Today I am explaining why increasing regulatory risks could crimp BT Group’s (LSE: BT-A) (NYSE: BT.US) bottom line.
Regulatory uncertainty undermines fibre’s success story
In my opinion, the eye-watering success of BT’s extensive multi-year, fibre-laying programme currently underway across the country is not in question. The company announced in last month’s interims that more than 20 million premises are now wired up to its broadband network, with an astounding 70,000 new houses and businesses connected to the grid each and every week.
As a result, the business now boasts more than 3 million broadband subscriptions, figures which have been boosted by BT’s masterstroke to offer access to its BT Sport television package absolutely free.
And with the company ratcheting its network-building scheme up a notch — BT said that it had added another 2,500 jobs to realise its ambitious investment scheme — the telecoms giant is in a terrific position to enjoy stunning internet demand growth in the coming years.
However, the company’s fibre operations come with a potentially-catastrophic sting in the tail: that of increasing ire from the regulator over how much it charges its competitors to use its network.
BT was cleared by Ofcom in May over accusations that its wholesale prices to TalkTalk were excessive. Since then, however, the body has said that will open consultation implementing price margin controls — indeed, Ofcom noted that “the rules would mean that BT has to maintain a sufficient margin between its wholesale and retail superfast broadband charges to allow other operators profitably to match its prices.”
Should the firm be on the receiving end of a bad result, BT could be forced to increase what it charges its own retail clients, or lower what it charges its rivals to use the network. This could have a catastrophic result for the strong momentum for either — or potentially both — of its Wholesale and Consumer divisions.
At present, City brokers expect BT’s earnings to decelerate rapidly from those of recent years, with modest growth of 4% and 7% pencilled in for the years concluding March 2015 and 2016 correspondingly. But the threat of increased price regulation could give its rivals a welcome boost in what is an increasingly-competitive marketplace, a situation which could dent even these modest earnings projections.
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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.