Openreach’s Bargaining Chip in Pledge to Fund UK 10Mbps Broadband USO

The CEO of Openreach (BT), Clive Selley, appears to be closing in on a deal that could see the telecoms giant commit hundreds of millions of pounds to deploy the Government’s promised 10Mbps Universal Service Obligation (USO) for broadband, but only if Ofcom softens their planned FTTC charge controls.

At present it’s widely expected that fixed line “superfast broadband” (24Mbps+) capable networks will cover around 97% of homes and businesses in the United Kingdom by 2020. The Government is also working to implement a new legally-binding USO from 2020, which would offer a minimum broadband speed of 10Mbps (Megabits per second) and this is primarily set to focus on those in the final 3% of premises.

The government has yet to set out their exact criteria for the USO design, although estimates produced by Ofcom and the Broadband Stakeholders Group (here) suggest that it could cost anything from £180m and up to around £1bn to deliver (depending upon coverage level, cost threshold and whether or not inferior Satellite is used for a tiny proportion of the most remote properties).

Openreach could use a mix of technologies to deploy the USO (e.g. FTTP, FTTrN), although their Fibre-to-the-Cabinet (FTTC) based Long Reach VDSL (LR-VDSL) solution is the current favourite to deliver on most of the extra coverage in the final 3% (details here and here). Under LR-VDSL the national coverage of so-called faster “fibre broadband” (mostly hybrid) networks could reach upwards of 99%.

According to the Sunday Telegraph, Openreach are now in “late-stage negotiations with the Government” over a deal that could see the operator fund all of the USO deployment cost. However one key stumbling block appears to be Ofcom’s proposal to slash the wholesale cost of the 40Mbps (10Mbps upload) FTTC tier (here) from £88.80 +vat per year (now) to £52.77 by 2020/21.

The price reductions could drive a surge in consumer uptake of FTTC based “fibre broadband” packages and that might finally kick old style ADSL connections into history, although at the same time such a cut could also make it harder for Openreach to gain a return on their investment.

Clive Selley, CEO of Openreach, said:

“I want to deliver decent broadband to all of the UK. It is not like it is their agenda and not mine. I will have a happier customer base if everyone could get fast broadband.

…

It is short-term price cuts versus enabling the industry to get together to build an infrastructure that will take 20 years to put in place but will serve the country for decades after.”

We should point out that Clive’s final sentence appears to be more of a reference to Ofcom’s proposed charge controls versus Openreach’s hope of being able to deliver a much wider scale deployment of “full fibre” (FTTP/H) ultrafast broadband, which is a related but largely separate challenge to the USO.

Naturally there’s little incentive for a commercial business like Openreach to commit to funding such a huge investment (they first proposed funding the USO last year) if they’re unable to get their money back. However Ofcom seem unlikely to abandon their proposal, although it’s conceivable that the regulator could cut the size of reduction or instead apply it to a much slower tier.

Meanwhile those who optimistically say that alternative network providers (AltNets) could help to deliver the USO should note that none have shown any interest. This is largely because the financial and legal responsibility of handling a USO is quite a significant obstacle for such providers, the bulk of which operate at a much smaller scale than Openreach.

Openreach has also raised the problem of the VOA’s recent business rates hike on existing fibre lines (apparently this has hit them with an annual increase of £200m) and issues with local councils delaying necessary roadworks for 3 months.

We should point out that KCOM would also need to find its own separate USO solution for their network coverage of Hull in East Yorkshire, although we expect that a future expansion of their FTTC/P deployment should resolve most issues.

The Government had previously promised to set out their final USO design this summer (part of one last consultation), although that was before the General Election and its ensuing chaos. Still there’s plenty of time to reach an agreement before we slip into the autumn.