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No Buyer for Digital Region in South Yorkshire UK as Losses Continue

Posted Saturday, January 5th, 2013 (9:10 am) by Mark Jackson (Score 1,265)
digital region south yorkshire uk

The debt ridden Digital Region (DRL) network, which has gobbled up over £100m of public money to cover 80% of premises in South Yorkshire (England) with a superfast broadband ISP platform (alternative to BT’s infrastructure), has so far failed to find a buyer for its service and today reported more financial losses.

The operator had originally hope to award the contract to either ETDE SA (Entreprise de Transport et de Distribution d’Electricité) or the more controversial choice of BTWholesale Managed Services by December 2012 (here), which is roughly when their last injection of £10m to keep the network afloat was expected to run out (here).

Any delay could conceivably result in DRL having to be supported with yet more public money, more than would have been anticipated had a sale been achieved. As it stands DRL has just submitted its report and financial statements for the year ended 31st March 2012, which revealed an operating loss for the year of £14,285k (£14m), before exceptional costs of £62,936k.

The exceptional costs are claimed to be as a direct result of the accounts being “prepared on a break up basis“, which requires DRL to write down the value of its assets. This has been necessary because DRL has yet to conclude the procurement process to appoint a new operator of the network.

But DRL are keen to stress that “this does not mean that the network is being broken up, or that the exceptional costs will materialise“. The process to find a new operator, which would be accountable for the network’s revenues, costs and risks, is still said to be “ongoing” and is “on track for completion in early 2013“.

David Cowell, Chief Operating Officer for Digital Region, told ISPreview.co.uk:

Whilst these financial results appear disappointing, they are in line with the forecasts for the business so this outcome is not unexpected. The focus remains on moving DRL to the next phase of its development.

The intention remains to select a new operator that will ensure the network delivers on its original remit of digital transformation across the region, and provide quality and value for money for South Yorkshire residents and businesses.

A total of 29 expressions of interest were received in the initial stage of the procurement process and we are now working with two shortlisted bidders in the final stage.

A world class superfast broadband infrastructure is now in place, and we’re working to ensure that the people and businesses of South Yorkshire benefit from the transformational potential it offers.”

Teresa Robbins, MD of DRL ISP LittleBigOne.com, added:

There is significant cost associated with creating something as complex and cutting edge as Digital Region’s superfast internet infrastructure, and – thanks largely to European Union funding – more than 80 per cent of households and businesses in South Yorkshire now have access to some of the fastest and most resilient broadband connectivity available in the UK.

The fibre optic technology Digital Region has installed under South Yorkshire is not going anywhere and customers can buy internet services delivered over the network with confidence. The number of subscribers to littlebigone.com’s superfast broadband services, which are delivered over the Digital Region network, have soared over recent months.”

Last month the COO of UK ISP ASK4, Ross Bray, told ISPreview.co.uk that the new owner of DRL must turn it into a “credible” and “competitive .. alternative to the standard BT product set” if it is to survive (read our interview). But that can only work if BT doesn’t win the contract. However others suggest that BT may now be the most logical choice to save DRL; the irony of that would surely not be lost on anybody.

As it stands DRL’s real problem remains its lack of subscribers and their failure to attract any big name broadband ISPs, although the new Service Exchange Platform (SEP) and recent special offers might be able to change all that. But this will take time and meanwhile DRL still needs to pick a buyer, which would at least help the operator to edge towards sustainability.

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18 Responses
  1. That’s the problem when you don’t own infrastructure and just lease it from, er well, who I wonder? All that public money going down the same sink hole as the current lot will do.

    • PhilT

      But they built their own infrastructure Chris, as far as the cabinets at least. The only “lease” is unbundled sub-loops at a pretty small rental.

    • FibreFred

      No the problem is they built their own network at great expense using public money and not many want to use it.

      Go altnets! Another success story

    • Bob

      @Fibrefred @PhilT

      Chris is correct. The problem is that they rent the sub-loop from from BT. FTTP *does* cost in, providing you can make the equivalent line rental that BT makes from their copper lines. BT must be completely removed from the loop to make FTTx work for altnets.

