The UK has seen a proliferation of cash-rich, independent fibre providers in recent years. However, in light of economic and operational challenges, there are concerns that some of these will fail. Should Ofcom have a plan to manage the potential fallout?
The UK has witnessed the emergence of new fibre broadband providers looking to take on the established operators by rolling out their own networks. Encouraged by supportive regulation and plentiful funding, these ‘altnets’ have prompted incumbents to ramp up their infrastructure investments.
There are concerns that intense competition and rollout challenges mean that some altnets will not survive. Unlike in the business market, consumer telecoms does not have a Supplier of Last Resorts (SoLR) process in place, which would otherwise establish a safety net for the customers of ailing providers.
Amid high inflation and supply chain issues, Ofcom is said to be devising contingency plans with BT should some smaller operators fail. In that scenario, the regulator considers that service disruption for end users would be unlikely because a struggling altnet will typically be acquired by a rival.
In the energy sector, the SoLR process means an alternative company automatically takes over the customers of a failed supplier, thereby ensuring an uninterrupted service for households. Given the backing of altnets from several large investors, some do not see financial resilience here as a cause for concern.
The proliferation of independent fibre operators has prompted incumbents to up their game
In recent years, the UK has witnessed the proliferation of new broadband providers, which are backed by private equity firms or investment funds and are looking to take on the established operators in the deployment of fibre (see Table 1). The Government has made a commitment to ensuring that a third of UK premises has access to fibre broadband by 2025. Meanwhile, Ofcom has created a regulatory framework intended to stimulate network-based competition in fibre, which has supported investment and a rapid growth in coverage.
Buoyed by the policy environment, available financing and (until recently) a slow pace of fibre rollout by the incumbents, altnets are deploying infrastructure across the country, including in areas sometimes considered uneconomical. According to the Independent Networks Cooperative Association (INCA), more than 5.5m UK homes and businesses could connect to an independent fibre broadband network at the end of 2021, with live altnet connections exceeding 1m (a 19% conversion rate). All of this activity has triggered a response from larger rivals. Via Openreach, BT has ramped up its fibre ambitions, committing around £12bn to reach 25m homes by the end of 2026. In addition, Virgin Media is spending £2bn to upgrade its copper network and has formed a joint venture with InfraVia Capital Partners, which will initially deliver fibre to 5m premises, with the potential to expand to a further 2m. Given these investments, the question now is how many altnets (despite their considerable funding) have the right business model to turn a profit.
An intensely competitive market will inevitably produce both winners and losers
As altnets make headway with their respective deployments, several stakeholders have voiced concerns over their financial sustainability, with no altnet consistently profitable (although CityFibre expects to be in 2023). Competition with BT and Virgin Media inevitably results in so-called ‘overbuild’ in some towns and cities, while price erosion, rising input costs and limited access to private land and skilled labour all present challenges. BT CEO Philip Jansen has said that it is “just not possible” that many altnets will make enough money to survive. In addition, Dana Tobak, co-founder of London-focused Hyperoptic, has stated that it is “inevitable that some will fail and some will make it”. Tobak is anticipating a wave of consolidation, arguing that “no one expects” there to be more than three or four national fibre networks in the long-run.
If the market is unable to support a variety of smaller operators, those not deemed an attractive acquisition target will exit – i.e. go bust. People’s Fibre was almost the first casualty. It went into administration in November 2021 after below expected revenues and heavy losses caused a “breakdown in the relationship” between the firm’s director and investors. The company had planned to build a FTTP network in Braintree (Essex), one of Gigaclear’s target locations. People’s Fibre was subsequently acquired by Fern Trading-backed Swish Fibre in a £2.8bn deal, with this figure largely based on the asset value of the infrastructure already deployed. Should other altnets encounter financial difficulties but are not snapped up by a rival, the consequences are currently somewhat unclear – including the implications for their retail customers.
