Market Insight

Grim prospects for UK superfast broadband

July 04, 2013

Alzbeta Fellenbaum Alzbeta Fellenbaum Manager – Research and Analysis, Service Providers & Platforms

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The UK government has postponed its target for superfast broadband roll out in rural areas of the country by two years. The original plan, adopted in 2010, promised to connect 90 per cent of the population to superfast broadband by 2015. It has now been reconsidered and its deadline extended to 2017, when 95 per cent of the UK population is set to be reached by superfast broadband (minimum 24 Mbps connection speed).

This is more bad news for Britain's digital infrastructure following the failure of UK Chancellor George Osborne's plan to spend £150m to build high-speed fibre networks in 'super-connected' cities. Under the scheme, 22 UK cities were to build out superfast Internet connections to homes and businesses not currently served by BT and Virgin Media's existing networks; however, the project has been scaled back dramatically after a legal complaint was brought by BT and Virgin Media arguing that the project would benefit rival companies.

Both of these developments show the struggle that the government faces in promoting effective broadband deployment in those UK areas outside of the reach of the digital backbone. In its evaluation of the rural broadband project, the National Audit Office (NAO) concluded that the project's progress is slow and that the lack of elements which promote competition undermines the public value of the £530m central government investment.

This means that up to 5 million households in hard-to-reach areas will continue to struggle to reach even a basic 2Mbps Internet service. In most areas, the deployment of superfast broadband, either though optic fibre-to-the-property (FTTP) or VDSL (combination of optic fibre and copper loop in the last mile from the exchange), will be delayed for up to 22 months over the original timeline. This is partly due to the extended period it took the European Commission to approve the project (under state-aid rules), but also because some counties in areas such as the Highlands and Islands, Norfolk and Suffolk failed to request sufficient funds.

The lack of competition is another problem connected with the project. While the programme was designed to promote competition and control appropriateness of bidders, costs and profit levels, most potential suppliers withdrew from the bidding process leaving BT as the only participant. Consequently, BT is likely to win all 44 local projects in the framework. The Broadband Delivery UK (BDUK) team responsible for managing the rural programme has been repeatedly criticized for lack of transparency and cost control of these bids and for being unfavourable to smaller broadband companies. Moreover, only nine out of these 44 projects are expected to be completed by the original May 2015 date. 

Meanwhile, the 'super-connected' cities programme has been watered down to support small and medium enterprises in installing faster broadband. SMEs will be able to apply for vouchers, but only in those areas where connections already exist, thus the programme will not support deployment of new infrastructure and the minimum speeds will be much lower (30Mbps) than those promised by the original plan (80-100 Mbps).

It appears BT is the only winner in the current situation. The government originally expected BT to pay for 36 per cent of the £1.5bn total bill for the rural broadband development; this amount has now dropped to just (according to NAO calculations) 23 per cent and £207m less than anticipated. But BT will still benefit from £1.2bn from public funds at the end of the project.

BT remains in pole position in the UK broadband market. The company does not report urban/rural splits for its customers, but at the end of Q1 2013, BT was serving 6.7m broadband households in the UK - 1.2m of these with VDSL technology, 0.1m with FTTP. With the latest developments for rural broadband deployment and 'super-connected' cities, BT's primacy remains untouched.

Geography
UK
Organization
BT Sky Talk Talk Virgin Media
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