So let's dive into this work of research that is Broadbad. Quotes from the paper in italics.
• Openreach has so far received £1.7 billion in taxpayer subsidies to connect harder to reach areas of the UK to superfast services, but has repeatedly failed to deliver
Openreach have not received £1.7 billion in taxpayer subsidies and have not repeatedly failed to deliver. They have received approximately £700 million according to BT's accounts and projects are ongoing. Openreach have delivered the coverage agreed almost universally in the timescales agreed with local authorities, and will continue to increase coverage under the Superfast Extension Programme.
• Around 5.7 million people in the UK have internet connections that do not reach Ofcom’s ‘acceptable’ minimum speed of 10Mbit/s. 3.5 million of these people live in rural areas.
Not the case. The source material data was collected during May and June of 2015 so is out of date, and that same Ofcom Connected Nations Report states:
'Government programmes, such as those administered by Broadband Delivery UK (BDUK), are helping to address the problem of poor broadband coverage, particularly in rural areas. We would expect to see further improvements in rural broadband availability over the coming 2 to 3 years.'
This is more accurate and up to date.
• Poor internet connections are costing the UK economy up to £11 billion per year
Based on research from March 2015. I have no idea how valid that figure is, however it's not the job of private companies to spend money to increase UK GDP. The Conservatives privatised BT. Private companies have a responsibility to operate in the best interests of their shareholders. I'm sure we can find other industries that have cost the UK economy more and don't have MPs having papers written demanding their reorganisation. A number centred around the Canary Wharf and City of London area come to mind immediately.
• 42% of SMEs report experiencing problems with their internet connectivity and 29% also report poor service reliability.
Yep. The exact quote from the source material is the following:
'Our research has found that 42% of SME internet users had experienced issues with their internet connectivity in the preceding 12 months. Poor service reliability was the biggest problem, with 29% citing it as an issue, followed by slow download (16%) and upload (13%) speeds.'
Of course what is ignored is that reliability problems can be caused by wholesale providers and service providers, not just Openreach, as can performance issues, and that these are subjective measures. At what point will an SME complain about reliability? An outage every day? Month? Year? How do we know these problems are all the fault of Openreach?
• Following the announcement that BT will be merging with EE it has been calculated that BT will have a 40% share of the retail telecoms market and a 70% share of the wholesale market.
Separating Openreach from the rest of BT Group, as the paper demands, will have no direct impact at all on BT's retail market share and will potentially have quite the opposite indirect impact from reducing it. Free of the regulatory burdens involved with having Openreach as part of the group BT's retail arm may be free to more aggressively pursue market share. It is unclear what is defined as their share of the wholesale market as the source for these numbers isn't an Ofcom research paper, it's a Guardian article discussing Sky's and especially TalkTalk's advocacy of separating Openreach from BT Group.
• The time has come for BT to be forced to sell off Openreach to encourage more competition and a better service for every internet user and for the benefit of the UK economy.
Strangely given this is apparently so self-evident there are zero specifics given as to how this would encourage competition and improve services; in fact the expected impacts of separation are given 2 vague paragraphs in a 22 page report.
The introduction of the paper mentions Mr Shapps being alarmed by complaints about broadband in his constituency despite its close proximity to London, because London is the centre of everything and so proximity to it should be used as some kind of measure in these things. Alongside this comes confusion over what a natural monopoly is.
The following merits quotation. Page 9 paragraph 2:
This report contends that Britain, the birth place of the man who invented the World Wide Web, Tim Berners-Lee, should be leading the world in digital investment. The Government and local authorities have now generously granted a total of £1.7 billion in subsidies to BT to deliver broadband to the harder to reach areas of the UK.
A noble aim and with that in mind government and local authorities have provided a 'generous' subsidy. Except that subsidy, actually £332 million from central government matched by local authorities at the time of the numbers in the 'Key Findings' section, though higher now hence my mention of £700 million earlier, looks somewhat less than generous noting France's £17 billion public-private partnership, Germany's E2.7 billion for 50Mb+, or Australia's £14.9 billion to cover a population less than 40% of ours for the NBN project.
Singapore spent £639 per premises on broadband subsidy to deliver fibre to premises in a city-state. Our spending relative to that is hardly generous.
