Consolidation and the ‘right number’ of fibre networks dominated discussions, with the ultimate survival of some altnets the elephant in the room
The potential for some altnets to go bankrupt was mentioned once and not again
On 2 July 2024, the Internet Services Providers' Association (ISPA) held its annual ISP Business Summit, co-hosted with DLA Piper. Rowan Aspinwall (Legal Director, DLA Piper) presented metrics on the financial health of the UK’s fibre market and the stresses facing altnets, pointing to – on average – declining net income, worsening liquidity, increasing overbuild and a higher chance of default (at >10%) relative to UK businesses overall. He envisaged three possible scenarios for the coming years: 1) altnet-altnet consolidation; 2) the acquisition (or rescue) of some altnets by Openreach; and 3) the failure of some altnets that are not rescued by an investor or a larger competitor. While consolidation among altnets received much airtime at the event, the suggestion that Openreach would buy rather than build in certain instances was scoffed at by several attendees. The potential for some altnets to go bust was arguably the elephant in the room and not mentioned again (although perhaps unsurprisingly given the makeup of the audience).
Panellists fundamentally disagreed over whether having three national fibre networks was economically viable
M&A was the focus of the first panel session, with Jonathan Paines (Legal Director, DLA Piper) advocating combinations among regional players, for example to make themselves more attractive to future bidders. Similar to other recent events, there was definite uncertainty about the exact path the consolidation journey will take; however, more so than ever, there was a sense of polarisation regarding the number of fibre networks the UK will – and should – end up with in the long-run. Will Creedy (Corporate Development Director, CityFibre) set out the case for the UK needing three national networks to see effective competition, with CityFibre aiming to be the third (competing with Openreach and Virgin Media O2/Nexfibre). He added that CityFibre could be the main consolidator of smaller altnets as it actively considers targets with >100,000 ready-for-service premises. Giles Rowbotham (CDO, Nexfibre), said Nexfibre is also looking at ways to grow inorganically, using cash rather than equity as its “primary currency”. However, he disagreed on the UK’s future market structure, stating that the economics of having three national networks do not add up. Rowbotham considered anything north of 20m households as national in scale, of which he thinks there will likely be two in the end, plus some niche rural players. James Harraway (MD, Infracapital) didn’t pick a side, but his firm’s preference not to invest in altnets that would be the third provider in a given area was perhaps instructive. Rowbotham later took aim at the vertical integration model employed by some operators, arguing that it does not make sense from an operational or a financial perspective, and that having an anchor tenant does not work in the medium-term or beyond. In contrast, Oliver Bradley (Senior MD, Macquarie) considered that the success of many altnets could be determined by securing a large ISP customer. He surmised that if Sky uses an altnet’s network, they’ll be successful. If Sky doesn’t, they won’t be.
Adoption remains a challenge, potentially more so than industry lets on
The subsequent panel turned to the increasingly pressing issue of adoption and how altnets can drive take-up, particularly as consumers report fairly high satisfaction rates with their current broadband services, as well as frustrations with the switching process. According to Graeme Oxby (CEO, Community Fibre), the demand is there and scaling adoption “is not rocket science”. Altnets have to be present and build trust through good communication and installation – two key risk areas when engaging with customers. For Jo Pilkington (Principal Research and Market Intelligence Manager, TalkTalk), altnets can’t focus solely on price, but must tailor offerings to meet a household’s needs. Eoin Heaney (Vice President International, Calix) emphasised that brand is a major driver of adoption, reiterating comments from speakers at last year’s event about the need to invest in marketing to build consumer recognition. The fact that addressing low adoption rates continues to be discussed suggests this is a nut that many altnets are yet to crack – and potentially remains more of a challenge than some are willing to let on.
Connecting the final few percent will require regulatory and government help
Despite the UK’s significant progress in fibre network rollout, the third panel set out the challenges to connecting the country’s rural areas. Naturally, Malcom Corbett (CEO, INCA) hailed the “fantastic job” the altnet community has done rolling out to rural premises, building at the same level as Openreach last year. However, discussions quickly turned to the role of Ofcom and the (next) Government in overcoming barriers in these areas. Nathan Rundle (CEO, Gigaclear) stated that achieving 100% gigabit coverage by 2030 will require regulatory changes, particularly for the last 1-2% of premises that will never be economically viable. He called for a sensible approach to regulation and to government intervention, with collaboration across the public and private sectors, but considered that no credible solution for the final few thousand households was currently on the table. While panellists generally felt Project Gigabit was working (despite a slow release of funds and painful bidding process), Corbett urged changes to the allocation of ‘Type C’ contracts, for which Openreach is the preferred bidder. Acknowledging the challenge BDUK faces in determining those areas that are commercially viable and those that aren’t, he argued against awarding all funding for those contracts to a single supplier. Corbett also wants policymakers to ensure “genuine choice” for consumers in blocks of flats by enabling all providers, not just Openreach, to acquire wayleaves. Easier access to MDUs has been called for by Clive Selley (CEO, Openreach) as a way of helping operators build faster and more economically.
A call to prevent future Equinox offers from Openreach
In the final panel of the day, Rajiv Datta (CEO, Nexfibre) continued the debate about the ‘right number’ of networks. He repeated the view of his colleague Rowbotham that the UK market will not support three national fibre networks, stating that there will be three in some geographies, but two or “two plus” overall. Wil Wadsworth (Group CFO, Netomnia/Youfibre) also saw potential for some rural altnets (e.g. Gigaclear, Truespeed) to survive in the long-run, but believes the country can support three national networks if capex is deployed efficiently. He highlighted the recent Netomnia/Brsk merger as the joining of two similar, well-funded businesses that together will be better positioned to challenge larger networks while also helping to create one of the biggest retail ISPs. Other panellists preferred not to talk market structure, including Richard Allwood (CSTO, Openreach), who sees M&A as “a bit of distraction”. He stated that Openreach is working to deliver fibre nationwide by 2030, leveraging Type C contracts to plug gaps in very hard to reach areas.
On regulation, Allwood stated that the Wholesale Fixed Telecoms Market Review (WFTMR) framework is working well and that Ofcom’s ongoing Telecoms Access Review (TAR) should ensure stability and not impose further constraints on Openreach that would inhibit “competition on the merits”. Datta also had several requests of the TAR, including predictability in pricing – i.e. no Equinox 3, or 4 or 5. In contrast, Ana Baide (Head of Regulatory Affairs, Vodafone) would welcome new Equinox offers – given Vodafone wholesales from Openreach – so long as competitive safeguards were in place. For Wadsworth, PIA is the topic priority for the TAR. While he considers it has been a very useful product to accelerate deployments, cost inputs and pricing levels must be assessed and reduced. From discussions on the sidelines of the conference, improved PIA pricing is a key ask of Ofcom for many other altnets, alongside adjustments to geographic market boundaries (particularly for ‘Area 3’) and a floor on Openreach pricing. Who will be leading the TAR through to completion though remains unclear, with Selina Chadha (Director of Connectivity, Ofcom) soon departing the regulator for the Civil Aviation Authority, leaving Ben Harries (Economic Director, Ofcom) to step in on an interim basis.
