Q4 and full year 2016/17 was always going to be a difficult set of results for BT given the enormity of the year they’ve had which saw two scandals (with considerable financial consequence), and the end of a protracted battle with the regulator over one of the most important lines of business. While that battle may be over, it’s clear there’s a new one beginning over Ofcom’s wholesale local access market review and investment incentives which looks set to dominate the agenda over the coming months.
Reforms already underway at Openreach as a new period of consultation begins
The removal of uncertainty around Openreach is both good for BT and ultimately the country as a whole as investments in rolling out fibre closer to customers can now get underway. To this end, Openreach has wasted no time by starting to consult (confidentially), with customers on new product design and the appetite for so called ‘full fibre’ networks which run directly to the customer’s premise. During the results presentation, BT stressed that they remain technology agonistic when it comes to upgrading the broadband network which translates as a mix of G.fast and fibre. However economics and customer demand remain critical to the precise balance of that mix which is why it’s important to establish the nature of that demand and the commitments downstream BT and other providers are willing to put behind it.
New battle lines drawn as BT challenges Ofcom over regulatory certainty for investments
At his last results briefing, outgoing chairman Sir Michael Rake was scornful of Ofcom’s recent proposals for the wholesale local access market (WLA). He drew attention to the agreement for pricing flexibility reached with Ofcom when BT started to deploy FTTC at scale in 2009. It was clear BT saw that as an investment programme with a 13-year payback period, during which they expected the regulatory regime to remain stable, implying no change until 2022. Recent proposals to regulate the wholesale price of some variants of BT’s fibre product have caused concern about the clarity and certainty of the regulatory environment BT invests under.
The WLA market review proposals as they stand would have a significant adverse implication on returns for BT. Any significant reduction in the 40Mbits price reduces the potential return on investments that have already been made. The suggestion, however, is that the implications from the WLA market review could be felt more widely than just by BT with prospective investments in faster fibre also affected. While Ofcom is not currently proposing to regulate the price of faster products, the logic goes that they may in the future, and that uncertainty is likely to affect the appetitive for investment from the sector as a whole, particularly when full fibre is likely to demand an even longer payback period.
There is of course a third stakeholder in Britain’s fibre future and that is the government. The recent minister has made it clear the preference is for more fibre, however that narrative is now on hold until after the general election. Crucially, when questioned, BT’s chairman didn’t rule out getting the government involved in the discussions with Ofcom over how investment incentives in such networks would be affected by decisions in the WLA market review.