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Gigaclear and Hyperoptic Highlight Problems with UK Broadband and BT

Thursday, Feb 4th, 2016 (10:00 am) - Score 5,480

Pure fibre optic ISPs Gigaclear and Hyperoptic have offered a unique insight into the current challenges with rolling out new ultrafast broadband infrastructure across the United Kingdom, not least in regards to the difficulties of going up against a state aid supported BT and the question of whether or not to separate Openreach.

The comments, which have only just been made public, were officially given last month as part of an Oral Evidence session for the cross-party Culture, Media and Sport Committee inquiry into UK digital infrastructure. In attendance at the event were Matthew Hare (CEO of Gigaclear), Dana Tobak (Managing Director of Hyperoptic) and Scott Coates (CEO of the Wireless Infrastructure Group).

The debate itself touched on a multitude of topics, although some of the most interesting exchanges involved those that shed light upon BT’s dominance in the state aid fuelled Broadband Delivery UK programme, the costs of deploying new infrastructure, frustrations with business rates (aka – the so-called “Fibre Tax“), the challenges with gaining access to use Openreach’s physical cable ducts / poles and the question of whether Ofcom should separate BT from control of their national infrastructure arm (Openreach).

Gigaclear, which is focused upon deploying a 5000Mbps (5Gbps) capable Fibre-to-the-Premises (FTTP/H) network into remote rural areas, kicked things off by revealing a bit more about their usually demand-led business model (except in BDUK support deployments where they follow a general roll-out). The operator also noted that they intended to “raise about £90 million worth of capital this year” (a combination of debt and equity) and were already halfway there.

Matthew Hare (Gigaclear) said:

“Our costs are just under £1,000 per property we pass, so our business case is very much based on how much revenue we can generate off that capital investment in order to make a return for our investors. The operating costs of a pure fibre network are considerably less than a copper network because you do not run electricity down a fibre network, therefore when it comes in contact with water it makes no difference at all, it quite happily runs.

It is much more robust and of course the technology is modern. Some of the copper network is well over 100 years old, it is just very old, and I know that having seen some of you have rural communities in your constituencies, obviously you know that people literally experience that when it rains their broadband gets worse.”

However Gigaclear noted that their estimated costs don’t always work out as planned. For example, in Kent they originally forecast a cost of £784 per property passed, but it ended up costing them about “three times that level“, which was largely due to contractors who did poor quality work and this required an expensive fix (we saw some examples last year of shallow trenches etc.). Matthew also took responsibility and admitted that some of the problems “were our fault“.

At this point the conversation turned more towards the Government’s state aid supported Broadband Delivery UK project, which has seen most of the related contracts being gobbled up by BT as part of the aim to make superfast broadband (24Mbps+) services available to 95% of the UK by 2017/18. Gigaclear has also picked up a few much smaller Phase 2 BDUK contracts (e.g. Gloucestershire here, Essex here and Berkshire here) and no doubt they hope to grab a few more in the future.

Matthew Hare (Gigaclear) said:

“About a third of the work we do this year in 2016, about a third of the properties we pass will be those that are supported by a grant from BDUK. Two-thirds will be still our commercial investment, where we expect it to be just under £1,000 a property. In the BDUK areas, our costs are considerably higher.

If you said that it is roughly 50% more expensive in those areas to build out the footprint that we are proposing to do, that is roughly correct, then you can net off that the value of the grant that we are going to be getting.

Our business case, unlike other operators, presumes that we are going to achieve over five years that 60% of those properties will take a pure fibre service from us, either directly or via another operator using our network. So the utilisation that we are expecting of fast broadband is much higher than the assumptions made by other operators.”

Matthew noted that some local authorities, such as Kent, had been more helpful than others by de-scoping areas from their BT/BDUK coverage plans when Gigaclear confirmed their intention to upgrade through private investment. “That has not been the case in other areas—so, the second or third network we built was in Rutland and we were almost instantly overbuilt by Rutland County Council and BT with a fibre to the cabinet service,” said Matthew.

Matthew Hare (Gigaclear) said:

“My own village in Oxfordshire, Stanton Harcourt, when we told them we were going to build Stanton Harcourt, a year later a BDUK-funded cabinet turned up — a year after we had gone live. What is the current guess for BDUK? It cost £38,000 a cabinet. That is £38,000 of money that has been spent in an area that already had ultrafast broadband, where they could have spent that £38,000 in one of the many other villages in Oxfordshire or rural areas in Oxfordshire where they have no upgrade at all.”

Gigaclear’s experience is by no means unique, with B4RN (e.g. Dolphinholme in Lancashire) and other alternative network operators often reporting similar experiences. In some examples we’ve witnessed situations where councils have even been made aware of such plans, often prior to an Open Market Review (OMR), and yet for whatever bureaucratic reason they’ve still chosen to allow an overbuild.

In this sense Matthew called for any future BDUK Phase 3 funding scheme (this will focus on improving connectivity for the final 5% of UK premises) to ensure greater transparency of coverage, so that altnet operators can easily identify where they can safely invest. “I think it would give a much, much better outcome to consumers, whether they are residential or business, if there was complete clarity on what the plan was, even though that plan will clearly change from time to time. But it is not going to change that much in most places,” added Matthew.

