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Sky Attacks BT Openreach for Not Spending Enough on Broadband

Friday, September 18th, 2015 (9:58 am) - Score 1,743

Sky (Sky Broadband) has ratcheted up the pressure on Ofcom’s Strategic Review of the UK’s digital communications market, which will decide whether or not to separate BT from control of their telecoms and broadband network, by criticising the operator’s alleged lack of investment and interest in building a national Fibre-to-the-Home (FTTH) network.

The latest criticism flows from a Telegraph editorial that has been written by Sky’s Chief Strategy Officer, Mai Fyfield, who in no uncertain terms slams BT for “under-investment” in its national infrastructure and attacks their “unacceptable levels of faults and service problems.”

At the same time Fyfield suggests that the current market situation has left BT with “little incentive to invest” in Gigabit capable Fibre-to-the-Home (FTTH) based broadband services, at least on any kind of truly national roll-out scale (they have about 160,000 premises passed with FTTP).

Mai Fyfield said:

However, we have seen recently that BT is intensifying efforts to close down this important debate before the arguments have been heard. Most recently, Joe Garner, chief executive of Openreach, argued in The Telegraph that separation would be bad for Britain.

The mere fact that the head of Openreach, whose intended role is to serve the market equally, should argue in such partisan terms for the BT corporate interest is a graphic symbol of how the existing set-up is broken. Moreover, BT’s case for the status quo is built on unfounded or exaggerated claims about the benefits of vertical integration and the risks of separation.

Most frequent is the claim that only BT would have invested £2.5bn in the roll-out of fibre. Yet BT’s own accounts put this figure in perspective. Over the investment period, Openreach generated around £15bn of earnings, while its total capital expenditure remained broadly flat. In practice, fibre roll-out has been funded in part by cutting spending on other critical parts of the network, with service quality and reliability suffering.”

The comments from Fyfield somewhat flow on from Sky’s earlier criticisms in June 2015 (here), when the provider called upon Ofcom to launch a competition review of BTOpenreach and at the same time highlighted some of the engineering statistics and challenges that often crop up when dealing with the incumbent.

Fyfield closes the guest editorial by predicting that a truly independent Openreach, one which could be part owned by some of the markets many ISPs (we assume that must still include BT), would be magically able to deliver better services and higher quality, not to mention more effective competition.

Naturally BT’s Group Director of Strategy and Policy, Sean Williams, has been quick to rebuff Sky’s remarks as “plain untrue“, adding that “no investments have been diverted away from Openreach. BT Group has played a vital role by investing £10.5bn of capital in to Openreach over the past 10 years.”

As ever Sky’s remarks are a simplification of the many complex problems that exist in today’s market and which Ofcom must navigate through to reach a conclusion. But the question of whether or not the grass would truly be greener on the other side, with an independent Openreach, is somewhat harder to judge.

Rivals of course have their own vested commercial interests at heart and will always fight for what benefits them the most, just as BT will surely fight for an outcome that would benefit their side of the proverbial fence. A few may even see a gain to be had in disrupting an independent Openreach to their own advantage.

In the middle sit consumers, who lately appear to have become part of a somewhat industrialised game of telecoms ping pong. Apparently it’s all about us, giving us better service and delivering the connections that we all want and more.

In reality this is business, it’s all about money, and you don’t make much of that by giving such things away for free. Improvements tend to come at a cost and that usually means higher prices for consumers. As in the case of the railways, we all pay a lot more for the service and yet the service quality in many parts of the UK remains just as flaky as it was a decade ago.

At this point what might help more is if BT’s rivals could provide some proof of their sincerity to deliver on such promises, such as by making a firm and jointly agreed commitment to spend a clear amount in order to deliver a much better service. Perhaps then if we could see what we might get, how much it could cost and where the money is coming from then it would be easier to buy the “trust us.. we can do it better” mantra.

