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Updated at the bottom: Unless you’re using Enron math, BT’s new plan to connect 10 million homes — roughly 40 percent of the United Kingdom — with fiber networks at a cost of £1.5 billion doesn’t quite add up. At today’s conversion rate, that’s about $3 billion — or $300 to wire up each of these proposed 10 million homes.
BT hopes this will help it stave off competition from rivals who have started to use their new backbones and the latest technology to eat into its broadband business. Cable operator Virgin, for example, plans to use DOCSIS 3.0 to compete with BT. The incumbent has been reticent about upscaling its infrastructure over concerns that it would spend billions and then be forced to share with upstarts, the way it does now. By comparison, the new plan is closely tied to regulatory concessions and includes some sort of investment protection from Ofcom, the British regulator.
The Guardian writes:
Under the current regulatory regime, BT must allow rival service providers to use its network on the same terms as its own retail arm. There would be a huge outcry if that “equivalence” was lost, following the battles between BT, its rivals and the regulators at the start of this decade when Broadband Britain was just an ambition.
Nevertheless, BT’s announcement is full of more holes than a wheel of Swiss cheese. Lets look at the deal from a distance: 10 million homes for $3 billion. In comparison, Verizon is spending about $22 billion to fiber up some 18 million homes. That’s a cost improvement of 9x, which means BT’s plan just doesn’t make sense, even if you take into account that somehow it will get massive sops from Chinese equipment maker Huawei.
BT plans to sell 100-meg connections to homes it will connect with fiber (FTTP) using mostly G-PON technologies. Other homes, which will be connected to special cabinets on the curb (which are, in turn, connected to the Internet using fiber), will get a top speed of 40 Mbps. So in a sense, the plan is a blend of broadband strategies being used by Verizon (all fiber) and AT&T (combination of fiber and copper.)
Having followed this business for some time, I know that neither of their strategies are cheap. Verizon spends close to $1,400 per connected home (assuming that everyone is going to sign up for the service). AT&T’s numbers are also higher than $300 per home.
According to my sources, it costs just north of $500 to get the network ready to offer households super broadband, or what is generically known in the industry as homes passed. This doesn’t include laying fiber to the home, its associated labor costs and the on-the-premise gear. All that costs between $750 and $1,000. The on-the-premise ONTs cost between $150 and $200 alone.
Given that the network is scheduled to be rolled out in 2012, let’s assume that by then, prices decline by half — but the numbers still don’t add up. It could be that this $300-per-home-for-fiber is on top of the previously announced spending on BT’s broadband buildout as part of the 21CN. But even taking that into account, I’m not ready to buy BT’s splashy announcement. I would like to know from BT the exact breakdown of the cost structure of their network.
BT’s new CEO, Ian Livingston, whom I had a chance to meet back in 2006, is a sales maven, given his background with a high-street retailer and an upstart ISP. Some say he’s so good he could sell ice to Eskimos. Of course.
Update: My good pal, Dave Burstein, who writes the influential newsletter DSL Prime, wrote in to point out why the news is spin. “There is nothing in the announcement that wasn’t discussed by Christopher Bland with Andrew Parker a year ago,” he wrote. Dave tracks the industry closely, so I’m not surprised he found the “spin” in the news. He also pointed out that by 2012, less than 1 million will be on fiber, and mostly new fiber.
And Andrew Odlyzko, the authority on broadband and networks, in an email to me noted that the incremental 100 million pounds in capital expenditure increase for this promised network upgrade is a mere 3 percent, and even that is contingent on regulatory relief from Ofcom.
Q: Is this investment dependent on Ofcom creating a new regulatory framework?
A: Yes. The right regulatory environment is vital for anyone seeking to invest. The funds required are extremely large and companies need confidence that risk-taking can be appropriately rewarded.
Image courtesy of BT plc.