In the business market, Ofcom, the Office of the Telecommunications Adjudicator (OTA) and operators have worked together to develop Supplier of Last Resorts (SoLR) processes in case downstream providers are forced to withdraw at short notice. These contingency plans differ according to which player in the supply chain fails. While some processes are still under development, the parties have agreed the course of action should a reseller customer of non-Openreach primary network operators (e.g. Gamma, TalkTalk, Vodafone) experience failure. Here, an eight-stage “Standard Skip-One SoLR Process” requires the operator(s) directly upstream of the distressed provider to undertake best efforts to ensure service continuity, with an emphasis on protecting vulnerable end users (see Figure 1). The process could last around eight months, eventually concluding with full disconnection if invoking a SoLR cannot be avoided. However, in consumer telecoms, there is currently no equivalent safety net in place, thereby providing little predictability as to what would happen in the event an altnet cannot survive. Recent events in the UK’s energy market provide for a useful case in point, with the failure of dozens of suppliers, such as Bulb, resulting in confusion and uncertainty for customers.
Ofcom is said to be working with industry on a plan to prevent broadband blackouts
In its submission to Ofcom’s Strategic Review of Digital Communications in 2015, SSE stated that the lack of a SoLR system in the retail broadband market would become “increasingly problematic” as society becomes ever more dependent on telecoms networks for vital services such as personal banking and e-health. Now, amid a much-changed macroeconomic climate, inflationary pressures and ongoing supply chain issues, there have been warnings of a potential spate of bankruptcies among the altnet community – and the possibility that this scenario could leave thousands of households without connectivity. Encouragingly, former cable firms NTL and Telewest were able to guarantee service continuity despite facing financial problems, before they merged in 2006 (and later combined with Virgin to form Virgin Media). Nevertheless, it has been said that Ofcom is drawing up contingency plans with BT for how to handle the fallout should a number of smaller operators start to fail.
Responding to these claims, Ofcom stated that it keeps a watchful eye on developments in the broadband market as part of its work to support fibre investment and protect consumers. In the regulator’s view, customers tend not to experience a loss of service when a “network company” fails because they are typically sold as a going concern. In the rare case that a network suddenly fails and ceases to provide services, Ofcom has said that it would work with alternative (upstream) suppliers to help reconnect customers as soon as possible. This could be through Openreach or another provider, “depending on the circumstances”. If Ofcom harbours serious concerns about the financial resilience of certain altnets, it should consider engaging with them and the largest operators to develop proportionate solutions that would mitigate the risk end users suffer service disruption.
Is a Supplier of Last Resorts needed for consumers?
If Ofcom is indeed collaborating with industry on a new SoLR framework, it should look to utilities for guidance on how to establish a support and governance system for when a provider withdraws from or fails commercially in the market. Similar to UK telecoms, the energy industry has seen the entry of new suppliers, going from 13 in 2010 to 40 in 2020 as the Government encouraged competition. However, a recent surge in input prices has caused a number of providers to go out of business. If an energy firm goes into insolvency and prepares to cease trading, the SoLR procedure means an alternative company (e.g. British Gas, EDF) will automatically take over their provision of gas and/or electricity and the accounts of their customers en masse, thereby safeguarding households’ uninterrupted energy supply. According to Ofgem rules, the appointed SoLR – which can seek reimbursement of incurred costs – will put the inherited customers onto a ‘deemed contract’ and should act in good faith to try and match their previous tariff.
Unlike the energy sector, consumer telecoms has no such SoLR arrangement in place. In response to Ofcom’s Wholesale Fixed Telecoms Market Review 2021-26 consultation, INCA, Jurassic Fibre and Swish Fibre each submitted that altnets’ backing by large investment groups lessens the risk of insolvencies, which ought to be considered negligible. While a wave of consolidation may therefore be more likely than one of bankruptcies, a sense of caution has crept into financial circles. Some investors appear less ready to part with their cash, particularly when it comes to some of the UK’s newest altnets. With no SoLR precedent or established framework in the market, it would be prudent of Ofcom to anticipate a worst-case scenario of altnet failures and to engage with industry on the steps to take in response. The immediate risk of such an eventuality may well be low, but planning ahead would soften the potential impacts should smaller providers run into trouble, ensuring appropriate operational and communications mechanisms are in place to protect against consumer harm.
