Part I – The infrastructure builders
A report from UK Plus
This report provides an update to our October 2023 publication, Ultrafast UK: Gigabit connectivity leading to shake-up of telecoms sector. It covers the key announcements and activities of the country’s three largest broadband players, Openreach, Virgin Media O2 and CityFibre, and looks at developments and progress made by several independent infrastructure providers.
For premises passed and subscriber figures, we aimed to provide the most up-to-date statistics where possible. In most cases, this will be published data from the close of Q1 2024, however, in some cases, public announcements will have been made up until the publication date of early Q3 2024. In such instances, we have used the most recent figures available.
In Summary
Openreach continued its FTTP deployment at pace and at the close of Q2 2024 had passed 14.8m premises (including 4.2m rural) or about 45% of the UK.
Openreach reported around 196k net losses across its FTTC and copper connections, but its FTTP connections increased by 387k q-o-q to reach 5.08m with a take-up rate of 34%.
As a result of the pushed back end date of the PSTN switch-off to January 2027, Openreach announced its non-broadband-based Pilot SOTAP for Analogue product from 1 May 2024; it aims to target vulnerable users who would otherwise struggle with migrating to an All IP-based phone service.
VMO2’s network footprint increased by around 6% per annum to reach 17.19m homes serviceable; its fixed line base has not seen comparable growth with its base coming in at 5.72m representing a penetration rate of 33.3%.
Nexfibre announced that its network passed 1m premises; Telefónica intends to launch a fully consolidated subsidiary of VMO2, NetCo, in 2025, to offer nationwide wholesale FTTP services.
CityFibre (CF) reported that its customer connections exceeded 400k, an increase of 77% year-on-year, with a footprint of 3.6m premises.
Altnets full fibre networks passed 12.9m premises and had just over 2m subscribers combined.
The sector is slowly shifting into a more consolidated landscape, with several possible outcomes all with significant changes to the marketplace.
Ofcom published its Review Document for its upcoming Telecoms Access Review 2026 – 2031; it will have a challenging balancing act in the current landscape of a plethora of suppliers along with a shifting marketplace due to look very different at the end of the decade.
Overview
As of June 2024, 84% of UK homes and businesses had access to ultrafast gigabit-capable broadband up from 78% at the time of our last report (October 2023). Full fibre network coverage reached 68% up from 57% at the beginning of October 2023.[1]
At the close of 2023, the incumbent infrastructure supplier, BT’s Openreach full fibre network passed 40% of the UK with coverage in each individual nation standing at England (10.9m), Northern Ireland (0.8m), Scotland (1.2m), and Wales (0.9m).
Virgin Media O2’s DOCSIS 3.1 and FTTP combined network footprint covered 17.2m premises, with 1m premises being passed in the year with FTTP mostly on behalf of its joint venture partner, nexfibre.
The majority of overall Altnet FTTP coverage is due to a relatively small number of mid-tier Altnets, with a long tail of the remaining smaller Altnets reaching pockets of local areas. We estimate Altnets combined FTTP footprints to have covered ~13m premises. Take-up rates have varied greatly depending on the provider, the maturity of their networks, and the type of service they offer (i.e. retail versus wholesale only) and typically range between 7% to over 30%.
This update provides an overview of these key developments along with potential changes and key overall changes to the sector over the next several years.
Key infrastructure supplier updates
Openreach
Openreach passed around 1m premises per quarter bringing its total to 14.8m premises or 60% of its target to cover 25m premises by the end of 2026 increasing to ‘nationwide coverage’ (~99%) by 2030. It had also covered 4.2m premises in the hardest-to-reach areas of the country.
At the close of its financial year (March 2024), Openreach reported 491k broadband net losses (with a further 196k in Q2 2024), higher than its previous outlook at the beginning of the year of around 400k.
The introduction of the ‘Equinox 1’ discount scheme in October 2021 resulted in swathes of communications providers (CPs) signing up to the offer with significant gains for the supplier. This did begin to taper off after a 15-month period where the large to medium ISPs were already early adopters of the scheme and BT’s Consumer division began to see a larger uptake in FTTP services (Figure 1).
VMO2
VMO2 has had a stable but underwhelming two quarters in terms of fixed line subscriber net additions despite its footprint increasing by around 6% per annum. Its subscriber base growth has only increased by 0.3% y-o-y when it should be around 3% to be inline with its footprint growth. VMO2 cited the weak market conditions and substantial overbuild by other networks as being contributing factors to its lacklustre performance.
VMO2’s broadband customer base increased to 5.72m, but its overall in-footprint penetration rate decreased to 33.3% compared to Openreach’s 34%.
At the close of Q1 2024, VMO2 expanded its full fibre network primarily on behalf of nexfibre by 194k premises which is down from the previous quarters’ 299k premises, bringing the total to just over 1m premises passed during the year (Figure 2).
Its total gigabit-capable footprint reached 17.19m homes serviceable at the end of Q1. Its growing fibre footprint is just over 4m premises but the company’s fibre deployment activity needs to accelerate for nexfibre to reach its target of 5m passed by 2026.
Part of this slowdown can be attributed to VMO2/nexfibre integrating Upp’s network of ~175k premises which should be added to the overall figure by later this year.
VMO2’s parent company, Telefónica, has pinned future financial recovery and business sustainability on the creation of its fully consolidated subsidiary of the supplier, NetCo. VMO2 also looks at a parallel agenda on acquisitions to that of nexfibre, with the two entities focusing on absorbing Altnets with assets inside and outside VMO2’s current network footprint.
