Boris Johnson's £5bn broadband bazooka has to hit the spot
He may have been the recipient of technology lessons from his good friend Jennifer Arcuri, but even for such a dedicated student as our Prime Minister, the complexities of broadband infrastructure policy are a tough nut to crack.
Johnson’s goal is clear enough and correct. Every home should be connected to a full-fibre network as soon as possible.
Our current digital plumbing is unreliable and will relatively soon will be incapable of meeting the data demands of ordinary families, particularly those who live outside big towns and cities.
The physics of sending signals over copper mean that the further you live from a BT exchange or a streetside cabinet, the worse your broadband. Fibre optics are meanwhile unaffected by distance or bad weather.
It’s a bitter irony that those in the countryside most likely to benefit from full fibre are currently least likely to get it.
To make a case for a new network in a densely packed city or big town, investors need to be confident they will attract somewhere between 30pc and 40pc of the market.
In the countryside, however, only a monopoly works and in the most remote corners of Britain the number can never stack up. There simply aren’t enough customers to ever justify the outlay.
This is conundrum Johnson and all his technological knowledge must tackle.
As we report this week, in those most unspoilt regions the answer is relatively simple: a bazooka of public money.
Such subsidies are fraught with pitfalls and Whitehall’s record of designing structures that ensure value for money is very poor. Yet at the moment there isn’t really any other choice.
Some might say that those parts of the country should just be left behind. After all, mains gas is not available everywhere. However, heating oil deliveries and electricity are universally available.
No similarly viable alternative currently exists for data connectivity. Leaving swathes of Britain behind as the economy is transformed by full fibre would not be tenable, especially for a Prime Minister in Johnson’s political predicament.
The calculus gets much trickier in the grey areas. These are the rural and semi-rural places where there are enough people to pay for one upgrade, but not two or three.
Nobody will currently invest commercially here, in case someone else comes along and splits the small market, destroying a fragile business case.
The taxpayer can’t be expected to bear the cost either. It should not be beyond the with of government and Ofcom to create a system that incentivises private money in this portion of Britain.
This is where the real action will be Johnson and the telecoms industry after his big subsidy announcement. Cracking this in the next few months won’t make the Prime Minister’s original target of ubiquitous full fibre coverage by 2025 achievable, but it could mean a sharp acceleration towards the goal.
On the other hand, if the Government and Ofcom get this wrong, it has no chance of delivering ubiquitous full fibre on any schedule. Number 10 knows this all too well and are signalling frustrations with colleagues at the regulator “sitting on the sidelines sucking their teeth at everything”, according to one insider.
The problem here for Ofcom and its departing chief executive Sharon White is clear. Creating a system that solves the economics of building full fibre networks everywhere ultimately will require the regulator to change its mind.
For years now it has pursued infrastructure competition, encouraging others to build independent new networks to compete with Openreach, BT’s legally separate broadband wholesaler, and Virgin Media. It has not been a success, delivering very little progress even in big cities. In the countryside, where only monopoly economics can justify investment, it acts as a serious impediment to investment. This is a reality Ofcom must confront.
It is a big moment for the telecoms industry too. The way in which the tensions between competing interests are resolved, or not resolved, will set the tone. The futures of BT, Sky and Virgin Media, not to mention TalkTalk, Vodafone and fibre challengers backed by the likes of Goldman Sachs are in the mix. There will be losers.
On the face of it, the proposals from Philip Jansen, the BT chief, seem reasonable. Those who want to build in town must build in the country. Yet, in part thanks to the policy of infrastructure competition, there are multiple players in the market set up to cherry-pick cities.
Hyperoptic, backed by George Soros and Abu Dhabi sovereign wealth, only does blocks of flats, and there are few in the Highlands. Virgin Media itself is very much an urban animal and has little interest in bringing cable to the shires.
The ultimate answer may be some form of joint venture that could be granted a regulated monopoly in rural areas where multiple networks would undermine the case for full fibre. Senior sources across the industry are mulling such ideas already.
There is at least a serious intent to come up with solutions. Johnson’s subsidies should build confidence, but time is not on anyone’s side.
Vodafone's deal takes a hit
The German sense of humour should be more celebrated. No sooner does Vodafone complete an €18.4bn cable takeover to create a national rival to Deutsche Telekom than teutonic politicians threaten regulatory changes that could seriously damage its business.
Vodafone Germany benefits from a strange system in which the landlords of apartment blocks in which millions live automatically add cable TV onto rent bills, and add a mark-up for themselves. Now the government is considering opening up this market when it transposes new European legislation into German law later this year.
The upshot is that as much as half of the profits of Unitymedia, the business Vodafone just acquired from Liberty Global, could be under threat for the first time.
Nearly two-thirds of parsimonious German consumers who are not locked into contracts choose free TV, according to market research.
This issue has been bubbling away in the background for some months but could soon become a big problem for the deal and Nick Read, the Vodafone chief.
For the price of Unitymedia to make sense he needs to deliver growth in Germany, challenging Deutsche Telecom with a superior broadband network and mobile bundles. The deal could end up a practical joke instead.
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