In the meantime full separation of Openreach is just one of several avenues that Ofcom are giving “serious” thought to (here). The regulator has an unenviable task and they’ve previously spoken against making any major regulatory changes. We expect to learn the first preliminary proposals from their review by the very end of this year or possibly early 2016. Place your bets now.

What do you think Ofcom will do (Strategic Review)?

  • Issues one of their epic 600+ page reports, which hardly anybody ever reads properly, only to then make no major changes of any particular note (i.e. retaining the current model). (49%, 68 Votes)
  • Fully separate Openreach from BT. (36%, 49 Votes)
  • Make some modest regulation and other tweaks to improve competition (i.e. opening up more of BT's network to rivals), plus a few new charge controls etc. (15%, 21 Votes)

Total Voters: 138

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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34 Responses
  1. Avatar tonyp says:

    I read the ‘Telegraph’ piece the other day and it made me feel that JG had quite a degree of ‘there is no alternative’ smugness. An obvious piece intended to influence sway the OFCOM review. But that could also be said about the other players as above. All big businesses and getting bigger. The telecoms element seems to be playing second fiddle to media (and perhaps that is right). Thus I believe that full separation of Openreach is the way forward. Similarly, the telecom element of the Liberty Global operation should be separated into a stand-alone company. Then there would be true competition and/or diversity for consumer/SME telecoms infrastructure. Smaller infrastrucure players might have a better chance of providing innovative telecoms but I doubt it. But we live in cloud cuckooland and I think the status quo will continue. Brown envelopes all round?

  2. And of course Sky is a firm believer in open and fair competition (not)!!! 🙂

  3. Avatar TheManStan says:

    Given that Sky has a year on year annual profit of over £1BN per annum, haven’t they wasted their opportunity to invest in a “final mile” network of their own, instead of being reliant on BTOR?

    Particularly, when they could have done so pre-2009 (when most other ISPs in Europe started, they still had >£700m profits back then) with minimal competition whilst BT had it’s hands tied with not being able to roll out a fibre network.

  4. Avatar Neil says:

    “Sean Williams, has been quick to rebuff Sky’s remarks as “plain untrue“, adding that “no investments have been diverted away from Openreach. BT Group has played a vital role by investing £10.5bn of capital in to Openreach over the past 10 years.”

    Err rebuff? More like shot his own foot off, half the issue is Openreach is part of the BT Group and has funds syphoned into it. Not to mention that demonstrates they are not independent of other parts of BT.

    1. Avatar Ignition says:

      Hmm.

      http://www.ft.com/cms/s/0/2d0dc706-ce7a-11e4-900c-00144feab7de.html#ixzz3m61KiIgR

      ‘On March 17, we published a letter from Sean Williams, group director, strategy, policy and portfolio at BT Group, in which he stated that BT’s Openreach unit increased its capital expenditure by 10 per cent a year from 2009-14. This was incorrect. In fact, Openreach increased its capital expenditure by 10 per cent over the whole period, not each year.’

      10% increase between 2009 and 2014 given the NGA project does seem pretty low, however it was higher in 2013 than 14, £1.14 billion to £1.05 billion.

      ‘BT Group has played a vital role by investing £10.5bn of capital in to Openreach over the past 10 years.’

      The man is essentially saying that all Openreach CapEx is invested in it by BT Group. For a company that’s supposed to be functionality separated that’s an entirely inappropriate comment. Openreach should fund its CapEx from its own funds, and according to the financial statements remains quite profitable with operating cash flow of £1.5 billion last financial year.

      If that is an exact quote shot himself in the foot indeed. Careless. Making it sound like any money Openreach invests it does so with the grace of the Group. That makes the argument for complete separation superbly.

    2. Avatar TheManStan says:

      Functionally separation doesn’t require financial separation…

      If they were a wholly owned subsidiary then the statements would be incorrect, but as they are a division within group then as with all divisions all finances are stated on reports as part of the group finances.