It's extremely disingenuous to quote total subsidies available and criticise based on results when a fraction of that subsidy has been used to date while also ignoring that all the subsidy isn't going to be used as Openreach have already returned some of it.
Page 9, paragraph 3:
Britain should have the most developed digital economy in the world but is instead lagging behind countries such as Japan, South Korea and others.
I could discuss at length why this is a ridiculous statement but we'll stop with a few simple facts. A far greater proportion of the populations of Japan and South Korea live in apartment blocks. In addition utilities in Japan and South Korea tend to be on poles. Those things that are considered to make places look 'third world' or become 'nineteenth century landscapes with overhead cables and wires.' but are really handy to string fibre optic cabling onto rapidly and relatively cheaply. Lastly there are more people in heavily densely populated urban areas in Japan and South Korea and their population densities overall are higher than ours.
We could, of course, focus on urban areas and delivering ultrafast services to those at the expense of leaving rural areas underserved for sure, delivering 1000Mb to many urban areas costs less per home than delivering 10Mb to some rural ones, but that would make complaints about the digital divide all the louder.
The idea that we should be at parity with these nations given the different factors at play and the level of public subsidy supplied thusfar is delusional.
Page 10 I will not comment on beyond to note that premises, not people, are the usual metric with regards to broadband coverage. Other parts are already covered elsewhere.
Page 11, paragraph 7:
As fig 1 on page 5 shows, vast swathes of the nation suffer from slow or even non-existent broadband speeds. A look at the South West of England, huge areas in Scotland and Wales and also the North of England show a nation plagued by poor broadband service.
These are sparsely or even virtually unpopulated areas. As a general rule operators don't tend to deliver copper and optical lines to places where there are no people. These aren't wireless solutions where people roam into the coverage, they are called fixed line for a reason. There's no fixed line broadband because there are no fixed lines to carry the broadband.
Page 13, paragraph 9:
It famously claimed in 2009 that 2.5 million homes would be connected to ultra-fast Fibre to the Premises (FTTP) services by 2012, which is 25% of the country. Yet by September 2015 they had only managed to reach around 0.7% of homes.
Frustrating as it was that the FTTP was scaled back, and that same ISPR review notes that BT actually spent more than they planned to on greater coverage than originally mooted in 2009 alongside upgrading the FTTC from 40Mb to 80Mb, 2.5 million homes isn't 25% of the country. Believing this would explain much about Mr Shapps' rather unfortunate tenure as housing minister given that there aren't 10 million homes in the UK, but as of 2014 26.7 million.
Page 13, paragraph 10:
BT has also frequently been accused of abusing the natural monopoly it has over the nation’s network and not giving equal access to other internet providers
I can't comment on this as the link cited, http://www.reuters.com/article/us-britain-telecommunicationsidUSKCN0J70W420141123, doesn't work.
I've had what looks like the correct link sent to me. Those making the accusations are Sky and TalkTalk, so obviously zero chance of a vested interest there. The link also makes clear where the 40% consumer and 70% wholesale market claim mentioned in the earlier Guardian article was sourced. In this article it's a direct quote from Dido Harding, TalkTalk Chief Executive.
Page 14, paragraph 11:
Competitors, like Sky and TalkTalk, argue that the relationship between BT and Openreach further exacerbate the problems brought about by the current situation already being a natural monopoly. These other providers have to pay a wholesale price to BT to make use of the network and they then charge their own customers for services.
It should be noted those guys pay Openreach for the most part. This comment muddies the water somewhat by being unclear. I'm unsure what alternative arrangements there could be. Separating Openreach doesn't alter the 'natural monopoly' point, it removes vertical integration which is a completely different concept.
They have consistently argued that Openreach has little incentive to invest in upgrading the network and in fixing faults quickly.
They have little incentive because no-one else is investing. This is a failure of the UK's broadband market and the the business case for building ultrafast broadband networks here. Separating Openreach isn't going to change this, they will still have no incentive to upgrade or fix faults more rapidly as it won't introduce competition to Openreach; they remain a natural monopoly until someone steps up with an open wallet and willingness to wholesale the network they build.
