2023 is proving an ‘interesting’ year for the UK fibre market. This article will take stock of the current status and look ahead at what STL Partners expects to see in the rest of the year.
What is the state of fibre rollout in the UK?
Fibre rollout in the UK has been continuing at a fast rate in 2023. At the start of the year, 48% of households in the UK had access to full-fibre broadband, an increase of 5.5 million homes since Spring 2022. At the end of the first quarter of 2023, overall fibre-to-the-premises (FTTP) penetration stood at just over 15 million, a 2 million household increase since the end of 2022.
This growth is in part driven by the UK government’s Project Gigabit programme seeking to extend gigabit-capable broadband to households across the UK. This meant that the opening up of the fibre market, beyond the incumbents, was accelerated and a new generation of ‘AltNets’ (alternative network providers) emerged, since the announcement in 2020. CityFibre is the largest challenger and passed 2.5 million premises earlier this year, with its wholesale-only offering including national customers, such as Vodafone, TalkTalk and Zen Internet. There are over 100 AltNets in total, with HyperOptic, Community Fibre, and Gigaclear are amongst the other big challengers.
Despite the rise of the AltNets, the incumbents, Openreach and Virgin Media (VMO2), are still significantly in front. Each covers 10 million and 16 million premises respectively (as of May 2023) and are targeting huge increases to 25 million and 23 million, respectively, by the end of 2025.
The Big Pivot: from homes passed to customers connected
The introduction of the AltNets and the rapid pace of fibre rollout have left the market in a state of overbuild that is only going to exacerbate as rollout continues. With current plans across network providers, the average home will have access to roughly 2.78 fibre connections by 2027. Some households will have access to up to 6 different suppliers. STL’s analysis suggests that AltNets will need to secure between 30% and 36% of customer take-up in any given location to make their business model viable. We will therefore see a situation in areas with overbuild that, by the time you reach the 3rd or 4th ranked fibre provider, the business model will be unviable. This is clearly unsustainable.
It remains to be seen which AltNets will be best equipped to survive. They have had different strategies with regards to rollout and service design. Community Fibre has been more London-focused, Gigaclear focuses on Buckinghamshire, Northamptonshire, Oxfordshire and Rutland, and Trooli focuses on the rest of Southeast England. Part of the problem that many AltNets face is that they have been using the same playbook from the same advisors, using the same market assumptions. These have proved fundamentally flawed and led to bubble-building on a grand scale.
Higher connectivity speeds have helped some to compete with incumbents. Research by broadband speed intelligence firm, Ookla, revealed that the AltNets are the fastest providers in many areas. They are already providing the fastest speeds in some of the largest cities, including London, Glasgow, Liverpool, and Manchester. This helps to create sources of differentiation needed to secure customer connections.
AltNets who have focused on converting coverage into customers are better equipped to mitigate economic headwinds, compared to competitors who have focused too heavily on coverage metrics. The latter are now having to scramble and rethink their plans.
An example of this is Netomnia, the fourth-biggest AltNet. It recently passed 410,000 premises, but has so far only connected 28,000 customers (under 7% take up). On the other hand, there is Hyperoptic, the third-largest AltNet, whose 230,000 customers represent a take-up rate of over 30%. Its partnership-first strategy has signed up over 50 UK councils, over 250 developers, and homebuilders including Avanta Homes and Barratt homes. It is aiming to maintain this take-up as it continues to rollout fibre and pass 2 million households by the end of 2023.
Consolidate or collapse: the big pivot
The state of the market means that we expect to see more restructuring activity in several forms throughout the rest of the year and into 2024:
1. Funding will continue but this will increasingly be tied to connections rather than homes passed
2. Some providers will begin to sell off fibre in areas of competitor overbuild
3. Consolidation will continue as smaller providers’ business models become increasingly visibly unviable
Funding will continue for providers who secure service take-up
Most AltNets have been heavily backed by private equity and other investors. CityFibre is backed by a consortium, including Antin Infrastructure Partners and Goldman Sachs, and raised £4.9bn in debt in 2022. Having already (by that measure, making it the second largest full fibre provider in the UK) with its highly-scalable wholesale-only business model, with high profile customers including Vodafone and TalkTalk, as well as numerous regional internet service providers (ISPs), we expect CityFibre to be one of the best-placed AltNets to challenge the Openreach and VMO2 in the long run.
Community Fibre raised £1.3bn in late 2022, as it is on track to pass 2.2 million London homes by the end of 2024, counting Deutsche Telekom Capital Partners and Amber Infrastructure amongst its largest investors. KKR bought a majority stake in Hyperoptic in October 2019 and earlier this year Trooli was acquired by Agnar UK infrastructure investors.
Heavily-geared AltNets will come under increasing pressure if they fail to achieve the necessary customer adoption numbers and may struggle to secure further funding to meet their long term plans. Nonetheless, Netomnia secured an additional £230m in debt financing in March of this year, a vote of confidence in their business plan from six bank lenders (HSBC UK, ING, NIBC, RBC, Standard Chartered, and UKIB).
Those providers who have not achieved the same level of service take-up as those mentioned above may begin to struggle to attract investment. A congested market, expensive debt and an unfavourable economic environment are increasing pressure.
Providers will begin to sell off fibre in areas of overbuild
Another trend that we predict is AltNets selling off parts of their network build-out. This may be to incumbent fibre operators (unlikely) or to other AltNets (more likely) who are either already present in the area or planning to be. This will be part of a strategy to focus on increasing take-up in specific areas where they can see their way to more success: improving services and concentrating sales and marketing efforts. Others may sell to cut costs and/or release cash. Some of these sales will inevitably be at a discount to book value.
Many AltNets, even those leading the market, have been making job cuts as the market tightens. Hyperoptic announced it was cutting over 100 engineers in areas where their roll out was almost complete, and CityFibre announced a cut of over 400 jobs now it has reached build out of over 1 million homes a year.
Consolidation in the market as smaller providers’ business models become visibly unviable
There has been consolidation in the market from the beginning of AltNets starting to grow in the market. CityFibre bought Fiber Nation in 2020, Community Fibre bought Box Broadband in 2021, and Swish Fibre bought People’s Fibre in 2022.
As the market continues to splutter, we expect more consolidation to occur before the end of the year. Engineering-centric AltNets whose business plans are proving hopelessly optimistic and/or whose commercial execution is failing may have to dramatically down-size or be snapped up completely by healthier competitors. This will mainly be because they have not secured a high enough take-up, their customers’ business is of dubious quality, or their cost-base is simply unmanageable. Buyers can hope to purchase such assets at distressed prices. For those investors with underperforming AltNets in their portfolios it is not too late. You can still act now to mitigate the consequences
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