      If they were wholly owned, then they would be separate legal entity and would report separately, with BTOR only showing on the consolidated accounts of group. But, if that did happen then the pension problem would have to be addressed… and those liabilities would end up with the majority in BTORs lap due to the historical employee locations.

    3. Avatar Ignition says:

      Indeed. As I said he just made the argument for full separation. Even with the pension fund liabilities Openreach appear to generate enough operating cash flow to remain profitable and increase CapEx.

    4. Avatar Steve Jones says:

      “For a company that’s supposed to be functionality separated that’s an entirely inappropriate comment.”

      That’s incorrect. BT are free to make strategy such that capex is invested wherever it makes the most sense. What BT are not allowed to do is run upstream activities (like BT Retail) at a loss subsidised by downstream ones. So

      If OpenReach can make a suitably profitable investment then it would be mad not to do so within the ability of BT to either generate the cash internally or raise it through the capital markets. The problem is making the commercial case. Just because OR might be able to fund a two or three hundred million pounds a year in capex (at the expense of dividends or further borrowings) is no reason to do it if it will not make a return. Of course it’s possible to argue that BT haven’t assessed the potential returns correctly, but quite why they’d do it deliberately is another question. OR already represents the considerably majority of BT capex.

      Openreach are a £5bn a year business, and the way it is regulated (and competition from other infrastructure owners in both business and domestic areas) means that there is very little prospect for increased revenues to justify a greatly increased investment level. It can’t expand upstream and the pressure is always on to reduce wholesale prices or produce new products to undermine its own revenue streams (see the recent dark fibre proposal which is a complete about turn by Ofcom).

      Essentially the demand by Sky, TalkTalk and so on for ever lower wholesale prices is not compatible with increased levels of investment which need new revenue streams unless they produce reduced costs in the near/mid term (which they won’t as the UK will have parallel copper/fibre for the foreseeable future).

    5. Avatar Neil says:

      “The man is essentially saying that all Openreach CapEx is invested in it by BT Group. For a company that’s supposed to be functionality separated that’s an entirely inappropriate comment. Openreach should fund its CapEx from its own funds, and according to the financial statements remains quite profitable with operating cash flow of £1.5 billion last financial year.

      If that is an exact quote shot himself in the foot indeed. Careless. Making it sound like any money Openreach invests it does so with the grace of the Group. That makes the argument for complete separation superbly.”

      Superb and 110% accurate post ignition 🙂 Seems the man not only has problems with figures but a failed grasp to understand why Openreach should be separated is even being considered.

    6. Avatar themanstan says:

      The function of Openreach is to provide equivalence of service to all it´s customers (as required by OFCOM)… it has nothing to do with CapEx (which OFCOM cannot regulate forced expenditure).

      As for CapEx (for all divisions) being decided by Group (by grace of), that is true, it´s the function of Group to decide strategic expenditure of all divisions.

      If BTOR was spun out then the need for equivalence would not be required (it´s required because of the vertical integration of BT) and customers (ISPs) could be charged based on how much business they do with the follow on entity (like all other businesses)… so be careful what you wish for!

    7. Avatar Ignition says:

      Openreach shouldn’t be having to compete with Retail for funding based on what makes the most commercial sense.

      His comment encapsulates a really good argument for full separation. Being a part of BT Group alongside Retail especially will inevitably deter long-term investment in favour of investments with potentially shorter periods of return, such as content. BT are beholden to shareholders, shareholders rarely like companies sinking money into expenditure that won’t show returns for long periods – see Verizon and the FiOS build.

      I’ve long said that this isn’t the case. Looks as though I was wrong.

      Stan, I don’t see why I should be careful what I wish for. Openreach’s regulated pricing can continue even if separated. Wholesale already supply volume discounts to larger customers and produce products to fit Retail’s needs.

      The only real concern is whether or not Openreach would be financially viable. On that score I don’t know. What I do know is that having the largest UK’s telecomms infrastructure’s funding dependent in part on how much Champion’s League football rights cost is discomforting.

