At the end of 2021, we examined the dynamics of the red-hot fibre market, analysing the aggressive expansion plans by both incumbents and altnets (independent operators), as the UK pushes toward a gigabit future, where households and businesses alike have access to highest-speed, ultra-reliable connectivity.
What a difference a year makes. The original challenge of a finite connectable market swarmed upon by both types of players has created a market where survival of the fittest – and fastest – would prevail. Investor appetite for this opportunity, spurred on by low debt rates, would supercharge the race to the front doors of homes and commercial premises up and down the country.
Now, as we enter 2023, we see a series of significant concurrent headwinds facing the altnets. As they drive aggressive fibre-to-home/building/premise (FTTx) rollouts, the digital infrastructure market is being reshaped by soaring inflation, equipment supply chain issues, labour shortages, and the increased cost of living.
For instance, we have observed material prices increasing by as much as 70%, exacerbating the financial strain in keeping pace with already ambitious business plans. Coupled with this, revenue growth is equally challenged, with rollouts not translating into revenues as fast as desired. Newer entrants to the market will also be encumbered by a higher cost base than more established operators, putting them at a cost disadvantage from the outset. In addition, further Equinox pricing changes by Openreach may provide further challenge in converting homes passed into homes connected.
Despite these headwinds, operators continue to seek aggressive rollout plans, with current estimates suggesting that by 2025 the number of FTTx premises passed will be twice the actual number of UK premises available – posing the risk of a significant overbuild, illustrated below.
There is an increasing reliance upon external funding to stay afloat in an investor climate that is markedly different to 12-18 months ago. While private investment and government subsidies remain available for altnets, the scrutiny on these dispensations has ramped up, and the pool of those able to forge ahead with funding is shrinking. The cost of capital has also spiked in line with the step-change in debt markets and recent interest rate rises, piling on further financial pressure.
More than 70 players are fighting it out for their slice of the fibre footprint in the UK, led by the incumbent market players of Openreach and Virgin Media-O2. With such intense competition, many smaller altnets are subsequently underachieving against their business plans, meaning the valuations desired by investors are increasingly strained. Instead, we anticipate increasing financial stress, as the debt holders of a number of altnets become compromised. This could spur market consolidation through changes in ownership to prevent business failure.
It is imperative that altnets take urgent steps to avoid falling by the wayside in the way that dozens of smaller companies in the energy industry did in the second half of 2021 and early 2022:
- Analyse and pursue new financing options to fund further development: Business plans are likely to have been originally developed in a more positive business environment, and now require reappraisal in terms of overall strategy and performance – particularly for potential new investors and lenders. Cash and liquidity management should be a vital part of any conversations here, and heavily linked to any changes made to deployment plans (see below).
- Reassess deployment strategy with operational efficiency front of mind: Deployment costs may be able to be reduced by adopting an alternative operating model approach (e.g. make vs. buy), using an optimised mix of contractors and in-house staff for network deployment, as well as seeking help in planning, executing and managing the build. Increased automation and enhanced fibre laying techniques also reduce deployment costs and time – such as micro- and nano-trenching. Best practices also need to be considered with respect to financial planning, analysis, monitoring, and reporting for growing businesses to ensure the right level of accurate data is available both internally and for investors.
- Review go-to-market approach: Ensure that homes passed are being converted into homes connected, and that revenue is being realised from the investment. Altnets have a number of choices here, particularly on the question of whether to go retail, wholesale, or both. Whatever their chosen strategy, altnets must ensure there are clear executable initiatives to ensure success and, moreover, having won a customer, that there is the capability in place to quickly and seamlessly connect them to the network. This requires the operating model to be set up for growth, with the right capabilities in place, not only organisationally but also from process, systems, and skills perspectives.
- Carefully manage M&A: Where M&A opportunities arise, deal structuring and strategy must be designed to maximise value, alongside the execution of detailed due diligence regarding the quality of assets being acquired and the deployed capacity. Deal synergies must be captured through effective pre-merger planning and post-merger integration (PMI), intrinsically linked to an appropriate operating model.
History would confirm that consolidation in a market with dozens of smaller players represents a natural part of the business cycle. The next two years, therefore, look set to be a critical period of industry transformation, with only the most agile – and resilient – altnets likely to succeed.