Why BT should have been handed Britain's fibre fund

29 Mar 2012

So here we are, almost two years after the Government set aside £530 million to help British broadband, and not one citizen has had their broadband access improved as a result of that public money.

We’re three years away from the Government’s target of universal 2Mbits/sec broadband – a target so appallingly unambitious that a former chief technologist of BT recently told a Lords committee that “you might as well not bother” – and you’d do well to find anyone who even thinks even that is achievable.

Earlier this month the Government published a progress report on how the broadband money was being allocated. “We set a demanding timetable and I’m pleased that we are making such fast progress,” culture minister Jeremy Hunt crowed. Of the 44 local authorities listed, only six had even entered the procurement phase. If that’s what Hunt calls fast progress, let’s hope he’s never put in charge of NHS waiting lists.

The reason why so few companies are willing to bid against BT is that the company has a massive competitive advantage

Still, at least the money is finally set to be spent. Although few think the half a billion pounds on the table is anywhere near enough to get the job done. “The £560 million being talked about [it’s actually £530 million], I have to tell you, is petty cash in this game,” said Dr Peter Cochrane, the former BT technologist who was giving evidence to the Lords.

He suggested the Government should hand that money to “small players”, who could light up the fibre in their own regions. Yet, Broadband Delivery UK’s rules specifically preclude such small players – only companies with a turnover of £20 million for the past two years can be considered for the tendering process.

That’s partly why, according to reports, there are now only two companies left who are prepared to bid for BDUK money: BT and Fujitsu. And Fujitsu has repeatedly stated that it will only proceed with its fibre rollout if it wins enough contracts to make the deal commercially viable. There is every chance that BT could become the last man standing, making the past two years a complete waste of everyone’s time and money.

Economies of scale

The reason why so few companies are willing to bid against BT is that the company has a massive competitive advantage. BT already has an established broadband network in each of the 44 local authorities. When it’s bidding for money, it’s often only to extend the reach of the fibre broadband network that it already plans to rollout. Take the case of Iwade in Kent, in which a modest investment of £13,000 from the local council was enough to unlock £62,000 of investment from BT and bring fibre to the entire village. It's highly unlikely that £13,000 of public money would be enough to tempt a third party to lay its own fibre, it simply doesn’t add up. BT told me recently that it will take around 14 years to recoup its investment in fibre – how long would it take a much smaller rival?

There are other reasons why Dr Cochrane’s vision of dozens of local fibre projects doesn’t make sense. For one, you end up with a mish-mash national network, built on different technologies, all running at different speeds. Even if these local fibre projects are willing to offer wholesale access to to their network, major ISPs such as TalkTalk and Sky don’t want to deal with a different provider in each region, each with different routing equipment, billing systems and prices for end users. They want three or four different broadband packages that they can sell on a national, not a regional, scale.

The danger of funding dozens of different regional fibre projects is that you create dozens of mini-monopolies, where one network becomes the sole provider for that area. That might work well initially – 10 years ago the residents of Kingston in Hull had a bleeding-edge broadband network supplied by just such a local monopoly – but within three or four years those residents were complaining about relatively slow speeds and no access to much more competitively priced products from other broadband providers. And what happens when that tiny regional project runs out money, as some inevitably will?

Controlling BT

As unpalatable as it may sound, the best way to eke value out of that meagre £530 million pot would have been to hand the lot to BT two years ago. It will probably end up getting the lion’s share – if not all – of the BDUK cash anyway. Except now it’s going to get the money on its own terms, and not the Government’s.

Ofcom waived many of the controls it imposed on the wholesale price of BT’s broadband as a condition of BT embarking on its fibre rollout two years ago. If the Government had offered BT the £530 million, but imposed conditions such as a guaranteed level of coverage, open access to anyone who wants it at a regulated price, and a minimum speed guarantee, Britain’s broadband network would probably already be in a much healthier state than it is now. Which, I grant you, isn’t saying much…

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