The UK national newspapers are all featuring a story this week which would see Vodafone helping to pay for improved fiber for BT Openreach, the BT subsidiary which manages most of the UK broadband access network.
While we are confident that such talks are taking place, we are not confident that a successful outcome can be reached, because the regulatory regime for fixed broadband in the UK is complicated.
British Telecom has had to separate out the company Openreach from BT, so that arms’ length relationships can be observed for BT as well as all the other broadband providers, which offer unbundled or wholesaled broadband – including Sky, TalkTalk and to a lesser extent Virgin Media. Virgin is the only cable company in the UK, and uses minimal BT services compared to other broadband providers and to all the cellular operators.
For the past 8 or 9 years we have been saying that Vodafone needs to stop being a purely cellular operator and establish physical wired infrastructure in the ground, in order to give it sufficient supply of cellular backhaul. This is increasingly important with 5G and is critical in all of its strongest European countries, and it has acted in Germany and Spain, by acquiring local cable operators, and in Italy by acquiring ISP lines. In the UK it relies entirely on British Telecom for its cellular backhaul and every time it threatened, in the past, to build out its own wireless backhaul, BT simply dropped its prices to bring Vodafone back to the table. Even in the Netherlands, prior to deciding to merge with Liberty Global there, Vodafone had embarked on a fiber build out.
Being tied at the hip to BT is part of Vodafone’s history, like it or not, and by investing it can dictate the pace of change and the pricing points for future broadband. And by not taking on all the investment itself, Vodafone will keep down the cost of building fiber.
But finding a financial formula which will allow this move past the regulators is going to be tough. Ofcom has repeatedly had to push BT back into line in a market where competition is almost entirely due to the unbundled nature of broadband, with Openreach responsible ultimately for most broadband. The vectored nature of VDSL and G.fast has meant that one player or another has had to take over all crosstalk cancellation at each telephone exchange, and in order for that to make sense, it has mostly been carried out by BT, and services are then supplied to the other broadband providers on a virtual or wholesaled basis. Only Virgin stands out as a company that has its own end to end cable network, and currently it enjoys the dominance of being able to offer the fastest broadband. BT, using first generation G.fast chips has only managed to launch a 300 Mbps broadband service – which second generation G.fast chips will only take up to 600 Mbps. This is because of the distances between cross connect cabinets and each home, and extending fiber another few 100 feet closer to homes would see these speeds go up and over 1 Gbps.
Not only is that plenty for next generation broadband access, but the extension of such fiber would also mean that many more cellular small cells – a requirement of LTE Advanced and 5G – would be supportable from more backhaul points, and that’s what Vodafone really needs.
But by spending its own money, Vodafone would want privileged access to this fiber, and under regular Ofcom’s watchful eye, Openreach MUST treat every customer equally. About the only way we could see this working is if BT was “loaned” funds to build out fiber and repaid the cost of finance the build to Vodafone over time, a move that would ensure that not only BT and Vodafone got all the bandwidth they want, but all of the other cellular and fixed broadband partners of Openreach also got an upgraded service.
Vodafone has also delayed the emergence of an OTT delivered TV service in the UK, and this is possibly due to a lack of sufficient bandwidth for delivery, so more fiber might accelerate those plans. In Spain, Telefonica has managed to reach deals with Orange and Vodafone to share fiber costs, and Vodafone has done similar deals in Portugal.
Any deal that BT and Vodafone manage to cook up, would likely be frowned upon by Liberty Global, who owns Virgin Media here and is the Vodafone partner in the Netherlands. Virgin currently enjoys the fastest broadband speeds in the UK, and would likely see much of this advantage eliminated in fixed line broadband if this partnership goes ahead.
Only the “Brexit” factor would likely get this past regulators, with a promise to get UK broadband ahead of the remainder of Europe, to support the UK as an attractive place to do business.
Sky in the UK has already said that it plans to deliver full TV services over broadband during 2018, and it should therefore be in favor of any plan to upgrade UK fixed line connections. It is in favor of what it calls a “take or pay” approach to fiber upgrades where it identifies postcodes areas where it thinks it can sell faster broadband and offers to dump copper lines in favor of fiber, giving Openreach both a roadmap and the confidence to invest.
We expect Ofcom to step in with approval of some kind of similar approach to the one Sky has outlined, offered across all customers of fixed lines, including cellular players 3 Group and O2.