Fibre a Necessity not a Choice for BT

The voices calling for a next-generation access (NGA) strategy for Britain have been getting louder over the past 12 months. Now, with BT’s conditional offer to cover 40% of UK households with an upgraded fibre network by 2012, there is at least a firm proposal on the table.

City and analyst reaction to the announcement has been predictable, both sceptical about BT’s return on its investment, and damning about its modest objectives. Analyst firm Point Topic has a different view.

“I believe investment in NGA is essential for BT, and it should generate a good return for decades to come. On the other hand, if BT doesn’t renew its local loop infrastructure its existing copper network will be worth only scrap value within 10 years,” says Tim Johnson, Chief Analyst at Point Topic.

The focus on consumer broadband as the driver for NGA is understandable but misleading. An upgraded network will provide much wider benefits and revenues than just better broadband services.

“Fibre in the local loop combined with BT’s 21CN [twenty-first century network] project allows BT to provide a complete IP-based telecoms environment to the end user. Customers should get more flexibility for less cost and dreams like seamless fixed-mobile convergence will become reality,” says Johnson

Cost v Return – is it a good investment?

BT’s proposal to cover 40% of the homes in the UK for £1.5bn works out at £150 per household. Past estimates have ranged up to £20bn to provide fibre coverage for all the 25 million households in the UK, or around £800 per household. A much lower cost to cover the whole country now looks likely.

“By offering new and better services, saving on operating costs and having a relatively low capital cost to recover, BT stands to make good margins on this first phase of its next-generation investment. We estimate they would need to earn only about £3 per month per household for a good return,” says Johnson.

“Of course, even £3 a month would be a heavy extra burden to put on the price of broadband services,” Johnson points out. “But the £3 is for the partial replacement of what broadband customers are already buying, not for something additional.”

“BT will also get lots of benefits from cost savings and other new services, besides basic broadband,” he adds. “So I don’t think the NGA investment should increase the cost of broadband overall – although people will get a lot more for their money.”

BT makes the point in its press release that its £1.5 billion NGA investment depends on: ”removing current barriers to investment and making sure that anyone who chooses to invest in fibre can earn a fair rate of return for their shareholders.”

The biggest barrier at present seems to be not so much current regulation as the fear that the rules will be changed to undermine the business case for fibre. BT is being canny by exploiting the current clamour for high-speed broadband to create the feeling that next-generation access will need special treatment to go ahead.

In fact the roll-out of next-generation access will be much like any other cycle of renewal in a utility network. There may be a need for some special subsidy to bring NGA to the most remote places, as there has been already for current-generation broadband, but by and large BT’s shareholders should be able to finance the investment, carry the risk and reap a good profit in return.