At this point Hyperoptic’s Dana Tobak chimed in to add that BT’s hybrid-fibre FTTC (up to 80Mbps) deployment is a “short-lived asset” and we would be “best served by upping our vision” to focus on rolling out pure Gigabit capable fibre optic connectivity (FTTH/P). Mind you if BT did start to focus upon FTTP then that might shrink Hyperoptic’s niche and make it harder for them to grow.

Tobak was also asked about the challenges with gaining access to BT’s cable ducts and poles, such as via the somewhat unpopular Physical Infrastructure Access (PIA) product that altnet ISPs often detest due to awkward costs, administrative processes and other restrictions (can’t use it for business lines etc.).

Dana Tobak (Hyperoptic) said:

“I know that the evidence given was that there was no industry demand for duct access, which I think is not true. BT has set up an industry group to allow the voice of potential customers; those voices are quite loud and we sit on that table as well.

Having access to infrastructure that exists potentially has the opportunity to lower costs, although in the current form it is a very serial process, almost as if you are going through primary school, each and every grade, to get to secondary school. There is no parallel path being taken and it seems like the process was created five years ago potentially to meet a regulatory requirement, but not to make it easy for customers.

Another great example from that is that in order to submit your plans you need to send it in e-mail, you are not allowed to give it in any other form. Last year those e-mails could only be up to a maximum of 10 Meg, which limited the size that your plans could be, and we had an issue earlier this year where although we are not allowed to have macros enabled, the form that you were
given had macros enabled and you were required to use the form that was given. So this is not a process that is being designed in order to help end customers.”

Dana was then asked about the often raised question of business rates (tax) on fibre optic lines, which are set by the notoriously complicated Valuation Office Agency (VOA). We usually hide under the desk whenever this one pops up, for fear of brain melt while attempting to read one of the VOA’s many perplexing documents. Even ISPs find them hard to understand.

In this case the committee were interested in “the way taxation can be done” and whether it can either “enable or inhibit infrastructure rollout“. This is often a hot topic among ISPs and so we will include Dana’s full reply. Feel free to skip it if the word “tax” brings you out in a cold sweat.

Dana Tobak (Hyperoptic) said:

“We would be in the [scheme] that would pay per metre of fibre. There are two elements to the current approach to the fibre tax that are difficult. One is the rateable value, which is that they have determined the rateable value based upon a survey that was done somewhere in the 10 to 15 years ago range. For example, in London the current minimum rateable value is £3,000. You can get rent a circuit from BT for cheaper than that. That is public information, it is a regulated product, but yet the regime is still based upon pricing from the past. That works very well in an asset that is increasing, but when you have an asset that is decreasing in rates specifically, that is an inappropriate mechanism.

The other part is that the tax that you pay is based upon the contiguous length of your network. What we would look to do in the urban areas is look to connect to buildings or look to connect up a street, in which case it would be a very short distance. Under the current regime, for example, a link that connected two buildings that basically goes across a road would cost us £1,500 a year just in the taxes associated with that.

We have been having a discussion ongoing for about a month now with the Valuation Office with respect to one link, I think it is about 500 metres, and how much they would charge us for it. That was using the passive infrastructure access, so that was through the PIA duct programme, and we are still waiting for what our tax obligation would be. The difficulty of course is in a model where we might look to do more of that, whether it is through civils or through duct access, it is nearly impossible to build a business model or commit infrastructure spend when we do not know how much we are going to have to pay.”

Finally the meeting came to the endlessly vexed question of whether or not Openreach should be split from BT’s control. At this point we were particularly interested to see what Gigaclear and Hyperoptic had to say, not least because some arguments have suggest that an independent Openreach might focus on FTTP/H and attract investment away from smaller commercial players, which could risk disadvantaging altnets that have only just found a modest foothold.

Despite those concerns we note that Dana favoured separation and suggested that “Openreach would perform better and from our perspective we would appreciate that“. On the flip-side Matthew was a bit more divided: “It will probably be slightly better for us from a competitive point of view as a company if they remain part of the BT group because they will maintain their poor performance and underinvestment. [But] from a country point of view [i.e. not in Gigaclear’s interest] my view would be that an independent Openreach would be much better.”

Scott Coates from the WIG concluded, “There is absolutely no doubt, certainly in our view, that an independent infrastructure company will receive more investment and it will be easier for all the players in the market to access that infrastructure. If you separate out the ownership from one retail player it will be serving all of the customers fairly and evenly in the market.”

In an entirely separate development we note that Vodafone has today accused BT of loading unnecessary costs on to Openreach, which is supposed to be a “functionally separate” business. Jeroen Hoencamp, Vodafone UK’s CEO, told the FT it was “unacceptable that BT loads its Openreach unit with inappropriate costs from other parts of its business, which it expects to be paid for by the rest of the industry and passed on to customers.”

Vodafone naturally wants to see BT and Openreach being split, although they’re perhaps more self-interested in the business than consumer advantages of such an outcome. Ofcom are currently looking into this issue, although with the current structure it may be difficult to avoid some cross-over due to the technical complexity of how BT Group functions. In some areas it may even make service provision more expensive if resources couldn’t be shared.

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 X (Twitter), Mastodon, Facebook and .
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