The market for the UK’s broadband suppliers is potentially facing its most critical year since the rollout of full fibre in the UK. There's been an explosion of smaller, independent telecommunications networks, or 'altnets', since the regulator Ofcom opened up competition for the rollout of a fibre network across Britain to connect homes and businesses to ultrafast broadband. Known as Project Gigabit, the government's mission has been supported by billions of private equity investment and lending leading to over 100 UK altnets at present.
The government is now fearful that this explosion has created the risk of altnet failure – driven by too many suppliers, excess capacity and too few customers. The government is also concerned that some suppliers may not reach a financially sustainable level of operation before their funding runs out.
In early 2023 the Times reported that the government was investigating the need for an emergency support process in the broadband provider market, similar to that which exists in the energy sector. The concern is that essential services that rely on secure broadband access, such as hospitals and emergency services, could be severely impacted should a broadband provider fail. That review process is still underway. A Times source apparently close to the plans was quoted as saying that it was sensible for the government to prepare for the worst.
Market overview – a rush for connectivity
The two largest incumbent operators, Openreach and Virgin Media O2, dominate the broadband provider sector. But there are now around 100 new players in the market. Openreach owns around 80% of the broadband connections in the UK and 100% in some parts of the country.
Echoing a gold rush, there's a near-stampede of altnets, all aiming to be the first to connect a specific area and then secure connected customers to plug into that new infrastructure. When a miner staked their claim, however, that area of ground was theirs to prospect on. This doesn't apply to the roll-out of broadband, however, as current regulation allows multiple operators in the same area.
The growth of ‘overbuild’
With no restriction on the number of suppliers who can implement infrastructure in any particular area, we're seeing the growth of what's known in the sector as 'overbuild'. It's not uncommon to see three to six suppliers installing infrastructure in the same area, and then fighting to secure customers. If your pavements are in a constant state of excavation, this may be why.
Industry predictions suggest that by 2025 there could be an overbuild level so significant that the number of houses and premises 'passed' by full fibre broadband could be twice the number of actual premises available. This could continue to escalate beyond 2025.
An altnet generally needs to secure around 40% of the connection capacity in its chosen area to become a viable proposition. Which effectively means that if you're the third or fourth overbuilder, you're unlikely to see a return.
Market consolidation of altnets expected
The operating environment for altnets has changed significantly over the last 12 to 18 months. A climate of increased interest rates, high inflation, wage rises and rising raw material costs has severely tested the business plans and funding structures of some.
Many altnets remain in robust financial health, are well funded and making progress in the rollout of their networks and connection of customers. Others, however, are struggling, and industry commentators confidently predict a pattern of mergers, takeovers and consolidation. This is a classic economic reaction to an overcrowded and under-demanded market.
Ofcom needs to manage dominance of the major players
This pressure on the altnets is exacerbated by actions planned or contemplated by Openreach, which are intended to maintain and bolster its leading market position. Openreach has recently said that it wants to lower its wholesale prices to its customers (such as Vodafone and Sky) for the second time in two years. This is likely to lock more customers in, and make it more difficult for the altnets to attract those customers to their own networks.
Ofcom has a balancing act to ensure that Openreach doesn't revert to the old-style monopoly enjoyed by BT, or even a duopoly with Virgin O2-Media, and to create a level playing field for the altnets to make progress.
Industry commentators suggest consolidation may lead to the emergence of a third major credible alternative to Openreach and Virgin O2-Media. Some suggest this could be CityFibre or Hyperoptic, although this is only speculation.
Altnet winners and losers
As with any industry sector with these dynamics, scale is everything. The winners will be those altnets that are well funded, well managed, have a clear territorial strategy, and who are able to quickly and successfully sign up customers to their installed networks at the required scale.
The losers will be the poorly funded operators that are too far back in the build queue, who don't get to the table quickly before all the food is gone, or who choose the wrong table in the first place.
There's still evidence of successful fundraising in the sector. In March 2023, Tewkesbury-based Netomia raised £230 million of debt financing from six banks, for example. But there have already been at least two failures in the last couple of years. People’s Fibre, a small altnet, failed in September 2021 by which time it had passed around 5,000 homes but only secured 150 connections. It was funded by Swedish investors, and its business and assets were sold to Swish Fibre.
And in early 2023, Light Source, a designer and installer of networks for Openreach, Virgin Media O2 and others failed. This demonstrates that problems are also apparent further down the supply chain.
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How can altnets bolster their position?
Altnets, together with their lenders and advisers, should consider the following questions:
- What is the firm’s financing position, and how much runway does it provide? Is that enough to reach a viable level of installation and connectivity?
- Can the firm reduce its installation costs or fixed cost base by outsourcing or collaborating with other suppliers?
- Does the firm have a successful and effective conversion strategy which is demonstrably succeeding?
- Does the firm have a plan B, even if that is only a theoretical plan at this stage?
If some altnets do decide that they can't reach a viable level of performance, those who act quickly have a greater chance of securing a partner or a buyer while there is still time and value can be preserved.
To achieve the best possible outcome, you need to address any challenges head on at the earliest opportunity.
For more information or advice, contact Nigel Morrison.