    8. Avatar Steve Jones says:

      @Ignition

      BT Retail and Openreach do not compete with each other for investment. It’s very simple. If there is a decent prospect for a return, then funding can be found. There’s no sense in which OR is starved of investment in favour of BT Retail or vice-versa. If it makes sense to do so, then money is available. There are plenty of willing investors if they think there’s a return.

      You also need to be disabused of the notion that companies have a certain stream of funds that they have to invest. Shareholders have a choice. If it doesn’t make sense to invest free cash flow they will simply demand its returned to them if they feel they can make better use of the money. If they think that forgoing dividends in favour of capital investment is a a good strategy as they can expect growth, then they’ll support that.

      A separated OR will face precisely the same issues as it does at the moment. There is not real prospect of substantial growth (at least in the UK) due to the market structure and regulation. It could easily return excess money to shareholders or, possibly, look at investments abroad outside of the regulator’s control.

    9. Avatar Neil says:

      “…If there is a decent prospect for a return, then funding can be found. There’s no sense in which OR is starved of investment in favour of BT Retail or vice-versa. If it makes sense to do so, then money is available. There are plenty of willing investors if they think there’s a return.”

      Which is the problem exactly if funds are switched back and forth between Openreach and the rest of the BT Group they are not operating as a separate entity. That in turn means other providers reliant on Openreach are not treated as equals.

      Mr Williams has put his foot in his mouth with his statement without even realising it.

  5. Avatar Al says:

    I’m sure Sky will be willing to cough up some of their own money then. So why not spin off BTOR and form a new company where all telecom operatores have to contribute towards the cost of a national FTTP network. And by national I mean FTTP to every single property no matter how much it costs.

    1. Avatar TheManStan says:

      Who picks up the, “at all costs” costs?

    2. Avatar DTMark says:

      This was the right solution, and one passed on by BDUK whose efforts have made the problem worse in the medium to long term.

      BT is a company with a huge pensions burden and a proven track record of underinvesting, making poor business decisions, and generally milking the network and spending as little as they can, made possible by having an infrastructural monopoly.

      So BT’s threats ‘not to invest’ if they are split up are the stuff of comedy.

    3. Avatar Ignition says:

      Hate to point this out to you but businesses don’t have money trees. Every penny to deliver this broadband panacea has to come out of our pockets.

      Do you fancy telling people they are to pay more for broadband/telephone/TV to deliver ultrafast at £5k+ per property to ultra rural areas as it’ll also be supplying them an FTTP service they don’t want at £500+ per property as they’re fine with what they have?

      How long do you think it’d take to deliver such a network? Estimates I’ve read believe it’s a 15-20 year project.

    4. Avatar DTMark says:

      That’s why it would have been imperative to have Virgin Media on board, the attraction for them being their future sales to a nationwide network.

      In a way the timescale isn’t that important, it will take years, which is why it needed to be started years ago.

    5. Avatar TheManStan says:

      But OFCOM and UKgov screwed things up with the daft clauses in the Enterprise Act where it was illegal for BT to roll out fibre for residential purposes, unlike the rest of the world which got on with things almost 2 decades ago.

      So instead of having a graduated level of investment the expectation is a mad rush to get things down as quickly as possible and catch up.

    6. Avatar Ignition says:

      The rest of the world hardly started deploying FTTP almost 2 decades ago. It’s still pretty rare outside of new build besides a few notable exceptions.

      The international reports indicate that the UK is largely equivalent to our peers but well behind the ‘leaders’ in ultrafast.

    7. Avatar TheManStan says:

      If you take S. Korea which started deployments in 1995, this should have been a heads up to OFCOM to consider evolution of BB. 14 years later Enterprise Act gets amended for BT residential fibre BB… so 20 years ago the first national fibre network started in the RoW.

    8. Avatar DTMark says:

      Does anyone know *why* BT were prevented from laying fibre?

