Consolidation looks likely for UK broadband providers • The Register

Research on UK gigabit broadband investment lauds efforts by alternative network providers to build infrastructure but warns their numbers are now unsustainable and a period of consolidation is imminent.

The study, “What’s in store for us: 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”, due in part to the investment and roll-out plans of alternative or independent network providers (altnets).

The results are based on interviews with broadband infrastructure investors, but it turns out there are only five of them: Oliver Bradley of Digital Infrastructure Investing; Charles Cameron by Cameron Barney; James Harraway at Infracapital; Neil Marvell of DIF Capital Partners; and Rob Skinner at Octopus Investments.

According to the report, billions of pounds have been invested in full fiber networks by providers across the UK since 2010. This has resulted in funds reaching underinvested parts of the country and “transforming the infrastructure for generations to come,” it says.

However, it also acknowledges that Openreach and Virgin Media have played important roles in the UK now having wider access to high-speed broadband, with 39 per cent of the country having access to ‘full fibre’ (Fiber to the Premises, or FTTP) broadband and 70 percent of these are now able to have gigabit service.

The ability to access finance was a key element of the story, with funding coming overwhelmingly from industry itself raising money from investors, ISPA says, and public funding likely only needed in the hardest-to-reach areas. The level of private investment is over £30 billion (about US$32.5 billion), dwarfing government funding.

A key reason for investing in altnets was the lack of fibre-optic services in the UK, according to the report, but this opportunity had to be weighed against the realization that Openreach would likely continue to be the main national network, with significant coverage in a large part of Virgin’s country Media.

Openreach is the infrastructure arm of BT, the UK’s former state telecoms operator, while Virgin Media has its own fiber network and is the only cable operator in mainland Britain.

This means that altnets are more likely to target areas where there is less competition, such as B. rural areas, with the ambition to be the leading independent operator in a specific area or region.

But the report says investors now agree 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 is widely viewed as a natural, healthy part of market development,” the report’s authors state. We suspect that opinion isn’t necessarily shared by everyone in the industry, nor will customers look forward to the chaos that often accompanies a service provider being swallowed up by a larger competitor.

The report says this is already happening on a small scale, citing the example of Community Fiber’s purchase of Box Broadband last year, but concludes that we’re likely to see a lot more in the coming months and years.

Service providers looking for additional rounds of investment are likely to find a different environment than that in which they raised their initial funding, according to ISPA. To secure long-term funding from investors, they must now seek to differentiate their services from those of their competitors as gigabit speeds are less and less of a critical factor for consumers.

This was confirmed by a report in the financial times in June, which warned that each of the altnet providers must capture about 40 percent market share in the locations where it operates in order for its business models to be commercially viable.

According to FT, no altnet has yet turned a steady profit, although the largest – CityFibre – is expected to do so over the next year.

According to the report, we could also see the market shift away from the dominance of vertically integrated suppliers towards one where wholesale suppliers play a larger role. Being both a network provider and an ISP has been a crucial part of the business case, but that may change as altnets go live in more and more parts of the UK.

The market is also changing, the report notes. Consumer broadband has traditionally been viewed as a highly competitive, low-margin business, with broadband typically bundled with a landline phone and possibly a cellular or television service as a triple or quad-play package.

This situation is now evolving as customers switch to TV streaming services and landline phone usage decreases. Full fiber optic networks are better able to serve increasingly connected homes with 4K streaming TV and remote work, and can support more devices, the report said.

Investors seem to agree that while ISPs are largely able to compete by offering high-speed fiber access, they will soon need to rethink their overall offering and unique services will become a key differentiator.

The report ends on an optimistic note, forecasting that the market will remain healthy and dynamic in five years. One investor anticipated that there will likely be more ISPs than there are today, meaning customers will have far more choice and customers will see the benefit of an updated infrastructure fit for the next few decades.

On the other hand, ISPA expects that there will still be some kind of digital divide, with urban areas benefiting from more competition with sometimes up to four or five infrastructure networks, while rural areas will likely only 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 major industry milestones to be met – including Ofcom’s and BTs’ one-touch switch policy Shutdown of the public switched telephone network (PSTN) by 2025 – Huge opportunities remain to invest in the broadband sector,” the report concludes. ® Consolidation looks likely for UK broadband providers • The Register

Laura Coffey

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