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‘Altnets’ are up against incumbent operators in the battle for fiber broadband subscribers in the UK

In mid-2019, staff at the largest hospital in Milton Keynes were struggling to access patient records and process images and scans because the internet connection was so poor.

“Our digital infrastructure came to a standstill,” said Oliver Chandler, head of technical IT services at Milton Keynes University Hospital. Chandler’s team in the south-east England city turned to CityFibre, which had installed all-glass broadband in 275 areas across the UK, and within two weeks the hospital had a new network.

CityFibre is one of dozens of so-called alternative network providers – or “altnets” – that have taken advantage of the rapid pace at which BT, the one-time monopoly, was upgrading its network to quickly dig up roads and lay fiber optic networks across the country.

It has now completed its rollout in its flagship area, Milton Keynes, with 90,000 homes and 90 percent of the population having access to the network.

But over the past year, the battle between these challenging companies and incumbent broadband operators has intensified as Openreach, BT’s networks division, and Virgin Media O2 have responded to the threat by accelerating their full-fiber rollout.

The question is whether money will continue to flow from private equity funds and debt capital markets, which have been the lifeblood of the sector after pumping an estimated £15bn into a handful of the most promising companies.

That depends on its assessment of whether BT can use its market dominance to build networks to be rolled out by newer entrants – including CityFibre, Hyperoptic, Gigaclear and Community Fiber – and convince existing wholesale customers like Sky and TalkTalk to join them to stay.

Several smaller companies have already gone bankrupt, and many more are expected to follow. The vast majority of the others will likely be bought out by larger companies.

Chart showing OECD countries in full fiber rollout, percent of fiber, DSL and cable subscriptions in total fixed broadband, June 2021

In 2018, when it became clear that the UK was well behind almost all other developed nations in modernizing its network, the government began encouraging these alternative providers, hoping that a more competitive landscape would disrupt the market and bring faster internet to underserved areas would bring.

“The deployment of our networks has forced incumbents to invest,” said Greg Mesch, Managing Director of CityFibre.

“Without us we would still have copper and bad internet across the country,” he added, referring to the copper cable networks which still run the vast majority of UK broadband networks.

In contrast, fiber optic technology uses tiny glass filaments to transport modulated light along the same underground paths, increasing the amount of data to be transported.

Gregor Mesh
CityFibre CEO Greg Mesch © Charlie Bibby/FT

CityFibre, which is backed by Goldman Sachs and Antin Infrastructure Partners with £4bn from the West Street Infrastructure Partners fund, among others, aims to offer its network to 8m homes by 2025.

It is also bidding for contracts for the £1.5 billion subsidies the government has tendered to roll full fiber optics in rural areas. If it wins, it believes it could reach 2 million more homes in the same period.

The success of any altnet depends on its ability to attract and retain about 30 percent of customers in each region, industry insiders say.

In Milton Keynes, where BT has made limited progress in fiber rollout, CityFibre has managed to capture around 20 per cent of the market through wholesale deals with players such as Vodafone and TalkTalk; she hopes to reach between 60 and 70 percent.

BT builds three to four times faster than its UK competitors

But BT has accelerated its fibre-optic rollout elsewhere in the UK over the past two years, pledging to spend £15billion to reach 25 million homes by 2025, and is seeking investors in a new venture to build a separate fibre-optic network serving 7 million homes will connect.

“If you add up all the fiber optic cables that are being built, we will be able to cover the country three times over,” said Dana Tobak, chief executive of Hyperoptic, an alternative network that has laid fiber optic cables for 750,000 homes in some of the country’s most populous cities UK and is backed by private equity group KKR.

“Some will fail and some will make it. Nobody expects there to be more than three or four networks in the long run, so it’s just a matter of who [fails] and when,” she added.

The fate of some companies will depend on whether their supporters’ wallets stay open. Upp, an altnet that deploys fiber in Norfolk and Lincolnshire, has secured £1bn funding from LetterOne, the investment group recently founded by Russian billionaire Mikhail Fridman ceded after being hit by EU sanctions.

Openreach did not respond to requests for comments. Andrew Lee, head of telecom research at Goldman, expressed optimism that Openreach can increase revenue and defend itself against challenger networks as it targets the fastest fiber rollout of any enterprise in Europe.

“The overall addressable market for fiber deployment has shrunk due to BT’s massive acceleration,” he said, adding that the incumbent’s existing customer relationships give it an advantage.

Households connected to CityFibre's network
Homes connected to CityFibre’s network © Charlie Bibby/FT

Altnets have already moved to most locations in the UK that have some commercial potential, although this has left glaring gaps that government subsidies have been unable to fill, such as Cambridgeshire and Dorset.

The House of Commons Budget Committee, which oversees government spending, recently said it was “not convinced that the [government] will deliver on time” on its recent target of providing 85 per cent of the UK with gigabit broadband by 2025.

It called for “significantly increased investment” in rural and remote areas as “the commercial sector is unlikely to be able to fill the gap”.

Meanwhile, private investment and government subsidies remain available for altnets, but the pool of those who can move forward is shrinking.

“A few years ago you could find anyone who had a shovel and he or she would get paid,” said Olaf Swantee, a former EE chief who chairs Community Fiber, an altnet in London. “Today, there’s still plenty of money to be had for those who have proven they can actually build and win customers.”

https://www.ft.com/content/098513d5-681c-47f2-be20-ba0bba4cb15f ‘Altnets’ are up against incumbent operators in the battle for fiber broadband subscribers in the UK

Adam Bradshaw

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