Fibre upgrade cost traps Britain in cyber slow lane

* UK regulator Ofcom proposes BT separates network

* Fibre upgrade could cost up to 25 billion pounds

* PM May wants Britain to meet European gold standard

* BT investing in upgrading existing fibre-copper mix

By Paul Sandle

LONDON, Dec (Shanghai: 600875.SS - news) 2 (Reuters) - Britons desperate for faster broadband are unlikely to get it from a plan to separate the country's biggest network from BT unless the industry tackles how to pay up to 25 billion pounds ($76 billion) to upgrade to fibre-optic cables.

In a bid to boost Britain's economy through Brexit, Prime Minister Theresa May's government has said it wants to address business concerns and replace an ageing copper network with the "gold standard" common across Asia and parts of Europe.

But getting anywhere near the 1Gbps speeds the government is seeking is a big ask because the national network, owned and run by former telecom monopoly BT, is trapped in the copper age.

Pressure has been building on BT and its Openreach division for years, led by rivals TalkTalk, Sky (Frankfurt: 893517 - news) and Vodafone, who rely on the network, and by a group of politicians who believe it is failing consumers and businesses.

Rivals blame BT, saying Openreach's cashflow funds other parts of its business - such as expensive sports TV rights - and have called for the network to be spun off completely. BT says its content costs are more than covered by its retail business.

Regulator Ofcom has instead proposed putting Openreach into a legally separate company with its own board to increase transparency over how it is run, saying a clean split would be riskier and more costly and take too long to deliver.

BT has defended its track record, saying it offers broadband speeds of more than 30 Mbps to nine out of 10 homes and that a smaller standalone network business would not be able to make the investments needed.

"Rolling out networks is an expensive and risky business with very long payback periods, that's why it is so important that Openreach remains a part of BT Group (Other OTC: BTGOF - news) ," a BT spokesman said in emailed comments to Reuters.

However, in terms of fibre to the home, Britain ranks 27th out of 28 in Europe, with only 2 percent of buildings connected.

Spain has raced ahead in rolling out fibre to the premise, helped by a more modern infrastructure that can be upgraded without having to dig up roads. More people also live in apartments, making it cheaper to roll out a network.

In Spain, Telefonica (LSE: 826858.L - news) has taken the lead, investing in fibre to prevent customers from leaving while the regulator has also encouraged others to invest in the infrastructure.

"Our members tell us that broadband is the number one issue for them. Faster broadband would make them more profitable and more productive. We have a booming digital economy, but it's in spite of the network not because of it," said Dan Lewis, Senior Advisor on Infrastructure Policy at the Institute of Directors.

Lewis said the government needed to promote competition around the provision of broadband infrastructure.

Ofcom says its plan would create a more independent Openreach, "well placed" to invest in full fibre broadband and the debate has already spurred BT to pledge more fibre coverage.

A 6 billion pound investment plan by BT will help connect 2 million premises with full fibre by the end of 2020 and take coverage from 2 percent of properties to 7 percent. As part of the funding plan, it will also rely on G.fast, which squeezes speeds of up to 330Mbs out of the existing network.

"That investment will see us make ultrafast broadband available to 12 million homes and businesses...we believe our mixed technology approach is the best way to get affordable ultrafast speeds to as many people as possible in the shortest timeframe," the BT spokesman said.

FEAR TO FUEL FIBRE FUTURE

Hull is feted by the government as an example of how the industry can move towards a fibre future. The city in the north east of England gets its network from KCOM (LSE: KCOM.L - news) , which will be able to offer fibre to 150,000 premises by the end of 2017.

KCOM Chief Executive Bill Halbert said rolling out fibre had been relatively easy because the network had been designed to be upgradable, so very few roads had to be dug up. But the payback on the investment will still be 15 to 18 years, he said, based on a 10 percent take-up modelled in 2010.

Industry reports have put the cost of rolling out fibre to the premise at between 20 billion pounds and 25 billion pounds.

The only thing that will spur BT to make the investment, smaller fibre providers say, is fear of losing customers.

Greg Mesch, the CEO of CityFibre which has joined forces with TalkTalk and Sky to build a FTTP network in the City of York in northern England, said BT Openreach had no motivation to invest when it was making money from its fibre-copper network.

"They already have the revenue stream, they are already valued at a free-cash-flow multiple, so any cash that they divert (to fibre) would actually drive down share value."

Mesch said 400 million pounds of government funding available to smaller companies could help him build networks in other cities, chipping away at BT and prompting it to respond.

"The spark that we create is the spark that will change BT," he said. "BT will only move because of fear."

Analysts said Ofcom's legal separation plan could help BT spin-off Openreach if it wanted to in the future, because it would help crystallise its value. But they agree that legal separation will not necessarily encourage any more investment in the network.

BT said it expected to reach an agreement over its future structure that would suit both customers and shareholders.

A fully independent Openreach could in theory attract capital from its customers - although Sky has said it is not interested in investing in infrastructure.

TalkTalk's Chief Executive Dido Harding said separating Openreach would enable others to see how much money was going into the network, rather than any other BT service.

"In the end it is the action not the words that will matter," she told Reuters. "If this (legal separation) leads to the benefits that businesses and consumers desperately need, then it's a good thing." ($1 = 0.7906 pounds) (Additional reporting by Kate Holton; Editing by Alexander Smith)