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Morningstar | BT Holds a Solid Position in the U.K. but it Needs Regulators to Get on Board

Following its 2016 acquisition of wireless carrier EE, BT has been the only telecom operator in the United Kingdom with the ability to offer fixed-line and wireless services without leasing network access from others. After three years, however, the benefits of this converged position have been modest, failing to overcome the regulatory, operational, and competitive challenges BT has faced. We believe the firm is gradually moving in the right direction, but progress will likely be slow. BT's relationship with regulators has been among the most contentious globally. Ofcom, the U.K. telecom regulator, forced BT to split its infrastructure business Openreach from its customer-facing units. The long-term expectation is that Openreach will roughly earn returns around its cost of capital selling network access to BT and other operators, like Sky. The details of this arrangement have been under continuous debate, ultimately slowing BT’s network plans. The firm built fiber-to-the-curb across most of the country several years ago, but its only upgraded about 3 million customer locations (about 10% of the total) to G.Fast or fiber-to-the-premise. BT management recently stated that it will build fiber to 15 million locations by the mid-2020s, but only if Ofcom will allow a “fair” return on investment. Fiber network construction is more advanced in other European countries and BT’s lack of progress has created an opportunity for competitors. Despite the network challenges, BT has managed to generate modest growth in its consumer business (a bit less than half of total sales) thanks to rising fixed-line revenue per customer and consistent postpaid wireless customer additions. However, BT's global services division and the U.K. public sector business are struggling due to operational miscues and economic pressures. Regulatory price cuts have also hit Openreach. As a result, total revenue has steadily declined in recent years, forcing BT to constantly cut costs to preserve margins. The global services division has shown some improvement recently, especially with regards to profitability, but BT needs to come to terms with Ofcom to ultimately reduce uncertainty.