Free broadband: how telecoms shares reacted to Labour’s election pledge

Shares in telecoms giants such as BT and TalkTalk fell after Labour announced plans to deliver free broadband to every UK household.

Free broadband how telecoms shares reacted to Labours election pledge                                 

With the UK’s general election campaign in full swing, Labour hit the headlines with a bold policy proposal: to offer free broadband to households across the country.

The opposition party argues that such a move is necessary because of how internet connectivity has become a basic utility. Labour leader Jeremy Corbyn also claims it could deliver big benefits – giving a much-needed boost to Britain’s economy while aiding social mobility.

But rolling out a full-fibre connection to every home and office in the land won’t come cheap. Labour estimates that its ambitious broadband plan would cost £20bn but critics have claimed the true figure would be five times more at £100bn.

Mr Corbyn’s idea was, perhaps unsurprisingly, treated with derision by Conservative leader Boris Johnson. The Prime Minister dismissed the policy as a “crazed communist scheme” and used it as ammunition to claim that Labour plans to spend more money than a country recovering from austerity can afford.

Delving into details of the free broadband policy also sets off alarm bells for companies that provide internet access to the nation. Here, we’re going to delve into what the pledge would mean for these businesses in the long run, assess whether the proposals are actually viable and how stock prices of UK telecom companies have reacted since the announcement was made.

How Corbyn’s free broadband policy would work

According to Labour, the free broadband in UK homes would be achieved by partially nationalising the telecoms operator BT. Openreach, the division which is responsible for operating the UK broadband network, would be brought back into public hands. On the face of it, this might not be as difficult as it first seems – Openreach was legally separated from the rest of BT in 2017 amid competition concerns. The latest financial figures show that Openreach generates £5bn in revenue a year and employs 32,000 people.

Estimates vary on Openreach’s valuation, but financial news organisations such as Bloomberg have suggested it could be worth £15bn. Getting current BT investors on board could be quite difficult as Labour plans to give shareholders government bonds rather than cold, hard cash for their stake. The returns offered by bonds are usually considerably less than the dividends that BT pays its investors, meaning that many would be reluctant to back the deal unless a fair price was being offered.

Another question is this: how exactly would Labour be planning to pay? Well, part of the multibillion-pound sum would apparently be derived from a tax on international tech giants such as Facebook and Google. This would be calculated by ascertaining how much their UK operations contributed to global profits. Successfully implementing such a levy is going to be far from easy and it could have the knock-on effect of causing such companies – many of which have a presence in the UK – to rethink plans to invest in new offices and job creation on these shores.

Share prices in the telecoms industry took a sizeable hit in the immediate aftermath of Labour’s announcement in mid-November. The BT Group share price, which includes Openreach, plunged by 4 per cent on the FTSE 100, but it later recovered some ground to end the trading session 1 per cent down at about 193p – wiping about £250m off the company’s value. It isn’t completely clear whether this can solely be attributed to the broadband announcement. On the same day, BT announced it will be paying £400m a year for TV rights to Champions League football matches between 2021 and 2024 – failing in its attempt to shave as much as £300m off the total £1.2bn bill for the three seasons to satisfy investors.

Taking a look at how the rest of the telecoms industry reacted can perhaps shed some light on how the market absorbed the news. TalkTalk, another provider which has been investing heavily in rolling out full-fibre broadband, saw its shares slide as the news emerged – and that was despite the company managing to generate a £4m gross profit and accelerate its customer base. In direct reaction to Labour’s plans, TalkTalk announced that it was suspending plans to sell its FibreNation division, which has been delivering full-fibre infrastructure to three million homes and businesses. It is difficult to know the financial impact on other key broadband providers such as Virgin Media and Sky, given how they are both now owned by the US companies Liberty Global and Comcast respectively.

Nonetheless, TechUK, the industry’s trade body, made its stance on the proposal crystal clear. In a statement, it warned that such a move could halt levels of investment by the private companies who are currently footing the bill for full-fibre broadband’s deployment in the UK. TechUK CEO Julian David added: “These proposals would be a disaster for the telecoms sector and the customers that it serves… [they] would be a huge setback for the UK's digital economy which is a huge driver for growth.”

And, although BT chief executive Philip Jansen welcomed Labour’s commitment to improving the UK’s internet coverage – which lags behind others in Europe and the rest of the world – he warned that the true cost of a policy could be in excess of £100bn.

The potential advantages of free broadband

Labour’s policy is likely to be popular with voters for two reasons. According to industry regulator Ofcom, the typical British household currently spends £83.56 a month on telecoms services such as broadband, landlines and mobile phone contracts, a figure that would obviously fall substantially if a full-fibre connection was free. Second, there is a public appetite for tech giants to contribute more to the Treasury following widespread criticism that they are not paying their fair share of corporation tax.

Plus, in a somewhat ironic twist, Openreach actually shared some compelling statistics about the impact that nationwide full-fibre broadband would have. Its October figures revealed that a successful rollout could boost the UK’s productivity by £59bn come 2025, eliminate 300 million commuting trips because Britons would have the technological capability to work from home and deliver an influx of 270,000 people to underpopulated rural areas because living near offices in big cities and suburban areas wouldn’t be as much of a concern.

Whether voters will be wooed by Labour’s policy remains to be seen. The UK goes to the polls on December 12 – and with Brexit, the National Health Service, schools and policing hot-button topics on the campaign trail, Jeremy Corbyn’s broadband vision is likely to be just one small factor as the electorate decides which box to cross on their ballot papers.

FURTHER READING: 5G explained: How different is it from 4G, and when will it arrive?

FURTHER READING: How do UK general election opinion polls help investors?

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