Government May Reject BT’s Voluntary 10Mbps UK Broadband USO Offer

Newspaper reports indicate that BT’s voluntary proposal to spend up to £600m on delivering a 10Mbps minimum broadband speed across the United Kingdom, which would implement the Government’s proposed Universal Service Obligation (USO), looks increasingly likely to be rejected.

According to the Sunday Telegraph, sources “close” to the negotiations have hinted that the talks are “close to collapse” due to the threat of legal challenges from rival ISPs (details) and other concerns, such as the scale of financial penalties for missed deadlines. The outcome would force the Government to impose the full weight of a “legally-binding” USO upon Openreach rather than adopt BT’s quick voluntary fix, which could take longer to deploy and may miss the 2020 implementation target.

The USO itself would focus on the final 2% of UK premises that are not expected to gain access to “superfast broadband” (24Mbps+) speeds under the Government’s national Broadband Delivery UK programme. The Telegraph wrongfully uses Ofcom’s old 1.4 million premises figure to reflect the gap that needs to be filled by a USO, although by 2020 the gap will actually be much smaller (estimated at around 600,000 premises).

A Spokesperson for Openreach said:

“We believe BT’s plan would be faster and more efficient than a statutory Universal Service Obligation, because we’d build the network proactively, rather than waiting for individual customers to place orders.

We don’t want people in not-spots to wait longer for decent broadband and this is an opportunity for the industry to unite behind a project that would help to close the digital divide, boost social cohesion and increase productivity across Britain.”

BT had voluntary offered to deploy a softer USO (here), which would cost between £450m – £600m (to be recouped from charges on existing products and services). But this plan would not complete its fixed line rollout until late 2021 or 2022 and so the operator offered to use a fixed wireless fix as an interim measure. Inferior Satellite would then handle the final 0.3% of premises that are too remote to reach (this is also true of the Gov’s model).

However, there are several points of conflict with this plan, not least over the operator’s call for Ofcom to soften the significant price cut that could be imposed on Openreach’s 40Mbps FTTC “fibre broadband” tier. The Government also want the regulator to take a less aggressive approach here because they fear that it would make it harder for providers’ to invest in and sell newer “full fibre” (FTTH/P) ultrafast broadband technologies (here).

On top of that BT’s rivals (e.g. Sky Broadband, TalkTalk, Hyperoptic and Gigaclear) fear that a voluntary USO could stifle competition (here), even though BT’s investment would be commercial and no other providers’ seemed to be even remotely interested in helping to deliver the USO (except for KCOM in Hull alone).

Part of this opposition from rival ISPs stems from Openreach’s plan to use Long Reach VDSL technology (a modified form of FTTC / VDSL2 that is faster over longer copper lines), which works best if older ADSL services are disabled first on related cabinets. But some ISPs have spent big to build their own unbundled (LLU) platforms inside Openreach’s network and would not want to lose that. The fact that FTTC services are more expensive than slower ADSL is another problem (ISPs could be nervous about forcing a more expensive upgrade on their users that may also require a new router and create confusion).

The government has also continued to insist that any USO should be “legally binding” (otherwise it’s more of a toothless USC – Universal Service Commitment), with consequences for failing to deliver. Agreeing terms and penalties under BT’s proposal was always likely to throw up disagreements.

At this stage it’s unclear whether the Telegraph’s piece is just a reflection of the usual hard-ball approach to last minute negotiations or a sign that the Government will ultimately have to push for a stricter USO, which may or may not need to recoup its costs from other areas (industry levy, public subsidy etc.). A true legally-binding USO at 10Mbps could cost up to £1bn to implement, although figures vary depending upon the cost threshold applied and number of premises served (examples here and here).

The Government had intended to announce their decision by the end of this year and we suspect that the plan might have been to make a decision in time for this week’s budget announcement.