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Dispute Puts £1.5bn TalkTalk UK FTTH Broadband Rollout into Limbo

Thursday, November 8th, 2018 (8:40 am) - Score 5,088
cityfibre microtrenching york uk

A Sky News report has today claimed that TalkTalk’s proposed £1.5bn plan to roll-out a new 1Gbps Fibre-to-the-Premises (FTTP) broadband ISP network to cover 3 million UK premises may have stalled, which allegedly stems from a valuation dispute with investment partner Infracapital.

According to Sky News, talks between the Joint Venture partners are still on-going but they have reached a stumbling block. Banking sources are said to have claimed that the ISP was “disappointed” by the value that Infracapital had attributed to their “full fibre” trial in the City of York, which is said to cover 20,000 premises and is aiming to reach around 54,000 by the end of 2019.

The York deployment has been slow going since it was first announced all the way back in 2014 (here). It was supported by an initial investment of £5 million from each of Sky Broadband and TalkTalk, while the network itself was then built by Cityfibre who already had an existing 10Gbps capable and 103km long fibre optic ring in the city (The York Core).

On top of that first £10m, the later expansion (i.e. building beyond the original commitment of 14,000) to reach 54,000 premises was estimated to require another £20 million (here), which ultimately had to come from TalkTalk since by that stage Sky Broadband had reduced their interest to that of a mere wholesale partner.

Despite this TalkTalk has previously stated that their roll-out in York had so far produced take-up of 35% for the first 14,000 premises and that build costs had come in below £500 per home passed, which is roughly where they wanted it to be. But clearly there’s some disagreement over how all of this should be valued and where the payback point will come.

Under the new £1.5bn plan announced on 8th February 2018 (here), TalkTalk proposed to establish a new company (Infraco), which in turn would be 20% owned by TalkTalk and 80% by Infracapital (the infrastructure equity investment arm of M&G Prudential). The latter would contribute £400m and TalkTalk £100m (plus they expected take on c.£1bn in debt).

However, as we reported last Saturday (here), there have been no truly significant updates on the Infracapital project since it was announced. At the time we were hearing similar whispers to Sky News and warned that TalkTalk was at risk of being overtaken by rivals that had already made stronger commitments (Summary of UK Full Fibre Plans). But TalkTalk told us not to worry.

A TalkTalk Spokesperson told ISPreview.co.uk (3rd Nov 2018):

“TalkTalk plans to be at the heart of Britain’s full-fibre future. As the leading value-for-money provider, we want to ensure all our customers can access it at affordable prices.

We’ve outlined our commitment to roll-out full-fibre to three million homes via a new infrastructure company, and we have already appointed a new CEO and Chairman. We’ll provide further updates shortly.”

Suffice to say that Sky’s report casts further doubt on the planned deployment and TalkTalk will need to resolve this quickly or risk their deal with Infracapital collapsing. If that did happen then Sky News suggests that TalkTalk would simply try again with a different partner.

As we said on Saturday, we think TalkTalk would have done better to partner up with Cityfibre again or somebody else who is already building such networks, particularly given the known shortage of skilled telecoms engineers and the rising level of competitive build ambitions between operators. But getting into bed with Cityfibre again, particularly now that Vodafone have secured prime position, could be tricky.

All eyes will now be on the ISPs forthcoming financial results, which we hope will provide some closure to these concerns and put TalkTalk back on the right track.

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he is also the founder of ISPreview since 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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20 Responses
  1. FibreFred

    Weren’t TalkTalk pricing FTTP in York at a very very low rate just to get people onto the network?

    If so I’m not surprised they are questioning the value. If they had to do that in York and have to do it elsewhere, I would be questioning the payback timescales and value as well.

    In the meantime others are cracking on. The boat hasn’t sailed yet, but their position gets weaker each month.

    • Keith

      So are B4RN also selling their 1 Gbps FTTP service (£30 pm) for a “very very low rate just to get people onto the network?”

    • FibreFred

      No, who said anything about B4RN?

      Why are you comparing York that has multiple suppliers providing fast speeds, with B4RN coverage?

    • B4RN is not comparable to a commercial urban build, completely different approaches.

    • Keith

      @FibreFred
      @Mark
      Yes I’m fully aware that the B4RN fttp project was built from community funds/manpower whilst TalkTalks York FTTP trial was a commercial fttp build. Reason for mentioning B4RN was to compare their similar monthly costs to TT, as FibreFred was clearly implying that TT were selling their York fttp service at a loss. Unless FibreFred is a former TT accountant who has seen the full accounts for their York project?

    • wireless pacman

      To be fair Keith, he did not say “at a loss”, but at a very low price. There is a big difference.

    • CarlT

      A symmetrical gigabit for £25.50 is a pretty low price whichever way you cut it.

    • wirelesspacman

      Depends on how much the average of those customers uses it really though.

    • CarlT

      Still need to have that gigabit spare on the backhaul to allow a punter to burst even if usage is relatively low among the user base.

