabit speeds and a more reliable broadband service for decades to come’. Isn’t that a bit like the power networks consulting to see whether electricity’s here to stay? Demand isn’t the issue. Give people something better, and you can be sure they’ll consume it. What’s really the issue is whether people are willing to pay for it.
And here we have an existential question which needs to be addressed. And it affects all of us, not just Openreach. We all want customers to properly value the benefits of superior connectivity. And we'd all like to see an appropriately rewarding margin for providing it. But competition is already taking that nice fat margin away. Which is kind of what free markets do, isn’t it?
Look at City Fibre and TalkTalk in York: retailing a nominal 1Gb FTTH for £29.99 a month. (Nominal because it’s contended. But it’s still regularly delivering a spot speed of 900Mb). Yes, £29.99 retail. Check it out. Now, FCS isn't party to the net net net margin positions attached to this, but I’m willing to bet it goes something like: incremental additional business for CF, who have already covered/amortised the long-term sunk costs of building the network anyway. Substantial added-value benefit for TT who can bolt something like spprt packages, subscription-gaming or other premium services in to the bundle, so Gb connectivity becomes essentially a loss-leader to sell in a quad-play package. But isn’t that precisely how the subscription TV revenue models have moved in recent years? Will the business connectivity market be immune?
This underlying assumption that Openreach is entitled to recover the cost of improving its network might prove the fatal flaw in this whole argument. If memory serves, the LLU/WLR price controls already include something like 8% to cover the cost of network maintenance, which means customers have been paying for network upgrades anyway. Not paying for Openreach profits to be syphoned off into BT acquiring sports rights. Which is why FCS has always argued for full structural separation. In fact, it now looks as though we will have ‘legal separation’ but still not be allowed to see ringfenced, transparent, Openreach-only annual accounts. But that, as they say, is another story.
In a nutshell, it’s not at all clear that the £3bn - £6bn investment CAN be recovered fairly through wholesale pricing. And why should it? It may well turn out that making those kind of investments is simply the cost to Openreach of remaining a player. If you’re a utility, you have to maintain and upgrade your network, don’t you? Isn’t that what the electricity and water companies have to do? Isn’t that why they set out 20-30 year investment plans and seek out pension funds and other long-term investors who are looking for low-risk investment profiles offering reliable paybacks over extended periods? Southern Water alone, for example, is currently half way through a £3bn five-year improvement programme. These figures are not unusual for infrastructure providers.
The problem is that Openreach's Board, for all its independence, is still hamstrung where it really counts. Because it can seek funds from only one investor -- BT. This is simply not fair on Clive Selley and his team. But it does explain why they talk the way they do, BT-style, in their discussions with CPs, Ofcom and policy-makers.
But let us take comfort where we may: one good thing in all of this is the ‘FTTP switch over’ idea. Best to think of this as the telecoms equivalent of moving over from town gas to North Sea gas (if you're old enough to remember that) or switching over from analogue TV broadcasting to digital, region by region. We really are talking about something of that kind of seismic nature.
This is hugely exciting: it’s an opportunity for CPs of all shapes and sizes to have real down-and-dirty discussions with customers about their connectivity needs and the advantages of an upgrade, in the face of something none of these customers will be able to put off or prevaricate about.
FTTP Switch Over represents a great opportunity for the industry. But probably not to get wholesale prices up: the opportunity – as with digital TV – is in selling the personalised value-added services which digital infrastructure makes possible. Nice for Openreach if they can grab a bit of profit-share on the back of making it easy for CPs to have those discussions. But they are never again going to be in the driving seat when it comes to wholesale pricing. They’d better get used to that idea. So had the rest of us.