BT is right to take a risk on faster broadband network
BT’s announcement that it will spend £1.5bn upgrading Britain’s broadband network has unnerved investors, especially as it is funding the investment by suspending its shareholder buyback programme.
But it’s important to remember that, in the long term, delaying this decision would have been worse for the company.
Falling Behind
The firm is falling behind its competitors when it comes to broadband speeds, and its charm position as the UK’s incumbent telco is increasingly under threat. Virgin Media already has a much faster network in major cities, providing speeds of up to 50Mbps while firms like Carphone Warehouse also have their own networks, which they could easily upgrade.
But the biggest threat to BT comes from mobile broadband. Many network operators now offer speeds that are much faster than fixed-line services; Vodafone, for example, provides its customers with a respectable 7.2Mbps in urban areas for £15 a month, whereas a recent survey on fixed-line services put average speeds at 4Mbps.
To deliver these connections, mobile network operators are busy laying their own fibre cable, which could eventually provide a fixed line rival; last month, O2 told CityA.M. it was ready to start such a project. If BT can’t compete on speed or price, it’s problems will be far more serious than a suspended shareholder buyback scheme.
Although the news has been reported as a huge change in BT’s strategy, yesterday’s announcement was conservative. The firm was already going to have to spend the coming years maintaining its ageing network, some of which was laid over a century ago.
BT is not building the kind of super fast network that exists in Korea or Japan, countries which boast speeds up to 100Mbps. Instead it is proposing a replacement of the cabling from its exchanges to the green street boxes – providing 40Mbps to around 10m homes. Compared to the £15bn it would cost to turn the UK into a “fibre island”, BT is playing it safe.
Predicting Demand
Demand for faster speeds is hard to predict. Although few consumers will now say they need faster connections, it’s worth noting that five years ago, most of us were happy with broadband that chugged along at 0.5Mbps and that there was no Facebook, iPlayer or YouTube.
BT is also playing a shrewd game with its regulator. This commitment is contingent on Ofcom providing a framework that will provide the firm with a guaranteed return on its investment. It is actually proposing a relatively moderate upgrade in exchange for much more carrot and much less stick. A risky move it might be, but it’s the right one.