Page 14, paragraph 12:
Logically this means Openreach has little to gain from improving the network. At the moment the infrastructure is largely a copper network, meaning it is outdated. BT has made much about a new technology it is introducing, G.fast, that it claims will enhance the performance of the existing copper network, using better signalling kit to push more data into the wires. The obvious criticism to make of this approach is that BT are merely trying to eke out what life there is left in an outdated network system instead of planning for the future and upgrading to a fully fibre network
It's believed approximately 50% of BT's spend on G.fast will be re-usable for a 'fully fibre network', just as a proportion of their spend on FTTC is reusable on G.fast or a full fibre network. This is just-in-time capital expenditure. Virgin Media in common with other cable companies are doing the same.
Page 15, paragraph 13:
BT has so far received £1.7billion in taxpayer subsidies to roll out superfast broadband to harder to reach rural areas. Ministers have done the right thing by wanting to connect up these areas but were
badly let down by the regulator and BT. The push should be for stronger, more competitive networks.
As mentioned above BT have not received £1.7 billion from the taxpayer. This was not specified to cover harder to reach rural areas, that was down to local authorities in co-operation with BT to decide. This programme was nothing to do with Ofcom. I have no idea what is meant by 'more competitive networks' that seems like a bit of 'buzzword bingo'.
Page 15, paragraph 14:
Openreach generates 50p in earnings before interest, tax, depreciation and amortisation for every £1 of revenue. No other telecoms companies, such as Virgin or sky, are in receipt of such generous subsidies. Yet 48% of rural homes still don’t have internet that Ofcom would describe as merely acceptable. To make matters worse, there are still large numbers of homes who cannot even reach speeds of 2Mbit/s. This means they are unable to make use of online services like music streaming or catch up TV sites.
Use of EBITDA is a gross simplicity at best, it also ignores pension deficits and indeed that some of Openreach's pricing is intentionally held high by the regulator in order to try and encourage others to build competing networks. The performance figures are out of date as noted. To be quite frank it looks as though someone ran through the Digital Comms Review and picked out bits that were 'on message'.
Page 15, paragraph 15:
BT benefits hugely from these subsidies. They get to spend the money given to them and will own the newly created infrastructure afterward. This effectively means the UK taxpayer is subsidising BT owned infrastructure through Openreach that they will then profit from. BT have also recently been caught in a scandal where it was found that £1.7 million of Openreach revenues had been used to fund the recently approved merger deal with EE, leading to a censure from Ofcom. This raises renewed questions about the takeover and has caused further worries for competition, compounding the problems that already existed over Broadband. It means that BT now has a 40% share of the retail telecoms market and a 70% share of the wholesale market.
The funding is gap funding. It specifically provides the amount of money in between BT's normal 'commercial' spend and the actual amount required to service the subsidised properties. The above comment ignores that there are clawback clauses in the subsidy contracts, worth £129 million as of July 30th, where sales of the subsidised superfast broadband have meant a smaller subsidy than originally provided was actually needed.
Other than the governent going back into the telecomms industry what was the alternative?
As previously noted I have no idea what the retail numbers have to do with divestiture of Openreach, and no idea what the share of the wholesale market refers to given its source is a Guardian article.
Page 17, paragraph 16:
The UK broadband network is largely made up of incredibly outdated copper wires. This technology may have been cutting edge when it was first installed, but today it sees us lagging behind other leading economies, such as Germany, Japan and France. It is frankly alarming that London’s Tech City has some of the worst broadband speeds in the country.
The UK has higher availability of Superfast broadband than Germany or France.
BT are apparently addressing Tech City, however I would ask why BT are expected to service Tech City and no-one else? If the demand is there and it's a viable investment why hasn't anyone else stepped in to deliver the products? BT aren't the only company capable of delivering broadband. There is nothing beyond the UK's regulations, costs of deployment and the willingness of companies to pay stopping others.
Page 17, paragraph 17:
BT’s approach to the need for faster broadband is to resort to G.fast. This technology makes use of more intelligent signalling kit to push more data through the existing copper wires allowing for the upgrade to ultrafast internet. This should allow for speeds of between 150Mbit/s and 1Gbit/s. However, it can only achieve speeds at the higher end of this scale in limited circumstances and that pure FTTP cables would be needed to guarantee these top speeds. Rather than acknowledging the need to comprehensively rethink their broadband investment strategy, they are instead effectively postponing the decision and trying to strain every last bit of profit they can from the outdated and struggling copper network. Whilst G.fast will increase speed for some it is a reactive measure, a short term fix that won’t address the long term need.
