A new report from the UK Internet Service Providers Association (ISPA), which examined appetite for investments in alternative broadband networks (AltNets) through interviews with leading investors, warned that the market is now “reached saturation point‘ and vendors looking for further rounds of investment are likely to face new challenges.
Around 70% of UK locations already have access to a gigabit-capable broadband connection, compared to around 40% Fiber to the premises (FTTP) networks. The number has improved significantly over the past 3-4 years, in no small part due to the mass of over a hundred Alternative Network Providers (AltNet) entering the market, often backed by significant private investment.
According to a recent report by the Independent Networks Co-operative Association (INCA), alternative “full fiber” Broadband networks expanded their coverage in the UK by 111% to 5.46 million buildings in 2021 and they are likely to double that number again this year. The same report found that investment and spending commitments in altnets totaled £5.7bn by the end of 2021 and could reach £17.7bn by 2025.
Suffice it to say that AltNets have had a lot of success attracting the initial investment they need to get started, but meeting their future coverage goals will require additional funding and backup, which will likely become more of a challenge given the saturation the market is having Became operators – many of them are starting to overbuild each other, straining the profitability of their competitive investment models (ie securing a return on investment for investors is becoming more difficult).
As we have said many times, the inevitable result of reaching this saturation point is that it will lead to a period of natural market consolidation and the rise in overbuild will inevitably lead investors to focus on an operator’s ability to sell that building in Convert a building to a reasonable level of customer acceptance and sales. Some will succeed while others will struggle, and investors will of course tighten their wallets.
We should point out that the above largely reflects private investment in urban and suburban construction, where there is currently no shortage of private investment to address the problem (i.e. the first 80% of buildings should be easily covered by commercial gigabit construction by 2025 will). . However, buildings in the last 20% of the UK are likely to need public support, and that is from the government £5bn Project Gigabit Scheme aims to address.
The aim is to have gigabit-capable networks available to at least 85% of UK sites by the end of 2025 (commercial deployments alone should reach over 80%) and then “at least99% by 2030, but there are still a few question marks over how altnet-friendly the gap-funded contracts under Project Gigabit will be.
Findings of the new report
ISPA’s new report – “WHAT LIES AHEAD: ISPA ALTNET GIGABIT BROADBAND INVESTOR REPORT” – largely reiterates the above points and warns that “Vendors looking for additional rounds of investment are likely to find a different landscape from where they originally raised their funding. Funding will take longer to obtain and may be more difficult to obtain.”
Charles Cameron, Partner at Cameron Barney, said:
“We have seen an increase in participants that is simply not practical and I expect a reduction to a significantly lower number. With the end of land grabs in sight, investors will increasingly focus on customer service and retention, profitability and network asset performance.”
Another widespread view among respondents was that Ofcom “has not yet fully understood the ambitions of the sector” as a whole, especially when it comes to recovery programs and the impact on specific regions. We’ve certainly seen the regulator at times tend to disregard the collective concerns of smaller AltNets, although Ofcom admittedly has a difficult task when it comes to filtering a mass of competing / vested interests.
Nonetheless, respondents believe that regulators have a natural bias towards larger players (e.g. Openreach) who “can get things done quickly“, and that you “prefer to work with a single organization that can build quickly and efficiently across the country, as opposed to 100 people who can build for the same number of houses.” The irony is that “too much competition and diversification (a regulatory goal)‘ has complicated things.
Summary of the main opinions
➤ In order to secure long-term funding from investors, providers need to differentiate their services from competitors. With gigabit speeds no longer a critical factor for consumers, providers need to think creatively about what they offer their customers.
➤ The impact of consolidation is also likely to mean a bigger role for wholesalers in the future, and increased infrastructure competition in recent years will provide consumers with more choices.
➤ The adoption of Fiber-to-the-Premise (FTTP) is supported by key developments in the broadband industry, such as B. The launch of a “One Touch Switch” initiative by Ofcom by April 2023.
➤ The policy environment can best support fiber rollout by removing bureaucracy and barriers to rollout, and the regulator should pay more attention to the increased infrastructure competition created by the market.
Regarding improving the political environment, respondents called on the government to “relax entry requirements‘ to address the shortage of skilled fiber engineers. The Home Office is already working on something for this, but they’ve been frustratingly slow on it. It also calls for more demand-side action to raise awareness of gigabit broadband, which would complement Ofcom’s new OTS switchover process.
In addition, the controversial issue of how fiber is advertised has been raised repeatedly, with the feeling that many consumers are unaware Fiber to the cabinet (FTTC/VDSL2) service is not as reliable or fast as FTTP. While the Advertising Regulatory Authority (ASA) considered and dismissed this issue a few years ago, it was argued that the widespread availability of optical fiber made it time to look again. The Gigabit Take-Up Advisory Group (GigaTAG) has also raised this issue, but we’re still awaiting movement on their proposals.
However, we were surprised to see no calls for a reintroduction – in England and Wales at least – of bank holidays at business rates for new fibre, a policy which came to an end earlier this year. Scotland continues to offer such reliefs and has roughly aligned them with the expected payback times for investments in new full fiber networks (ie 10 years and more), something Westminster has shown little interest in mirroring.
Overall, the ISPA report largely reflects our own thoughts on the sector, but it’s worth noting that the findings are based on feedback gathered in just five interviews (under the Chatham House rule) with Digital Infrastructure Investing representative Cameron Barney , Infracapital, DIF were carried out by Capital Partners and Octopus Investments. All key players, albeit those with a very special interest. We would have liked to have had the perspective of AltNets as well.
