Fool's Eye View

[ November 30, 1999 ]

Unbundling BT

By Alan Oscroft (TMFAlan)

Great Titchfield Street, London -- The long awaited Oftel timetable for "unbundling the local loop" has finally been released. But what are local loops, why do they need unbundling, and, hey, if it's so bad, how come they got bundled in the first place?

We'll come back to that in just a moment, but first let's spare a few moments to ponder the effect that today's news has had on the share price of British Telecommunications (LSE: BT.A), because yes, we're talking phones here. Well, kinda fast ones anyway.

The "unbundling" schedule is something that has been on the cards for some time now, and its eventual appearance was inevitable. So BT shareholders shouldn't have been in the least bit surprised by it, and we might have expected the share price to already reflect the knowledge that it was an inevitable event. But no, the long-awaited news is released and BT's share price falls. So much for the efficient markets theory, then.

So what is it? For those unfamiliar with telecommunications jargon, the local loop is a bit of copper, a long thin bit. Two long thin bits, in fact. It is the pair of wires (ie, the "loop") that connect your phone with your local exchange (hence the "local" bit). Although the capacity that this local loop currently runs at is a nominal 56K for data access, which is achieved using old fashioned analogue technology (you know, beeps, warbles and loads of hissing), it is capable of handling data capacity (or "bandwidth") of around 40 times that by utilising the latest in digital communications technology. The new technology comes in a variety of flavours, known collectively as DSL, or "Digital Subscriber Loop" technologies.

The thing that Oftel doesn't like, and it is a dislike shared by most telecommunications companies and by zillions of consumers, is the fact that BT owns 85% of all the local loop copper in the country. In order to allow other companies to compete for the supply of DSL and other new technologies, BT is obliged by Oftel regulations to allow competitors to obtain access to the local loop, and to run their own competing services over it. Physically, that will happen by competitors being able to install their own equipment in BT's local exchanges and directly connect to the local loop lines. And that's all "unbundling" means, really; it refers to the unbundling of services offered by BT to its competitors. So any images conjured up of workers in BT uniforms digging up the streets and unraveling bundles of wires should be cast aside, however appealing they may be.

BT has had its own proposed timescale for trials and rollout of DSL for some time, and Oftel's new pronouncement is pretty much in line with that. The gist is that competitors must have the same opportunity as BT in the ability to offer their own DSL and other high bandwidth services.

What is the timescale then? Here are the bare bones of it….

BT has already started trials of ADSL. ADSL is the "Asymmetric" version of DSL, and allows higher bandwidth in the "downstream" direction (from the Internet to you) at the expense of lower bandwidth in the "upstream" direction (from you to the Internet). As such, ADSL is perfect for, err, Internet use. BT has also announced its intention to launch ADSL services by March 2000, and is proposing to offer the facility to around six million households.

Oftel will now finalise a proposed new condition applied to BT's licence regarding unbundling plans. Formal consultation will begin by April 2000, and Oftel wants the new services to be offered to competitors by July 2001, or earlier if possible.

Are there any surprises here for BT shareholders? Well, there shouldn't be, at least not as far as the schedule goes, and it looks pretty reasonable to this Fool. The only surprise that today's news might hold is in the actual choice of implementation method. If non-technical Fools want to switch off here for a paragraph or two, please feel free, though I promise not to actually talk techie very much at all. In Oftel's earlier consultation document, there were five different technical options suggested, and they offered different levels of access and control by the various parties, though even then it looked like it would come down to a choice of two.

The lowest level option of the two likely ones, known by the fiendishly technical term Option 2, would give competitors more direct access to the physical hardware, effectively allowing them to lease the local loop lines themselves. It would place the responsibility for the costs of upgrading the technology required on the suppliers of the services, but would eliminate the possibility of getting different services from different suppliers over the same wires (so you couldn't get DSL from one company and your ordinary phone from BT, for example). The other option, cryptically named Option 4, would place the onus of upgrading the technology on BT, and BT would provide access to the actual services run over the wires rather than actually leasing the wires. This would enable a choice of suppliers for different services (and you could get your DSL and phone services from different companies).

BT favoured Option 4 at the time, but it looks like we will be getting Option 2 instead. That gives BT less control over the rate of implementation of competing services (as no equipment upgrading is needed by BT), and may be a disappointment to some shareholders. It hasn't come as a surprise to BT though, and the company has already been working with other suppliers on the proposal for a while now.

So is it really bad news for BT? I don't think so. Unbundling of services has been on the cards for some time, and I think Option 2 was inevitable, myself. The fact that 85% of the next generation of fast land line digital communication is going to go over lines leased from BT wouldn't cause me to lose much sleep if I were in BT's shoes.

Comments over on the new Fool's Eye View message board please. I'm going to take the full text of the new Oftel statement to bed with me. At least it will help me sleep.

And if you're feeling insomniac, here are the links to the two relevant Oftel releases again….

Access to bandwidth: Bringing higher bandwidth services to the consumer, Dec 1998
Access to Bandwidth: Delivering Competition for the Information Age, Nov 1999