      DR lease the sub-loop from BT. If they provide only DSL services, then the rental is quite small, but they don’t make line rental & calls revenues which are critical to providing a competitive service. If they take a full MPF solution, they can increase revenues, but the BT rental climbs considerably. The alternative is to use a BT WLR solution so BT provide the service, but the ISP administer it.

      Only by owning the entire distribution network can a credible alternative network to BT survive. FTTC is simply not an attractive, or long term option in my view.

      I have cost models that show that FTTP can work for typical rural village situations on a non-subsidised commercial basis. The line rental aspect is they key.

      It is far cheaper to run an FTTP network than copper, and especially FTTC in terms of OPEX.

    • Gadget

      @Bob Digital Region went out to contract and this was the solution that won the bid, if there were alternatives offered they were rejected by DR themselves. Did anyone bid an FTTP solution???
      You do, of course, realise that sub-loop unbundling is available in both MPF and SMPF variants from Openreach? (http://www.openreach.co.uk/orpg/home/products/llu/subloopunbundling/subloopunbundling/downloads/SLU%20fact%20sheet%20web%20vers%20PHME%2061156.pdf)

    • FibreFred

      So Bob,

      Two questions

      1) Why didn’t they do that then? FTTP
      2) Why would more customers sign up to FTTP than have for FTTC?

    • Bob

      @Fibrefred

      FTTP is weighted as an up front investment, where as FTTC is essentially an OPEX for the most part as it makes use of the existing copper assets. FTTP would cost considerably more than FTTC to roll out – that is not deputed. I claimed that FTTP is a more financially sound model and with far better long term prospects.

      Yes I am aware that Openreach offer SMPF and MPF. I mentioned both above. MPF will be the more profitable of the two options for those networks capable of POTS voice (that’s why TT / Sky etc all do it). Let’s looks at the 5 year costs for running an FTTC connection.

      MPF Rental = £93.96 per annum.
      MPF Connection = £127.61.

      Minimum costs are therefore £596.80 over 5 years, and possibly considerably more if there is customer churn during that period (ceases, reconnection, fault investigations etc). The cost *doesn’t* include an engineer to visit the house to perform any MODEM installation or checks, nor the provision of the MODEM itself, so this is a further cost to the ISP.

      So over the 5 year period, the minimum costs are likely to be in the order of £750 to £800+ before services. An FTTP network allows the money which would be paid to BT to be realised as revenue to the FTTP network operator, which shall pay for the build out of the network.

      One could also compare FTTP against an openreach provisioned FTTC tail (as in TT Sky etc). In that configuration there is both a line rental cost for the voice aspect and a FTTC cost for the data. The additional FTTC aspect is £88.80+ per annum on top of the line rental (by what ever means it is provided).

      That gives a cost of greater than £180 per annum to rent the Openreach FTTC customer.

      Over the course of 5 years the costs of FTTC and FTTP are roughly equal, but the level of profit made from an FTTP tail compared to an FTTC tail once the network has been paid for is considerably higher. There is a cost of finance which needs to be factored in too – I’ve ignored that for simplicity here.

      Potential buyers of the network are looking at the future prospects. SLU FTTC provides little in the way of product differentiation, and carries risk from BT duplicating footprints, and BT price changes. There is further risk in variability of the copper network (support costs, repairs etc) where as FTTP shall be much lower OPEX costs. Customers shall receive a better experience, and thus are less likely to leave and go back to BT. FTTC is inherently a short term solution, so shall require fork lift upgrades before 2020.

      I never said that FTTP shall bring in more customers, however it has been seen that Fibre displaced copper when both are available, and squeezes margins for cable operators. Just look at Sweden & Netherlands.

    • Bob

      Investors don’t like risk. SLU is very hard to quantify the risks. If DR were an FTTP network which was not reliant on Openreach, then I think that there would be many more interested players looking to take it over.

      SLU margins for a wholesale network are very thin. BT is still the distribution network operator, and the ISPs are still the ISPs. ISP margins are already razor thin. Do you really think there is space in that market to insert a middle man between the two?