Just-in-time CapEx is a legitimate strategy. G.fast as noted earlier will push fibre deeper into the Openreach network with approximately half of the spend being re-usable on deploying fibre to homes.
It is not considered a long term fix any more than FTTC was considered a long term fix. The G.fast range of speeds is considered ample for the foreseeable future. If BT offer the option of 1Gb via FTTP on Demand at more competitive prices as would be expected given G.fast pushes fibre much closer to customers that will serve 'power users'.
Page 18, paragraph 18
What is needed is the acknowledgement by BT that the network needs to be converted to all fibre throughout.
Openreach are aware of this, however they would disagree with the timescales posited.
Demand for broadband is forever increasing throughout the UK as more and more people rely on digital services for work, entertainment and day to day living.
Yes it is. This is actually showing signs of slowing down though as the major driver, video, becomes more efficient and reaches ubiquity.
By making the jump to an all fibre network we will be following countries like Japan, South Korea and even Spain. Ofcom have shown that as consumers get better download speeds, they consume more data.
Virgin Media's experience indicates that the higher the speed before upgrade the lower this increase. Very much a case of diminishing returns as people do the same things but more quickly.
Incidentally what's the big driver of FTTP in Spain? Competition. Telefonica didn't need separation, just a third party to come in and invest rather than relying on them to deliver everything and complaining about the manner in which they do. That and of course that while Ofcom require BT to allow access to all their products on an equal footing, Telefonica didn't have to wholesale anything over 30Mb. If you wanted to sell >30Mb in Spain you had to build your own network. Perhaps a reason to blame Ofcom and the obsession with retail competition that has allowed ISPs to avoid investing in their own networks as they can compete just fine with BT's own retail operations while having BT bear the risks of investment.
Whilst in the short term most users could make do with speeds that G.fast is capable of providing, this is hardly a compelling argument for the status quo. Demand will keep increasing and it makes sense now to invest in future proofing the network, not papering over the worryingly large gaps.
Neither is it an argument for separation of BT Group, and it does not by default make sense to invest in future proofing the network as this assumes all cash is on-hand and the investment doesn't amortise, which is wrong. BT would have to borrow, have to pay interest on the borrowing, and be writing down the investment.
Paragraph 19 I'm not going into depth on. Business parks tend to be passed by because there are few premises there so harder to make the economics work to deliver broadband to them. Repair and install times are below par, no question, but hopefully improving. There's no reason to think separation will improve these factors as it doesn't address the natural monopoly scenario. I've discussed the dissatisfaction above.
Page 20 paragraph 20 has no real content to discuss.
Page 20 paragraph 21:
This report considers that there is only one real option that would satisfactorily address the Openreach question; the structural separation of BT and Openreach. This means BT would be forced sell off Openreach so it becomes entirely separate company. This would directly address the current reasons BT has to discriminate against competitors. As well as this it would also increase Openreach’s incentives to invest in the network and improve on their issues with performance and customer services.
I do not see any explanation why such an action would increase Openreach's incentives to invest in the network or improve their issues with performance and customer service, They would remain the 'natural monopoly' discussed above, able to continue to behave in the manner of a monopoly.
BT Wholesale would remain their largest single customer, BT Retail the largest customer of BT Wholesale and hence there would remain a perfectly legitimate chain of influence between supplier and their largest customer. This report has presented no instances where Openreach are discriminating against other customers in favour of BT Wholesale. Openreach do not deal directly with BT Retail. There is no reason to believe Openreach's deficiencies are not affecting all customers equally.
Page 20 paragraph 22:
This report believes that formally separating BT and Openreach into two fully separate companies would be of immense value to the UK digital economy. The current model actually constrains BT. It makes perfect sense for BT to favour the status quo and underinvest across all the broadband services it provides through Openreach. It has a ‘natural monopoly’ and severely restricts proper competition. This hurts all internet users, as well as the wider UK economy. The current arrangement is a hangover from the days of nationalised businesses.
