Consolidation in the UK fibre market: roundtable for industry executives

Andy Wright, Partner, Technology Practice and Daniel Glyn-Jones, Principal, Odgers Berndtson Technology Practice, recently hosted a telecoms industry roundtable, focussed on consolidation in the UK fibre market. Andy and Daniel welcomed a combination of Alt-nets, larger industry players, and others with a broader industry view for an open discussion. Consolidation is what this industry has always been destined for, now being accelerated by a combination of market conditions and operational challenges.

This wide-ranging discussion took attendees on a journey through the evolution of the industry, the role of the regulator, government and investors, the timing and end-state of consolidation, and finally onto the industry’s longer-term identity – underpinned by a theme of how the industry can work together to achieve successful consolidation.

The evolution of the UK fibre industry and Alt-nets

The history of the industry was discussed, including the rise of the alternative network providers – who have developed at breakneck speed, leading to (depending on where you look) somewhere between 100 and 200 operators.

An interesting analogy was drawn with the UK motor industry, which was made up of some 500 manufacturers in the 1950s, none knowing what a good car looked like – meaning every business tried every different possible combination, building everything by hand, struggling to achieve the efficiencies needed to survive. Subsequently, 500 consolidated into less than 15.

The UK fibre industry started in a similar way but has progressed to now knowing what good looks like (although that doesn’t mean everyone reaches that standard – more on that later). As a result, companies coming together makes sense, but significant challenges remain to get there.

The drivers behind consolidation

Various market factors are driving the impending consolidation, particularly with challenges in both interest rates and the debt markets increasing the financial pressure on operators. But operational challenges in the market are largely to blame; in particular with many struggling to achieve customer take-up.

The industry has become polarised – separating those with high penetration and cashflow that supports their operating cost (with a small handful of UK fibre businesses estimated to be EBITDA positive) versus those that do not and will likely become financially distressed. An almost “perfect balance” of features is required to be successful; a company that can build infrastructure quickly, sustainably and efficiently, has been able to achieve sufficient take-up (the % of which was argued, but probably sits somewhere above 20-30%), and has likely been able to develop both retail and wholesale revenue streams – all of which require sufficient scale to be successful. Achieving this fine balance is far from easy, and explains the polarisation that has emerged. We touched on a potential missing link for fibre businesses – most have been funded on a residential play, but significant opportunity exists from a B2B perspective and in different segments.

Capital efficient consolidation

Whilst consolidation makes sense, there are considerable hurdles to it happening in a way that doesn’t destroy collective industry value – to achieve what was termed “capital efficient consolidation.”

• Overbuild

The first hurdle has long been debated – overbuild. Nobody lays out a strategy to overbuild, but it does end up happening – and the more this continues, the less collective value there will be. Some estimated this reduces the value of a network by 50% overnight. That estimate was debated, with others feeling that the quality of an operator’s network was more important than whether it was overbuilt, alongside other factors. Nevertheless, if a business was able to achieve 100% of the network in any location, this would maximise customer lifetime value (CLTV) and average revenue per user (ARPU), avoiding the need to fight for every customer with other operators.

Our group did feel, however, that overbuild has improved in the last 2-3 years. Its continued reduction is crucial to the industry avoiding large-scale capital destruction, which had happened in the Spanish markets as an example.

• Industry standards

Another obstacle, which the industry must overcome together, is standards. Telecoms may have reasonable technical standards, but operational standards are sorely lacking. The point was made that the industry is almost too safe – in comparison to industries where people’s lives are at stake more, such as airlines and utilities – where everything starts with health and safety. This inconsistency makes the industry costly and inefficient to trade with, for instance with Internet Service Providers (ISPs) having to integrate multiple IT stacks or contend with different standards around how long a customer installation takes.Whilst this will be difficult to overcome, much needed conversation to solve the problem is starting to happen.

• Customer take-up

Conversation then moved to the deep issue of take-up. Recent figures show that the UK has now jumped over the 50% mark in access to full-fibre. However, the proportion of customers using these networks is a small fraction of that, making issue as important as any for industry success.

Guests debated the key drivers behind take-up, including coverage, affordability, digital confidence, and devices. There was a consensus that the industry could better collaborate to drive take-up – described as a “marketing and sales efficient consolidation.” It was agreed that in the UK, we tend to “make do” with sub-optimal broadband, with a vast proportion of the population accepting speeds of 40-50 Mbps. The comparison was made to the digital switchover initiative, suggesting something needs to be done to encourage people to migrate to full-fibre broadband more proactively.

This took the conversation onto the “fake fibre” topic, with FTTC still legally termed as fibre, which isn’t doing the industry any favours as it looks to educate customers. Although a previous attempt to change legislation had failed, this potentially needs to be revisited.

The role of the regulator and government

The role of the regulator and government was a consistent theme. Many felt that Ofcom weren’t having their finest hour in terms of helping the fibre industry as a whole. A similar conversation was had around the role of government, with some debate around what their role actually was – with two key activities highlighted, 1) to convene industry to drive topics like integration, and 2) to help educate the consumer. It was agreed that in pockets, such as local government, good things were happening. But that the fundamental issue is that we can’t talk about government as one organisation, and that their fragmentation limits what can be done.

The investor mindset and debt markets

On top of looking at the operators, we discussed how the investor market would play out. From the volume of investors we’ve seen flood in, some can play the long game – namely bigger infrastructure funds with deep pockets. Equally, many investors got in without the model to be long in this market and may look to exit. However, the reality remains that some investors are willing to fund this market in the medium to long-term. This meant consolidation was unlikely to come to a meaningful conclusion in the next 12-18 months, as some remain willing to commit. Consequently, some of the previous considerations – including who has the best operating model or network – could well be superseded by which investors have the deepest pockets and longest time horizon.

We moved onto the state of the debt markets – in a relatively short space of time, banks have moved from proactively looking to get into UK fibre, to the exact opposite – with many over-indexed in this space actively looking to downsize their portfolios. The vast majority of banks weren’t looking at each fibre business on their own merit, but rather giving the overall sector a damning assessment. We discussed when and how this would change – to which there is no simple answer.

The timing and end-state of consolidation

We debated when consolidation would happen, and what the industry could look like when it does – to which there was considerable disagreement! The broad consensus was that we would end up with a handful of scaled national networks, plus a significant number of specialist (particularly rural) players. As for how many scaled players, the opinions were wide-ranging – with predictions between 2, 3, 4 and 5 thrown around – and others who couldn’t see it getting down that far any time soon.

As for timing, most felt a period of 4-5 years would see the coming together of these networks, although again others expected a much longer timeframe for meaningful consolidation – with a period of 20 years offered up by some.

The overall consensus, unsurprisingly, was that consolidation would not happen in a neat and tidy way – it would be messy and painful.

What next for the fibre industry

The conversation finished with an interesting question – “what’s next for the UK fibre industry” –directing to the longer-term identity of the sector. This centred around creating a collective industry vision for what broadband can do for the country. With dramatic leaps in demands coming from infrastructure projects (windfarms, hydrogen, self-driving cars), along with new technologies such as AI, it’s undeniable that better broadband will drive our economy forward. However, the size of the industry and its impact on GDP is misunderstood by many, including those in government. This creates a bigger purpose that the fibre industry can coalesce around, which could help unlock success.

It's clear that the fibre industry is set for a defining period ahead. Thank you to our attendees for an insightful debate. We look forward to hosting the next fibre roundtable in 2024.