What Does Sustainable Gigabit Broadband Competition Look Like?

Recently I moderated a panel on “What does sustainable gigabit broadband competition look like?”

A timely debate, given the current UK telco landscape currently consists of more than 150 altnets. One could argue that this suggests that competition is healthy. On the contrary, as highlighted by a discussion report written by SPC Network. While extensive work has already been done to estimate the number of companies needed to create effective competition for consumers, much less has been done to estimate the number of companies a market can sustain. You can read more about the report commissioned by Liberty Global here.

The author Richard Cadman, Founder of SPC Network, opened the session with some key takeaways from the report. Unsurprisingly, densely populated urban areas can support more operators than rural areas. According to SPC Network, there is no single magic number due to various models, inputs and so forth. But broadly speaking:

Dense Urban areas can support – 3 networks

Urban and Suburban areas can support – 2 networks

Rural and Sparse rural areas can support – 1 network

This in turn formed the basis for a vibrant and stimulating debate that centred upon two key themes, competition and consolidation.

Taking competition, Liza Lovdahl Gormsen, Senior Advisor to the UK Financial Conduct Authority and Senior Research Fellow at the British Institute of International and Comparative Law, said: “It is important to contextualize the issue. One of Ofcom’s strategic goals is to promote competition in order to stimulate investment in the UK telecom sector and infrastructure the country needs.” She added: “This will not happen if investors are not getting a reasonable rate of return on their investment. Which, according to SPC Network, is unlikely to happen. So Ofcom needs to think carefully about how to meet its strategic goal.”

In fact, Lovdahl Gormsen expressed her shock that: “In 2023 we are still talking about Openreach with Significant Market Power within this market when the UK started liberalising telecoms networks back in the early 90s.”

With that in mind, can the UK market support any new players and, just as importantly, make a meaningful return? Zeynep Lucchini Gilera, Investment Director with Infravia, seems to think so. Nexfibre has been created as a joint venture (JV) between Infravia and Liberty Global/Telefónica to build, operate and commercialize a FTTH network of up to 7 million homes in the UK. For now, VMO2 is the anchor wholesale client, which will also commercialize its network to UK ISPs.

Gilera said: “The UK regulator has failed in establishing competition as there is only one dominant national player, whereas the altnets do not have the scale. When we were presented with the opportunity to come we did not hesitate, as this is a solution that the UK needs - a real national scale alternative to Openreach.”

While the logic seems sensible, the new JV has yet to sign up another ISP alongside anchor tenant VMO2 Something that was raised during the discussion.

Some advocates believe that it might be too early to say that competition is not working because it takes considerable time for these networks to be rolled out and marketed.

Refuting this claim, Schellion Horn, Partner, Economic Consulting at Grant Thornton pointed out that 90 companies have less than £20m of capex and banks are not bending over backwards to lend them more.

It does feel as if the longer-term outlook is bleak for many of these altnet providers.  Horn outlined how the deployment ambitions of these companies, which are around 90m premises, equates to just under three connections per UK premise. This is something we clearly do not require: after all we have one relationship for gas, electric and water.

Horn eloquently highlighted that while customers are getting great value for money in the telecoms sector - particularly when compared to utilities - returns are not where they were a decade ago. UK telecoms revenues have fallen from £40bn in 2012 to under £30bn in 2021. Now telecoms is more risky than utilities, with some operators now making returns below the regulated WACC. All of this, coupled with the ongoing challenging economic conditions, is leading towards a path of consolidation. Horn noted that what we need is a smaller number of financially-sustainable providers who can effectively compete with each other to drive benefits to consumers in terms of price but also quality.

It is apparent that consolidation among the altnets is already happening. The introduction of Equinox 2 so soon after the first proposal is accelerating the demise of the altnets. Ofcom was due to finalise its decision at the end of March, now delayed for two months; initially said that it will not prevent Openreach from introducing Equinox 2. The panellists believe that the current regulatory environment has served its purpose: good fibre rollout, overbuild in many areas and in most cases great value for money for consumers. The altnets have started the job that Openreach looks set to finish reinforcing its market position.

This is something that Ofcom needs to look at very carefully, given its relentless focus on customer choice and healthy competition. The panellists argued that Ofcom has not regulated Openreach hard enough and it should not have been allowed to get away with certain behaviours, which create instability and an uncertain long-term view towards investment.

In conclusion, if this is to be maintained, then the UK fibre market needs a smaller number of financially-sustainable networks who have economies of scale to keep that pressure on Openreach. If providers cannot maintain quality of service, then they’re not going to make sustainable returns. To ensure a seamless transition for customers, then interoperability is paramount. Should a provider be financially distressed and facing closure, then someone acquiring those assets must still be able to deliver into people’s homes without having to drill more holes into it.

There were some concerns that Openreach could consider buying some of the smaller players, little by little. Any such moves could be under the radar as there is no obligation to notify in the UK. This would not fall under Ofcom’s scope (unless from a competitive perspective), something for the CMA to be aware of. Ultimately, Infravia expressed an interest in looking at potential consolidation options as an alternative to self building the network. 

Overall, we often lose sight of the customer’s needs and requirements. For now, it all looks rosy for them with lower pricing, However, in the long term it’s in their interest to have viable supplier investments. If the supply side is not working then the demand side will not. There’s no benefit to customers having 100’s of suppliers not making any money as the QoS will fall, as will reliability and speed. After all, we’ve seen the importance of broadband, which is now an essential service for all.  Providers are now looking for some stability for at least the next five years.

As a moderator, it was quite hard for me to keep my opinions to myself. I’ve long argued that we are in a golden era of connectivity and moving people to fibre is in everyone’s interests, as the merits of the technology outweigh copper. However, the market as things stand cannot support all players as there are too many chasing too few pounds. Consolidation is inevitable given the overbuild that is taking place. It is probably too late to think of any other approach than letting the market evolve towards reducing the number of suppliers, given the vibrant ISP landscape. A more sensible and regulated approach should be adopted to ensure UK plc benefits from fibre broadband.