How the UK fibre frenzy leaves BT playing defence

This build back better business appears to be catching. Investors and companies are lining up to throw money at the prime minister’s promised “broadband revolution”, a phrase never knowingly uttered without a reference to “levelling up” following swiftly behind it.

Just this week, there has been another £1bn pledged towards rolling out UK fibre from broadband newcomer LetterOne, the investment group controlled by Russian billionaire Mikhail Fridman. This backs altnet Upp, who wants to “level up” towns around Norfolk and Lincolnshire.

A newly-combined Virgin Media O2 this week said it could grab some of the cheap money looking at infrastructure to extend its fibre footprint by up to 8m premises, or about a quarter of the market.

This was accompanied by fighting talk from chief executive Lutz Schüler pledging to “go for” market leader BT, which itself last month hiked its target to reach 25m homes with fibre by the end of 2026 (possibly again with the help of funding partners).

That £15bn project puts BT on the “front foot”, said chief executive Philip Jansen, who has rightly identified that both the UK and the company should really have started this process some time ago. In reality, moving fast is the only option against this mounting fibre frenzy.

True, there is a school of thought that says altnet fever will burn itself out. It is certainly hard to separate money pledged from money spent, or promises from actual building. Inca, the (evidently-bullish) representative body for altnets, reckons that the sector’s intended capital expenditure totals £10.8bn to 2025. 

The website tracks nearly 90 alternative operators eyeing fibre: they range from those where “little is known” about their funding or plans beyond perhaps a target region and the likes of CityFibre, which has backing from Goldman Sachs and wants to expand its network to reach 8m homes at a cost of £4bn.

There is doubtless an element of wishful thinking in some business plans, and a round of consolidation to come. James Barford at Enders Analysis argues that often they are based on the assumption that BT’s Openreach will not roll out in the same areas.

BT’s new target takes it to about 80 per cent of the market (while Virgin Media O2 should cover about half with a combination of gigabit-capable cable and fibre by the end of this year). It seems increasingly unlikely that anyone is going to carve out their own little, lucrative niche, except perhaps in the commercially-challenging 20 per cent of the country where the government intends to subsidise building.

Still, faced with well-financed new entrants that could be significant in the market, BT’s best shot is to build and build fast. And it is, with Openreach passing 560,000 premises a quarter according to the company — compared with CityFibre on 200,000 and Virgin on 125,000. 

The Ofcom review in March which unlocked Jansen’s desire to “build like fury” gave BT until at least 2031 with no price controls on fibre, the so-called fair bet principle. But it also doled out encouragement to rivals, sharpening existing access requirements to ducts and poles which Virgin says have already reduced rollout costs by a third and restricting BT’s ability to use volume discounts or geographic pricing to capitalise on first-builder advantage.

BT shares are up about 50 per cent since the regulator’s conciliatory stance started to become clear last December, despite rising investment spending and little guidance on when the ensuing cash flows might start to materialise. Just because the regulator says you’re allowed to earn a fair return on your fibre investment, says John Karidis at Numis, doesn’t mean that you will. 

Virgin Media O2 is considering wholesaling its broadband network to other providers, an area it has previously avoided. And the furious pace of building heightens concerns that the fibre network will arrive before customer appetite for it does. Industry talk of “future-proofing” infrastructure effectively acknowledges this, as does a government task force GigaTAG aimed at geeing up demand for the fibre that everyone is promising to build.

The money flooding into fibre should, to borrow another awful government phase, help get the UK “gigafit for the future”. It’s not yet clear the same is true of BT.


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