If the company receives regulatory approval, it will mean a landmark shift in the UK wholesale market. One which will see national Altnet supplier, CityFibre and Openreach battling to keep major ISPs such as Vodafone, TalkTalk, and Sky. However, in the meantime, as VMO2’s FTTP network footprint is about a third of the size of Openreach’s indicates that initially NetCo will only be able to compete for wholesale ISP tenants in a limited capacity, with a focus on urban and suburban areas.
CityFibre
Focusing on operational efficiencies, CF announced a round of redundancies in early 2023 and managed to deliver a positive EBITDA performance for the full three months ended 31 March 2024, ahead of its target to break even in the first half of the year.
The take-over of Lit Fibre in March clearly marks CF’s decision to pursue Altnet acquisitions as a strategic growth driver towards and potentially beyond its 8m premises target. CF noted that it expects to close several deals over the next two years, with up to five acquisitions potentially on the horizon.
CityFibre has committed to deliver ten regional Project Gigabit contracts covering around 464k subsidised premises in total, with over 900k more homes and businesses set to be covered by its parallel commercial build. On 8 July, CF announced that it had connected the first customer to its new network in Cambridgeshire, rolled out as part of the government’s Project Gigabit programme. The 2.2 Gbps downlink service was being offered through its national ISP partner, Vodafone.
Other independent network operators
We have identified around 16 Altnet operators whose FTTP footprints when aggregated create a significant network that continues to rival Openreach’s. Their combined estimated footprint covers over 12m premises, however, with financial backing easing, costly overheads increasing, along with modest take-up rates, mean that overall penetration of around 15%.
It is worth noting that Altnets performances vary with operators seeing a range of uptake between 4% to over 30%, especially in areas where its network has been active for over 18 months (Figure 3).
Market consolidation and changing sector landscape
The consolidation of Altnets, VMO2’s nexfibre venture and creation of NetCo as a wholesale challenger with scaled network FTTP upgrade, along with Openreach’s completion of its near nationwide full fibre rollout will see the fixed line sector markedly changed over the next few years.
Altnets are not going away and will certainly feature in the consolidated marketplace, however, there will likely be a handful of larger Altnets remaining (with the odd diehard few local suppliers) covering large regions of the UK. Another rising trend within the sector is that of investment firms with multi-assets (e.g. wholesale and retail suppliers) to consolidate their holdings into two channel providers.
A few obvious consolidation outcomes in the future seem to be emerging: a consolidated pure wholesale Altnet, a larger amalgamated wholesale and retail Altnet, or a larger VMO2/nexfibre/Netco, with around 10 – 20 larger retail ISPs remaining. As CityFibre has already stated its intentions on strategic acquisitions it – along with VMO2 – will be trying to reach an agreement with Sky which if secured some of its wholesale business would serve as a huge boost to future acquisitions.
Taking all of this into consideration, consolidation of the market will be happening slowly over the next 12 months as rollouts are paused and the make-or-break take-up figures either are met or external buyers are brought in.
Figure 4 below provides an overview of possible consolidation scenarios and their outcomes on the Altnets and incumbent players, Openreach and VMO2.
Upcoming Ofcom Telecoms Access Review 2026 - 2031
On 26 March, unusual for the regulator, it published its approach and timetable for the Telecoms Access Review 2026 (TAR 2026) – which will replace the regulation that applies to fixed telecoms markets, set by the Wholesale Fixed Telecoms Market Review 2021 (WFTMR). The review is designed to promote the continued competition and investment in gigabit-capable networks.
A key focus for Ofcom, will be trying to avoid implementing regulations that will upset the current inward flow of investment, especially when that flow has eased off significantly, and many of the network builds have only reached the middle of their deployment cycles.
Ofcom has significant challenges ahead as it must also adapt to the new environment and challenges presented by the next regulatory framework period. Suppliers (especially Altnets) will be operating against both higher interest rates and competition than was predicted in the 2021 review. A much more significant focus will also need to be shown towards encouraging network uptake and ensuring the best results for the consumer.
Sector response to preliminary stages of Telecoms Access Review 2026
We asked Alex Blowers, CityFibre’s Directory of Regulatory Affairs, for its view on not only Ofcom’s decision to publish a ‘review document’ ahead of an official consultation but also key mechanisms such as geographic areas and Equinox to CityFibre’s expectations on outcomes of the review.
Regarding the review document's publication, Blowers commented, ‘We are surprised by Ofcom’s decision to put out a very high-level document of this kind rather than a first consultation setting out issues at more granular detail and seeking input from stakeholders. [W]e welcome Ofcom’s statements in the document that (a) its focus remains on the promotion of infrastructure competition; (b) that it recognises the need to focus on take-up and in particular the differential in Altnet take-up compared with take-up on the OR [Openreach] network, and (c) by implication that is prepared to look again at its remedies on pricing, migration and copper retirement, all of which contribute to Openreach’s current structural advantages.’
‘On market definition (including Area 2/3) CityFibre’s view is that the prize for Altnets would be minimal change. In particular, Ofcom should avoid prematurely deregulating the market by moving existing Area 2 locations into Area 1 (in which Openreach would be deemed to have no SMP).'
Conclusion
Suppliers are on the way to meeting government targets and have created a competitive environment that offers consumers affordable, reliable, and future-proofed connectivity. Looking at a potential market with significant players with high economies of scale mixed with many wholesale and retail models and agreements will not necessarily guarantee long-term price benefits for those players looking for short-term positive outcomes.
At this point, those suppliers that can afford to play the waiting game, should. As their networks mature, larger players carry out strategic M & As (with potential wholesale price reductions on the cards), along with the outcome of Ofcom’s TAR recognising Altnets as an integral part of the sector may result in consolidation becoming a more protracted but more strategic and less reactionary process.
[1] Thinkbroadband, June 2024 update on broadband availability across the UK, 7 July 2024.
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