30 August 2022

Roadworks are increasingly commonplace across our city streets as the race to roll-out Fibre-to-the-Premises (FTTP) gains ground. Aetha’s Amit Nagpal considers the form – and the potential prize.

Our city streets are the promised land in the race to roll-out Fibre-to-the-Premises (FTTP). In London, where I live, the presence of roadworks is commonplace and the sound of diggers part of the daily soundtrack to the city.

Increasing numbers of alternative networks (alt-nets) have set their sights on the potentially lucrative prize from securing a slice of the ultrafast full fibre broadband market. In the UK, FTTP has huge demand, lagging supply and the Government’s Project Gigabit targets driving delivery of super-fast broadband to 85% of the UK by 2025. The alt-nets are snapping at the heels of Openreach, the digital network division of BT Group, that is setting the pace to reach 25 million premises all over the UK by December 2026 – and currently installing around 800 metres of cable every minute.

The UK is behind the curve in providing full fibre broadband compared to some other countries that started deployment much earlier and have been growing at scale for years – Japan, Latvia, Portugal and Spain among them. We had the opportunity to get ahead years ago but opted to tweak the existing BT copper network to stretch capability, avoiding the capital expenditure of starting afresh with a new technology. Copper has been improved over the years but can no longer meet the needs of a digital world speeding towards the data-rich metaverse. The task of changing technology is underway, and this brings opportunity.

There’s currently no shortage of financial investments looking for a home, and the alt-nets offer an attractive proposition – the long term could bring rich returns plus the investment seems safe: the demand for fast broadband has been consistent since Covid, and even if the quantity of customers signing-up to the new offer falls short of the business plan, the fibre infrastructure still has intrinsic value.

It’s worth recalling that the first iteration of alt-nets were the cable TV providers, many of which lost mountains of money spent in digging up the streets to lay cable back in the day. While significant losses were made, Virgin Media eventually built a profitable business on the remains of the day. Fast forward to the present, and the now-named Virgin Media O2 is also working on upgrading its fixed network to FTTP by 2028 with a target of reaching 23 million premises. This upgrade means a likelihood that some streets will inevitably have at least two full FTTP providers.

The race between the alt-nets to beat Openreach and Virgin Media O2 at their own game brings a lot of players to the field, cutting down market size for the two large incumbents. While the full fibre space is not the sole domain of Openreach and Virgin Media O2, there are targets to be met and this pressure brings a fall-back position to the alt-nets if their money starts to run-out before they secure sufficient customer revenues to pay back investors. Openreach is likely surveying the fast-paced alt-net activity with a view to buying up the best-in-race companies in a move that delivers numerous benefits. Buying ready-made and in-situ FTTP infrastructure avoids the cost of building. Smaller towns and villages are hard and expensive to reach with less population density making financial returns on infrastructure investment from potential customers less lucrative. Buying existing fibre networks also addresses the challenge of the current shortage of labour. Securing fibre already in the ground – and the accompanying customer base – can only help Openreach hit targets and leads to a nice windfall for the alt-net shareholders too. There’s every chance that Virgin Media O2 might consider moving in on the alt-nets too if it helps the organisation hit their own roll-out targets, although there is likely to be less government pressure on Virgin Media O2 than on Openreach.

This sounds like a winning narrative that rewards all players while bringing competition to the market that will drive down prices for customers. However, there is a cautionary tale to be told. With increasing numbers of alt-nets operating throughout the country, coupled with Virgin Media O2 not only replacing existing cable with fibre but expanding its current footprint, the risk of overbuild on streets and across towns and cities is real as rival companies race to install their own cables and be the first to sell gigabit service to customers. Replication causes additional disruption to residents and roads, and it also adjusts the business model – if one operator has the only available cable running the length of a street, it has more intrinsic value and service pricing potential. Increase numbers and the fallback position for the alt-nets becomes less certain – there will be winners but there will also be losers. Where there are multiple providers, Openreach can play one off against another.

Planning, procuring and installing FTTP infrastructure takes a long time. Once the decision is taken to cover a borough or a town, it can be hard to change course if it turns out that a competitor had also launched plans for the same zone. Winning the FTTP land grab will require more than speed – alt-nets need to be prepared to change direction when circumstances require. There is little to be gained from being the second or third alt-net – the more providers there are in one area, the fewer customers to go around. If Openreach and/or Virgin Media O2 is talent spotting for future events, the alt-nets that come with higher numbers of customers to help Openreach/Virgin Media O2 hit their targets will be picked. Duplication of fibre infrastructure also dilutes the intrinsic value for each of the alt-nets meaning the financial safety net looks thin. And the near-simultaneous entry of multiple independent gigabit internet ventures risks ‘go-it-alone’ aggressive pricing and discounting that might quickly (and permanently) reduce average revenues per user (ARPUs) to levels lower than those in the forecasts used to raise the cash to finance those ventures in the first place.

The financial promise of the alt-net goldrush is appealing and the race is on. But promises can be broken and there is no guarantee of gold.