      Was it perhaps because they were seeking to trail along behind the cable companies overbuilding them, and building only in those streets, seeking to stifle competition before it even got going?

    9. Avatar Ignition says:

      South Korea and Japan are the exception, not the rule. I don’t include Hong Kong and Singapore as they are cities with a ton of apartments.

      South Korea is massively urbanised. 1/5th of the entire population are in Seoul, 1/2 of the population in the Seoul Metropolitan Area.

      The Netherlands scores highly on the average speed tables due to almost ubiquitous cable coverage. KPN heavily rolled back their FTTP plans.

      We aren’t in a great place, could be better, but certainly not a mile behind the curve.

    10. Avatar TheManStan says:

      Do you really mean “exception” or do you really mean an “ideal”?

    11. Avatar Steve Jones says:

      @DTMark

      BY weren’t banned for rolling out fibre in the mid 1980s (as some people characterise it). What BT were banned from doing was distribution broadcast TV over their networks, and without the revenue from that service (there was no BB in those days), it killed any prospect of a return. The reason was that when BT was privatised the competition model the government of the day favoured was based on cable networks (as in the US), and that meant granting local monopolies to cable companies in order to encourage them to lay networks.

      As it happens, at the time, there really wasn’t any history of laying fibre for domestic purposes anywhere in the world. It would have been virtually inventing an industry. It all hung on TV – the very idea of BB hadn’t really appeared on the horizon in the mid 1980s.

      In effect, BT were making a bid to be the national network infrastructure provider (at least for domestic purposes). Quite what wholesaling services would be available is another issue, but the government’s approach just killed the thing stone dead.

      It should also be noted that the state has changed the BT regulatory regime radically since when it was first privatised. Those who bought into shares at the time have found the environment changed over what was promised.

    12. Avatar MikeW says:

      @Steve
      “It all hung on TV – the very idea of BB hadn’t really appeared on the horizon in the mid 1980s”

      The residential world may have hung on TV; data at the time for consumers was oriented at Prestel with 1200/75 bps modems. So certainly the need for a new access network was driven by TV.

      The business world was slightly different; in the mid-eighties, I was developing high-end PABX equipment, and worked on features akin to ISDN. The top-end stuff then was a 2Mbps link, carried on coax, carrying 30 channels @64kbps that could be either used for voice or data.

      These 2Mbps links could be used in a variety of ways. One collaboration with DEC targeted use of a 2Mbps connection into their hardware, with 30 terminals connected through the PABX via the back of digital desk phones.

      Data, though not broadband, was just starting to be seen as a real separate service.

  6. Avatar fastman says:

    so where ths clamour for virgin to open up their network then

    1. Avatar Ignition says:

      They may have to open up their ducts in the not too distant. We’ll see.

      Their network cannot realistically be unbundled which leaves active wholesale products as the only option.

    2. Avatar JamesM says:

      @ Ignition

      Are you sure they are not already doing so? there is a company who is part of the BDUK vocher scheme and they say they can offer 150 for £35 a month in “certain areas” so assuming they aren’t selling their own FO kit could this be using VM also? If not it’s a radical co-incidence it’s the same speed as VM’s top tier and only in certain areas.

      I guess if they start to offer 300 then it’ll be a give away. Unless they are saying they will take the 3K voucher and this is the service charge – which is so is bloody cheap for a LL as I am sure anyone would agree

      The company is E-Volve I just found them from history.

      http://www.e-volvesolutions.co.uk/superconnected-cities.php it’s their EVO3 product I refer to.

    3. Avatar Ignition says:

      Yes. There are companies that buy broadband from VM and use it as a managed service, however the service itself is not a wholesale service, it’s standard VM Business.

  7. Avatar hamish says:

    well done sky they not spending enough due to the” shambles of superfarce broadband ” The openreach cowboys tell customers bull also .

    1. Avatar fastman says:

      Hamish who else has spend nigh on 4bn of their onw money ?

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