Why Hunt needs to break the broadband logjam now

There have been signs, hotly denied by vested interests, that the roll-out of broadband in Britain, may be stalling. Yet an analysis of the numbers suggests that if it isn’t the case, it certainly should be.

Market researcher Point Topic said in May that its broadband infrastructure index had gone backwards, dropping from 55% to 53% over the previous six months. It has cut its forecast for high speed broadband lines in use by 2015 from 8.8m to 6.7m, or just a quarter of the estimated 27m homes and offices in the UK. This is for superfast broadband over existing telephone networks plus new fibre ones, and exclude any that use Virgin Media’s cable network.

This will have come as a blow to culture secretary Jeremy Hunt, who wants Britain to have the “best broadband network in Europe” by 2015. Curiously, an election should take place around then.

Hunt is chasing the European Digital Agenda targets of universal access to a minimum 2Mbps service by 2013, and for a universal 30Mbps service by 2020, with 50% of the population having access to 100Mbps.

He has no chance of matching that unless he acts soon to to break the log jam caused by the twin duopolies of BT and Virgin Media in fixed networks, and MBNL, which supplies T-Mobile, Orange and Three, and Vodacom/O2 on mobiles.

What is the UK’s problem?

Several speakers at the NextGen conference in Essex on 21 June said customers want three things from broadband: availability, reliability, and affordability. In Britain today you can get any two, but not all three at once.

BT, which is leading the charge into next generation broadband with its £2.5bn, mostly fibre to the cabinet (FTTC) Infinity programme, said recently Infinity had passed five million houses. (So, only another 22-23 million to go.)

But that’s quite close to Point Topic’s target. Probably the UK already exceeds it, if you add in Virgin Media’s fibre roll-out, which is mostly to replace or upgrade its cable TV network, and the many, many leased lines to businesses, schools, hospitals, and other public sector premises, which could almost overnight extend further into communities, especially rural ones.

However, BT’s fourth quarter results to March (published in May) showed that the installed base of Infinity users is only 144,000. Kevin McNulty, Openreach’s general manager for next generation access commercial partners, repeated the figure at the NextGen conference.

McNulty said BT was adding between 7,000 and 10,000 Infinity users a week. At that rate, if BT installed no more fibre, it would take more than nine years to occupy the installed services.

Where’s the value?

Perhaps more importantly, the installed base is less than 3% of the available lines. According to McNulty, BT breaks even on its Infinity investment in 12-14 years with a 20% take-up. By comparison, the Norwegian FTTH company Altibox won’t move until 60% of residents have signed up.

Of course, breakeven points also depend on prices. Ofcom, in its wisdom guided by its mandate to look after consumers, has trained everyone to believe that low prices are good. That may have been short-sighted.

McNulty describes 60% of customers as “locked onto” low subscription rates, typically £3.00 to £6.00 a month. Infinity starts at £28 a month with a 40Gb data cap, or uncapped for £38/m. BT also offers an “up to” 20Mbps standard broadband triple play (TV, broadband and phone) for £30. (The Infinity prices include a phone line at £10/m and come with a first three months’ free offer.)

By comparison, Sky offers an up to 20Mbps triple play starting from £7.50/m with the first three months free. And on 10 June Sky announced Sky Go, whereby its subscribers can get free TV on their laptops, smartphones and other mobile devices, and later via Sky’s public network of 4,500 wi-fi hotspots.

According to McNulty, only 20% of BT’s subscribers are on the higher priced packages. It’s “quite a challenge” to get them to upgrade, he says.

The problem with this is that the rest of the market uses BT’s price as the benchmark. As a result, almost all market surveys show that the UK has among the lowest priced, highest penetration and the most used broadband service.

But its average access speeds and take-up of higher speed services are starting to lag competitor nations like Germany and France, and are already well behind the Scandinavian and some former Eastern bloc countries.

Britons clearly feel there is not enough added value in high speed broadband. The government is aware of this. It has hired Martha Lane Fox to get online the 8.7 million (about 13% of the population) who have either not touched a keyboard or who find little to interest them in cyberspace.

But it is also making things worse through things like BDUK’s proposed broadband procurement framework and the “indicative allocations” of BDUK money it will spend through county councils.

Broadband framework will exclude most network operators

Blogger Adrian Wooster, quoting informed sources, says only companies that have sales of more than £40m in the past two years will be able to tender directly under the framework. That excludes even  very capable mid-sized network operators. The department of culture, Olympics, media and sport (DCMS), which owns BDUK, has not responded to requests for confirmation.

However the DCMS officer in charge of BDUK (and from Monday spectrum too), Simon Towler told NextGen delegates the government would announce in July how much money it would give to each of the counties from what remains of the £530m earmarked for rural broadband, about £400m. Split (generously) between 44 counties, excluding the seven that have already got theirs and Cornwall, that’s an average of £12m each.

£12m won’t get broadband to many people even if, as Hunt tells MPs, it is doubled using matching funds, and especially if the UK relies on BT and Virgin Media’s traditional network building methodologies.

There is no shortage of ideas about how to do things differently. In fact the government may be already reeling with confusion at all the suggestions.

As a start, and to show his bona fides, Hunt could do worse than get the Treasury to zero-rate, for the next five years, the business rate tax on lit fibre. And get Ofcom to execute on Parliament’s unanimous vote to extend mobile coverage from 95% to 98% with the upcoming spectrum auction.

 

Update

In a note received on 27 June, Openreach’s Kevin McNulty makes the following points:

CPs do not want to launch new super fast broadband services in the early days of the roll out, until Openreach has achieved millions of homes passed because of the cost of putting their products and promotions together, a fact that would affect any new local or community entrants. Other major CPs have announced their intention to sell end user services over the Openreach fibre network, thus, numbers are expected to increase dramatically over the next year.

Perhaps more importantly, the installed base is less than 3% of the available lines today, and according to McNulty, BT is targeting a 20% take-up.

McNulty describes the cost comparison as “wrong and mixed up”, saying I do not compare like with like. He says it is right that broadband is price sensitive, but that many of these services are sold as “bundles”, and each contains different elements that make these comparisons confusing. He accepts as “a good point” that there is very little room to charge higher rates for fibre than current broadband services.