This reiterates paragraph 21 and is equally lacking in detail. As previously noted the report confuses natural monopoly and vertical integration.
I would suggest that, rather than freeing Openreach to invest separating them from the rest of the group leaves a for profit company directly at the behest of shareholders who will be wanting a return on their investments. For them spending as little as possible would likely present the best possibility of returns, as with the status quo. In the absence of commitments from third parties to invest, and I would point out that of the two loudest 'voices' in this discussion one doesn't have the funds to invest and the other has steadfastly avoiding committing to do so, I see no reason why separating Openreach from BT Group would have any short or medium term impact other than to ensure Openreach do not invest in their network.
Page 20 paragraph 23:
Under the proposal in this British infrastructure Group report, Openreach would operate as a totally independent company, no longer tied to BT.
By opening up to competition it would ensure that Openreach could turn to investing in the future and focus on digital innovation.
I am still completely unclear as to how separating Openreach would open anything up to competition. They remain a natural monopoly, they aren't going to be bidding against anyone else for use of their own copper and fibre assets. If suppliers wish to reach customers connected to Openreach's network they will have to pay Openreach to do so.
The only way to compete outside of some business areas with Openreach is to build a new network, and then allow wholesale access to that network. The only alternative network of any scale going to homes and businesses in the UK belongs to Virgin Media and is a closed network, no wholesale access.
BT's labs have a long history of innovation, and Openreach are at the forefront of G.fast, a technology that telecomms operators worldwide are planning to use in a variety of ways.
Rather than having to obey the orders of BT it could search out long term investment and partners for itself. It could seek this from all manner of sources, such as pension funds, and open up the market to greater competition. Meanwhile real competition would force the pace of investment to increase as companies would not be able to rest on their laurels and compete for custom by offering better speeds and cheaper deals.
Rather than having to obey the orders of BT it would have to obey the orders of profit-motivated shareholders.
Again what competition would force the pace of investment to increase? Openreach aren't going to compete against themselves and suppliers will only be able to offer the speeds the Openreach network delivers them at the prices that allow them to make a profit while paying fees to access the Openreach network.
The only way this could change would be for Openreach to allow access to all of their ducting so that others may place their own fibre in it and indeed for Openreach to replace the copper in there with fibre where others don't want to leaving suppliers to add the technology either side.
This would involve Openreach spending tens of billions over several years to make their current copper, FTTC and FTTP networks redundant and lose all of their current revenues in favour of becoming a dark fibre supplier to homes and businesses. Who is going to invest in that on a nationwide basis? The losses in ultra-rural areas would be immense.
The complication of deciding who has to fix what and who pays if there is, say, a fibre break affecting an Openreach owned duct with multiple suppliers' fibre inside it a genuine overhead. If in doubt are Openreach to pay for everything? Is this to be the attractive business case to institutional investors that will ensure money pours into Openreach or is it far more likely the business would end up run down, even more poorly performing, and potentially asset stripped where feasible?
To avoid all of this would require way more regulation than there is currently. A strange thing indeed for Conservative MPs to desire.
Page 21 paragraph 24
Unless BT and Openreach are formally separated to become two entirely independent companies little will change. They will continue to paper over gaping cracks. Whilst rural SMEs and consumers are left with dire speeds, or even no service at all, Openreach makes vast profits and finds little reason to invest in the network, install new lines or even fix faults in a properly timely manner. The time has come for a bold and comprehensive solution, full separation and deregulation will provide that solution.
A lot has changed, some of it for the worse, some for the better. The only way to prevent extensive unintended consequences as a result of full separation and deregulation is to renationalise Openreach. Anything else leaves that company, and the UK's telecomms infrastructure, beholden directly to investors whose main concern will be profit and loss. Deregulation opens up another level of unintended consequences from preferential treatment for profitable urban areas while rural areas see poorer service as there is no profit in serving them equally through to predatory pricing in those areas where there are competing networks.
Does a Conservative, or any other, government have the appetite to renationalise Openreach, taking on the prodigious pension deficit, in order to spend tens of billion reducing its revenue stream?
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25th January 2016 - added new paragraph with apparently correct Reuters link; corrected typos, tidied up formatting issues.