Consolidation looms for UK broadband providers
Too many small fish in the pond mean the bigger ones are about to enjoy a feeding frenzy
Resesarch on UK gigabit broadband investment toasts alternative network providers' efforts to build infrastructure, but warns that the number of them has now become unsustainable and a period of consolidation looms.
The study, "What Lies Ahead: ISPA Altnet Gigabit Broadband Investor Report" [PDF] from the Internet Services Providers' Association (ISPA), claims the UK broadband market has now reached "an exciting point" thanks in part to the investment and rollout plans of alternative or independent network providers (altnets).
The findings are based on interviews with investors in broadband infrastructure, but it turns out there are just five of these: Oliver Bradley of Digital Infrastructure Investing; Charles Cameron of Cameron Barney; James Harraway at Infracapital; Neil Marvell of DIF Capital Partners; and Rob Skinner at Octopus Investments.
Billions of pounds have been invested in full fiber networks by providers across the UK since 2010, the report states. This has resulted in money reaching underinvested parts of the country, "transforming the infrastructure for generations to come," it claims.
However, it also concedes that Openreach and Virgin Media played a major part in the UK now enjoying wider access to high-speed broadband, with 39 percent of the country having access to "full fiber" (fiber to the premises, or FTTP) broadband and 70 percent of it now being capable of having a gigabit service.
The ability to access finance has been a key part of the story, with funding coming overwhelmingly from industry raising money itself from investors, ISPA says, and public funding only likely to be needed in the hardest-to-reach areas. The amount of private investment stands at upwards of £30 billion pounds (about $32.5 billion), dwarfing the funds allocated by government.
A key driver for investing in altnets was the lack of fiber services available in the UK, according to the report, but this opportunity had to be balanced against a recognition that Openreach would likely continue to be the main national network, with significant coverage in a large swathe of the country by Virgin Media.
Openreach is the infrastructure arm of BT, Britain's former state-owned telecoms operator, while Virgin Media has its own fiber optic network and is the sole cable operator on the UK mainland.
This meant that altnets have tended to target areas where there is less competition such as rural areas, with an ambition to be the leading independent operator in a particular area or region.
However, the report states there is now consensus among investors that the number of companies building networks is unsustainable, and the UK may have reached market saturation.
"A period of consolidation is now widely expected and this is generally viewed as a natural, healthy part of market development," the report's authors state. We suspect this sentiment isn't necessarily echoed by everyone in the industry, nor will customers be looking forward to the chaos that often accompanies a service provider being swallowed by a larger rival.
The report says this is already happening at a small scale, citing the example of Community Fibre buying Box Broadband last year, but concludes that we are likely to see a lot more in the coming months and years.
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- Fibre broadband uptake in UK lags behind OECD countries
Service providers looking for further rounds of investment are likely to find a different environment from the one in which they raised their original funding, according to ISPA. To secure long-term funding from investors, they must now look to differentiate their services from those of competitors as gigabit speeds become less of a determining factor for consumers.
This was echoed by a report in the Financial Times in June, which warned that each of the altnet providers needs to capture about 40 percent market share in the locations where they operate for their business models to be economically viable.
No altnet has yet turned a steady profit, according to the FT, although the biggest – CityFibre – is expected to do so next year.
We may also see the market shifting away from being dominated by vertically integrated providers to one where wholesale providers play a larger part, according to the report. Being both a network provider and an ISP has been a crucial part of the business case so far, but that may change as altnets go live in more and more parts of Britain.
The market is also changing, the report notes. Consumer broadband has traditionally been seen as a highly competitive, low-margin business, with broadband typically bundled with a landline phone and possibly a mobile or TV service as a triple or quad-play package.
This situation is now evolving as customers shift toward streaming services for TV and landline phone usage declines. Full fiber networks are better able to power increasingly connected homes with 4K streaming TV, remote working, and can support more devices, the report says.
The investors are apparently agreed that while ISPs are largely able to compete on offering high-speed fiber access, they will soon need to look again at their overall offering and unique services will become a key differentiator.
The report ends on an optimistic note, predicting that in five years' time, the market will remain healthy and vibrant. One investor expected there will likely be more ISPs than there are today, meaning customers will have far greater choice, and customers will see the benefit of an upgraded infrastructure fit for the next several decades.
On the flip side, ISPA expects that there will still be something of a digital divide, with urban areas benefiting from greater competition with up to four or five infrastructure networks in some cases, while rural areas are only likely to have one or two infrastructure networks.
"There will be some challenging times ahead with the cost-of-living crisis, supply chain pressures and consolidation, but with big industry milestones set to be passed – including Ofcom's One Touch Switch directive and BT's switch off of the Public Switched Telephone Network (PSTN) by 2025 – there remain huge opportunities to invest in the broadband sector," the report concludes. ®