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BT: we need fibre, not share buybacks

The short-term thinking that's holding back UK plc

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The speed of the data pipe would also be increased as the current flavour of FTTH meets the GPON specification (ITU-T G.984). GPON offers a 2.4Gbits/s downstream and 1.2Gbit/s upstream shared pipe for 32 connections. This easily allows a 100Mbit/s down and 10Mbit/s up service - with a 200/20 service. The speed guarantee would not be distance related as is the current case with ADSL. This could command a higher price.

However, the biggest element of increased revenue is for Openreach to win lines back from the competition, or avoid the loss of lines. According to its Q1 results, Virgin Media had around 4.8 million customers with various services for Openreach to win back and gain additional revenue. This is excluding the business market, where alternative networks such as C&W have been directly connecting companies for years.

I would expect Openreach rolling out a FTTH project to cause serious competitive damage to both Virgin Media and C&W in the UK. For me, this is a not serious concern in either economic or competition terms as long as the Openreach network is truly open and BT Retail does not have special advantages over other service providers.

Digging up the road

For a greenfield site, the cost of deployment for fibre is estimated to be similar to that of copper. The equipment and cable costs are similar and the expensive labour intensive tasks of digging trenches to lay the cable and internal home and exchange cabling have to done for either fibre or copper. For reasonable sized new housing developments, there is no reason why Openreach wouldn't lay fibre rather copper in the future.

To replace the legacy copper network, digging and internal cabling have to be repeated, and this is not only expensive but disruptive to the neighbourhood. Costs can be minimised by using exiting ducts and telephone poles for overhead drops where available. These costs are normally grouped together as "cost to pass home" which are fixed whether one house or the entire street sign-up to the fibre network.

The other component is the "cost to connect", which is lighting the fibre and installing the electronics at the home and activating the fibre at the exchange. This is obviously success based.

In terms of actual costs, Verizon currently provides the benchmark with $800 per home passed and $842 per home connected quoted in its latest earnings call. There is also a recent paper by the Broadband Stakeholder Group which quotes a study by the Enders Group that 90 per cent of UK homes could be fibred for €14bn.

Given this, a nice round figure of £10bn won't be too far away from the mark for the UK FTTH project.

How much will fibre cost us per line?

An additional £10bn of RAV (regulated asset value) for Openreach would imply an additional £1bn per annum of earnings for Openreach (before interest and tax).

The additional fibre assets would generate an additional depreciation charge of £500m per annum to Openreach assuming a 20 year write-off. However, these charges need to be offset against the current copper network depreciation because, of course, the copper network won't be replaced. This is another big number: I estimated that the depreciation charge is around £250m per annum. The basis for this assumption is because the current £11.3bn of RAV will include quite a few items outside of copper plant, such as the actual exchanges - and I'm trying to be conservative. This leads to total additional earnings required at Openreach of approximately £1,250m per annum.

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