Regional Broadband – The Hidden Danger of Uber-projects

It was revealed this week that Digital Region, the centrally funded (to the tune of £90m – mostly public money) superfast broadband initiative in South Yorkshire is facing tough times, in particular a £9.2m loss on a revenue of only £167k (which only just pays the last CEO’s £100k salary – they are currently seeking a new CEO, one assumes to manage a turnaround).

The Yorkshire Post article goes on to explain another £4m of public funds have been ringfenced as a “security”, and that the four participating councils, already under budget pressure from Central Government austerity, may need to as much as £500k per year to secure the operations of Digital Region if the loan can’t be repaid. Is that throwing good money after bad, or is the situation redeemable?

This highlights my belief that these large centrally funded uber-projects contain a more significant risk of failure, and not of delivering the right product. The larger organisations that are able to bid and win such projects can come with higher overheads compared to the smaller community projects such as those serving areas with poor existing broadband service, who have a relatively captive and supportive market, and benefit from a tighter focus – for instance Rutland Telecom’s pioneering FTTC with unbundled sub-loop in Lyddington, which is using the same basic FTTC tech as DR is using, but on a smaller scale and in relative isolation.

The larger scale of the Digital Region deployment obviously needed a much bigger income to support the aggressive build and provisioning costs, along with what looks like a complex structure, and now that revenue hasn’t been realised. As can be seen on the DR website, and highlighted on the ThinkBroadband article, very few ISPs use the DR infrastructure to deliver service and is maybe one of the reasons they aren’t making their targets.

You have to ask yourself why this is?

So far the following reasons have been put forward:

• High setup and operating costs associated with the wholesale product.
  • The consumer-grade broadband mass market is price sensitive, the high initial outlay to setup service likely doesn’t sit well.
  • The higher ongoing costs make it more difficult to sell a competitively priced product delivered via DR’s wholesale service with a reasonable margin.
• A lack of choice of ISPs for the consumer to choose from – only a small number of local ISPs deliver service via DR.
  • Currently not got large players on the DR network, mostly local “niche” players, maybe partly because of good existing LLU coverage by the main LLU providers (O2, TalkTalk, Sky) in the population centres in the DR service area?
• A lack of awareness among consumers about the products offered and how it can support local business.
  • The circumstantial evidence supports the argument that there’s very little marketing about the superfast services, while those who use service provided over the DR platform say they are happy with the service they get.
• Alledged relationship management issues with BT have been hinted at.
  • Remember, BT Openreach still need to deliver the copper pair between street pillar and the customer.
• The network design back in 2009 assumed the problem (poor Broadband in the regions towns and cities) wouldn’t addressed by others during the build period.
  • This means the DR service is concurrent with BT’s FTTC coverage as well as otherwise acceptable (and already unbundled) standard ADSL coverage from Sky, et al, which benefits from mass-market leverage, and misses out on local support.
  • The project also continues to miss out the real local notspots which have no local LLU, long tail circuits, and seem set to remain that way.
• Existing broadband players improving their product, including BT and Virgin Media, since the DR project and scope was conceived, changing the local wholesale broadband playing field since the network was designed.
  • One could argue that if just the existance of Digital Region has made the other infrastructure-based providers accelerate their own upgrades and FTTC deployments in the area, it’s served it’s purpose, just in an expensive and rather sick sort of way, at a huge cost to the taxpayer.

Other possible reasons could be:

• Management difficulties.
  • The organisation has already been through two CEOs and is seeking it’s third.
• Excessive stakeholder indirection – remember we’ve got politics behind the money here.
  • The Public entities behind DR may not have sufficient technical awareness to provide consistent strategy and steering?
  • Is this causing a situation of moving goalposts and changing vision, no good for maintaining growth and direction?
• Artificially high cost structure.
  • Possibly due to layers of outsourcing – often found in uber-projects like this – for instance, the design/build/operate stakeholder, Thales, contracted the infrastructure build work to Kcom, Hull’s telecoms company. Everyone along the way will want to scrape their cut off the top if they are private companies who exist to deliver value to their shareholders.
  • This is a serious risk for publicly funded projects, because of the relatively small number of organisations who are capable and eligible to submit a compliant bid for the work.
• Unattractive and/or uncompetitive wholesale products and pricing.
  • I don’t know this for sure, though the lack of an affordable “entry level” service has been eluded to in the comments on ThinkBroadband, and apparently the DR wholesale service is more expensive than the BT equivalent.
• DR being difficult to deal with, either commercially or operationally.
  • Might this explain why other operators are not delivering service over the DR platform?

I’m not on the inside, so I can only surmise that these may be part of the woes.

I think one of the worst things that can happen in this case is that the project’s debts are written off but the network sold on to the highest bidder, debt free, as a “distressed assset”, as happened to so many failed startups in the dotcom era. Why? Because that’s going to allow a private enterprise (and it’s shareholders) avoid startup and build costs while reaping benefit from the infrastructure built with our taxes.

Such a product, so dependent on public money, needs to create a virtuous effect for it’s community.

There needs to be a re-investment in the region of the cash injected, not a net outflow. Supporting the local ISPs to deliver service is one thing, but it seems this needs to be much more far reaching. Given the main stakeholders are the Councils, it needs to continue to insource connectvity for council premises, schools, etc., getting them moved onto the network as soon as possible, for instance.

How can DR win wholesale FTTC business from ISPs who currently deliver product over BT? It’s actually relatively simple for an ISP already servicing ADSL customers via BT’s 21CN to provision FTTC – it’s all done with the same tools, traffic passed over the same interconnects.

The move to using the DR infrastructure has to some how offset the additional costs the ISP will have when interconnecting with DR, and setting up provisioning with their OSS, in addition to using BT’s. Other ISPs do use multiple wholesale providers to deliver service, such as A&A, so it can be done, and is obviously worth their while, but there must be a price point which makes it work.

DR need to be quicker and altogether more easier to deal with to win this particular battle, competing on cost alone may not be acceptable or simply unsustainable in the long term.

A turnaround for Digital Region needs to take into account the fact that, by design or by accident, it’s built itself a competitive marketplace where one didn’t previously exist and now needs to act as such, while the new CEO (when they arrive on the scene) needs to be able to fully engage and empathise with the ISP community, especially those with Yorkshire-based infrastructure to help contain interconnect costs, as these providers make up the prime growth market.

Sources: ThinkBroadband and Yorkshire Post