Beneath the streets of the UK, a billion pound race is unfolding. In many cities, at least three companies are digging to lay broadband fiber optic cables targeting all the same households, with some areas expected to have six or seven such lines by the end of the decade.
But only some of them will cross the finish line.
Encouraged by incumbent telecommunications group BT which is dragging its feet on upgrading old copper lines to fiber optic technology, dozens of smaller alternative networks – or “altnets” – have sprung up over the course of the decade. decade with the aim of laying the fiber as quickly as possible.
Their bet, shared by some of the biggest names in private equity, is that the very high speed they offer will allow them to poach frustrated customers. More than 50 altnets of varying sizes and ambitions have secured around £15 billion from private investors and banks, including KKR, Macquarie, Warburg Pincus, Goldman Sachs and Antin Infrastructure Partners.
The question now is how this market will finally shake up, and which of these companies will be able to get enough customers to stay afloat.
When the dust settles, will there only be two network operators – with Openreach and Virgin Media O2 dominating the landscape – or is there room for a shiny challenger with a sizable market share? stolen from incumbents?
“A lot of these business models were created assuming that if there was an altnet out there, Openreach wouldn’t overbuild them,” said James Barford, analyst at Enders Analysis. “It turned out to be wrong.”
For their business models to be economically viable, each of the altnets needs to capture around 40% market share in the locations they carve out, according to industry estimates, either by directly selling broadband contracts to consumers or by selling them wholesale to internet service providers such as Vodafone, TalkTalk and Sky.
No altnet has made a steady profit yet, although the biggest – CityFibre – says it will by next year.
“If you add up all the activity – all the planned activity – few of these companies will make enough money to survive. That’s just not possible,” said Philip Jansen, chief executive of BT.
The glaring challenge is that BT’s network division, Openreach, has rapidly accelerated its fiber build, moving much faster than most of these opportunistic companies had expected.
Meanwhile, rising interest rates and energy and labor prices, caused in part by Russia’s offensive in Ukraine, have changed cost forecasts for many of these groups. , which already suffer heavy annual losses.
Openreach is spending around £12bn to reach 25m homes by the end of 2026 and believe it could realistically reach 97% of UK premises by 2030. Virgin Media O2 has committed £2bn sterling to upgrade its copper network to a hybrid fibre-copper offering for around 15.5 million premises by 2028, and is seeking a joint venture to build all-fiber lines for an additional 7 million dwellings .
Their customers can also be quite “sticky” – reluctant to switch providers unless they have deep discounts or much better service.
Goldman Sachs analyst Andrew Lee said last year he had been “nervous about the risk of overbuilding for BT”, but now the war in Ukraine is creating new pressure. “Some of these guys are running with their shoelaces tied because of supply and labor bottlenecks,” he added, noting that rising costs were altering long-term returns. term that altnets could offer their investors.
Compounding these issues, carriers are also facing a global shortage of fiber optic cables, with lead times and prices increasing dramatically in recent months.
The price of fiber per kilometer of cable has increased by 25% due to rising raw material and logistics costs, according to Ankit Agarwal, managing director of STL, Britain’s largest fiber supplier.
“Logically, you want to give your best terms and delivery times to your biggest customers,” he said. “We prioritize BT and Virgin Media.”
But not all industry insiders and investors are so skeptical of the challengers’ prospects.
UK altnets have now surpassed a total of 5.5 million premises with fiber broadband, compared to 7.6 million for Openreach and around 2 million for Virgin Media O2. They have doubled their build speed year on year and now have more than a million customers, according to the latest report from the independent networking industry association and analyst firm Point Topic.
At first glance, there is little evidence that investments from private equity, banks and investors are coming to an end.
This month CityFibre secured £4.9bn in debt financing from a consortium of banks, while in May a new company called Freedom Fiber was promised £100m by infrastructure investors Equitix and Santander.
However, a major altnet investor admitted that “the money is flowing, but less than it was”.
“There is a flight to quality now,” they added, pointing to the fact that some recent capital raises have “struggled quite a bit.”
Companies with attractive business, the bulls claim, are those that have selected locations that other players have yet to reach, that build quickly and cheaply, and that are able to offer competitive prices to customers. .
As Ollie Perry, a partner at consultancy Oliver Wyman, said, “If I was the CEO of the company that’s the sixth superbuilder, I don’t think I’d be in the job for very long.
He added: “There is absolutely room for different operators – there is no room for multiple operators logging into the same building.”
Several industry insiders cite KKR-backed Hyperoptic as an example of a strong business model. The company targets high-density areas of apartment buildings, where it can reach more customers at lower cost, and has now reached 1 million homes and signed up 230,000 customers – more than any other altnet.
Meanwhile, Community Fibre, a London altnet, has signed a wholesale deal with TalkTalk across the capital, according to two people briefed on the deal. G.Network, on the other hand, has surpassed 400,000 households and signed up 55,000 customers, a 12.5% participation rate to date.
Despite some successes, it is widely predicted that many small businesses will go bankrupt or be taken over by competitors, as cable companies were in the 1990s. The first victim was People’s Fibre, a company on the Welsh border, which was placed under conservatorship at the end of last year.
In a sign of the appetite for consolidation, Community Fiber has been approached by several companies interested in acquiring or merging with the company, including CityFibre, Hyperoptic and G.Network, according to people briefed on the discussions.
Greg Mesch, chief executive of CityFibre, said he “deeply believes” there will eventually be a third national network, which he says would also be healthier for the UK.
“When you have a duopoly, they stop investing,” he said. “When you have a challenger, they have to do two things to survive: they have to have a better product and they have to have a better economy.”
Dana Tobak, CEO of Hyperoptic, said his team is still thinking about a wide range of future scenarios, including whether to become a bigger internet service provider, buy other altnets or sell the company altogether – but for now, there was too much “illogical money” flooding the industry to determine which companies will actually survive.
“For me, the question is: when will the era of rationality return to the market?” she said, adding that she expected this to become “more of a factor over the next couple of years as debtors recognize the importance of customers and revenue, as well as aggressive build cards “.