What would BT do without Openreach?
BT’s financial results for the year ended 31 March 2011 show just how much the UK’s largest communications company depends on Openreach, its regulated network building and operating subsidiary.
Of BT’s total revenues of £20.1bn, Openreach contributed £4.9bn or 24.6%; of BT’s gross profits or earnings before interest, taxes, depreciation and amortisation (Ebitda) of £5.9bn, Openreach contributed £2.1bn, or 36.2%.
Perhaps more surprising was that BT was able to increase Openreach’s operating profit (ie, after depreciation and amortisation) by 14% at a time when communications regulator Ofcom is taking a hard look at BT’s cost structure, especially on wholesale broadband access.
The results show CEO Ian Livingston sweating BT’s (Openreach’s) assets. Total sales for the year fell 4%, but tight cost control boosted profit before tax by 20% to £2.1bn. Capex outside Openreach was down, but BT’s programme to boost broadband speeds with a combination of more fibre to street cabinets (FTTC) and making copper go faster helped Openreach’s capex rise £180m from £907m to almost £1.1bn.
Openreach said it has spent £600m so far on its fibre network. It is unclear if this figure is part of BT’s present £2.5bn “superfast broadband” programme, or something else. But it does say it will put in more 100Mbps fibre to homes and offices and will test a 1Gbps fibre system in 2012. It also plans to double its FTTC speeds to “up to” 80Mbps, but it is unclear what this will mean for subscribers who are stuck with copper local loops.
It is also evident that BT is not giving up copper. At a time when the rest of the world is installing optical fibre as fast as possible, BT bizarrely brags it installed 11,000 net new copper-based services. “This is the first growth in the copper line base since the formation of Openreach in 2006 and reflects customers recognising the advantages of fixed-line broadband,” it crows.
The graph below from the London Metal Exchange shows how the cash price of copper in dollars per ton has changed since 1 January 2009. Which suggests that BT’s existing copper holding is an appreciating asset. But it is surely perverse of BT to add to it at current prices when fibre has almost infinitely more capacity, is not a target for thieves and is cheaper to operate.