    • FibreFred

      Exactly Carl, for a premium product the price is very low indeed.

  2. Meadmodj

    The issue is take-up within a reasonable investment period. This will affect all of them including Cityfibre. I suspect all the FTTP business cases are optimistic. As highlighted before consumers are cost conscious and will only move to FTTP if they can see a good cost/functionality benefit. The Talktalk £20/m near 1Gbps offering is clearly unsustainable even in York and provides a distorted adoption situation.

    All investors can see that a base FTTP entry product is necessary but not an artificial promotion expect realistic up-sell figures. They can see competitors such as Community Fibre and Hyperoptic being better positioned going forward in the cities (along with the OR dinosaur changing tack) which means that they know that where investment may be subject to significant competition TalkTalk need to be realistic regarding the market share they can realistically achieve. Also business cases need to be based on long term pricing.

  3. Yorkiebar

    As a York resident just to throw my 2 pence in. The take up of UFO is happening quite quickly.There is a strong demand and a waiting list of about four weeks for installation. The main drive is obviously speed and price. Bearing in mind the original target area wasn’t thuroughly covered by VM or any ultrafast provider people jumped at the chance to leave the OR dinosaur. I have to agree with costs of £500 per premises I can’t see the money being made back on the investment any time soon. £ 23.70 seems too cheap.

    • wirelesspacman

      The investment does not have to be made back within a short time period though, as FTTH is a long lifetime asset.

      For example, if (after vat and other costs removed), £12.50 per month is available to allocate to the investment, and take up is ish 33%, then the investment could be “repaid” in around 10 years.

    • NE555

      > the investment could be “repaid” in around 10 years.

      Equivalently, this means a return on capital of 10%, which is decent if not exciting. Maintenance costs have to come out of this too, of course.

      However this return figure is very sensitive to both the cost per property passed, and the rate of take-up.

      OR have increased their assumed take-up of superfast from 41% to 61%. But if you have OR + Virgin + one other provider in a given area, they will fight to get 20% each.

    • A_Builder

      @wirelesspacman

      Normally for heavy duty investment you are looking at 5% ROI being investable if the assets has a predicted life of 25yrs+ and with a 50yrs+ then no issue at all.

      At the end of the day it comes down to how cheap the peering and backhaul is. And it may not be as much as you think. given that most of the data volumes is Netflix/Amazon/iPlayer and Netflix/Amazon offer caching and termination to peering partners so the bandwidth strain is not as bad on the backhaul as you might think at first glance.

      @NE555

      This is where quality is a differentiator. If I had a choice between pure fibre FTTP, VM DOCIS and OR Gfast I would go for the FTTP every time. I have used all of them at different locations and there is no contest that a proper FTTP connection is just less bother. As at £25 mark it would be both cheaper and better than the other offers it would for me and most people I know be a no contest sell.

    • CJ

      It is far from guaranteed that the investment will see high levels of utilisation over a 25-50 year life. Cheap mobile calls killed landline usage for a significant proportion of the population in less time. Investors must allow for possibility that several 5G or 6G mobile networks will overbuild today’s FTTP networks in urban areas and spread the overall take-up even more thinly between the various competing networks.

  4. Jim Weir

    What you also have to factor is that that £23.70 has to be split between CityFibre and Talktalk as both have an investment stake.

    Likewise VF Gigafast has to split that retail cost between CityFibre and VF.

    So really you have Retail Price = Peering/Transit + Asset Support/Maintenance + TT CRM Cost + Talktalk Profit + CityFibre Profit

    I’ve said before that Infracapital will be taking a more cautious approach to what could easily be a FTTP investment bubble. Their timing to buy Gigaclear majority % could be badly timed as it comes to light that build costs are increasing as engineering resource gets restricted.

    • FibreFred

      Very good point!

    • Neb

      Agree with your point on the costs and 2 lots of profit margins.

      I see UK FTTP network builds as a medium-long term recession proof investment personally, even at double the Talk Talk/City Fibre/Virgin (target) cost per premises it’s still going to pay back more than most other investments under the same conditions. Compared with the water networks etc I’d say everything is cheap atm and it’s increasing appreciated now as what it is, the 4th utility.

      I also personally believe that although gearing up contractors is increasingly an issue, it’s more about the cost of those contractors and likely the machinery costs.

      Has Infracapital spent their infrastructure pot yet?

    • A_Builder

      @Jim Weir

      Those a good points you make. However, I think you are a tad pessimistic.

      @Neb

      However, as you say, the very long term nature of fibre networks makes it a better bet.

      Even if 5G and 6G do take over then they will need to connect to something and given the poor long range characteristics of 5G there will need to be a lot of cell density.

      Given that an FTTP network is mostly passive then the running and maintenance costs are a lot lower than copper and once debugged an FTTP network should run for 10’s years without intervention if properly built.

      This may all be more about BREXIT fence sitting, which is becoming an art form in itself, than anything else.

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