      Fluidata’s service exchange platform is yet another level of middle man between DR and the ISPs. The costs just keep rising.

      BT –> DR –> (Fluidata?) –> ISP –> Customer

      Large ISPs cut BT Wholesale out of the loop for exactly that reason.

      Low profits, high risk. I’m out.

  2. Somerset

    So why would a potential customer use an ISP on DR and not one of the many on the Openreach network?

    • I guess it would depend whether or not you were in an area where DR had ADSL2 + FTTC and BT had just ADSLMAX and or ADSL2 but no FTTC etc. I’m not sure how the network coverage of the latest technologies compare, although when DR began BT had little interest in bringing superfast broadband to DR’s intended coverage but things have changed.. in some parts.

    • Somerset

      DR say “Of the total number of premises able to benefit from the Digital Region network, approximately 250,000 were experiencing very poor or non-usable broadband services at the time of the network design.”.

    • DTMark

      Because they’ve had to endure something on the BT network before and realise where the weak link in the service provision is? ;)

      But your point remains valid, Digital Region was only a current gen project which has the same issues as the Openreach offering, rather than something genuinely NGA so it’s hard to find where the Unique Selling Points are where both are available.

    • FibreFred

      What would you have suggested mark full Fttp ? They can’t even run a fttc network at profit which is cheaper

    • Sheffield Owl

      In my case its simple,BT have no plans to upgrade my exchange to FTTC,DR came along and now I’m on a 24/10mb package with Origin BB.Before I was lucky to get 2.5mb with O2. So in my particular case DR has been a God send.

  3. dragoneast

    Two basic points which we choose to ignore:

    1. BT have economies of scale, which Digital Region and other altnets don’t. Basic economics.
    2. For some customers (quite a lot of them, I expect, actually) the BT network at all levels performs fully to its spec and more than adequately for their needs. That’s not my definition of a weak link, unless you’re God and live in heaven. For others it’s not good enough – but that’s so for everything in life.

    • Alex Atkin

      It was always extremely optimistic to expect Digital Region to make a profit any time soon.

      It assumed a LOT of people both knew about the service, knew it was actually an improvement over what they have now, and were willing to pay considerably more than their current provider for it. All in all, a recipe for where we are now.

      Most people are perfectly happy with shitty broadband, as long as its free or very cheaply bundled in with their telephone/TV service.

      Many of the people who WOULD be willing to pay more are distrustful of claims of “up to”. The fact they still can’t make any promises of speed, yet you have to commit a lot more money than to BT network ISPs, doesn’t gain them any favours.

      Fact is Digital Region had a lot to prove and didn’t do anywhere near enough to promote itself. They didn’t even bother to put stickers on the cabinets advertising themselves, like BT does on theirs. If I wasn’t extremely nosey, I would never have known either.

  4. PhilT

    @Bob DR customers have to take their phone service so there is revenue from that. The sub-loop is fully unbundled, AIUI, ie VoIP from the cabinet (for want of a better phrase).

    Openreach’s SLU costs have been fixed for a long time

    Sub Loop MPF Rental per annum 30/06/2005 93.96
    Sub Loop Shared MPF Rental per annum 30/06/2005 11.47

    so if someone built a business plan using these then it must have been broken as we can’t blame Openreach for doubling the costs to SYDR. The sub-loop rental is pretty attractive IMHO, if you spend an average £500 on FTTP the interest cost on that is £50 pa which is N times greater.

    Like the City Hospital in Peterborough, it was a bad business model from the start.

  5. RichH

    This was doomed from day one, I live in an area that is covered by Digital Region and for reasons only known to them. They decided to upgrade FTTC to areas that already had high speed broadband available to them. Yet missed areas out that were on slow connections. Where I live every street within a mile or so could get BT at around 30 meg, virgin media at around 100 meg. Yet the street I am on was limited to 3 meg. So Digital region upgraded all those cabinets and left the 1 street that would benefit. Then offered slower connection speeds at higher prices. You go work out yourself why the take up of customers is very low…

    The whole planning of this was a joke and another total waste of tax payers money.

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