Virgin Media O2 UK Update on Wholesale and FTTP Upgrade Plan

The CEO of Liberty Global, Michael Fries, has given an update on Virgin Media’s (VMO2) aspiration to launch a wholesale product for UK ISPs and their plan to upgrade existing Hybrid Fibre Coax (HFC) areas with XGS-PON based Fibre-to-the-Premises (FTTP) broadband. A trial of the latter is now taking place at 50,000 homes in 3 locations.

Firstly, we’ll touch on the FTTP upgrade plan for existing HFC areas (reflecting about 14.3 million UK premises), as Michael revealed a few little details that we hadn’t seen before. Back in July 2021 Virgin Media revealed their intention to upgrade those HFC areas to symmetric speed FTTP broadband by the end of 2028 (here).

By utilising the company’s existing fully-ducted network, which are the tubes through which fibre cables can be laid, the cost of delivery is forecast to be around just £100 per premises passed. But that excludes the usual final drop customer installation costs (after you make an order), which we think could be anything from around £50 to £100 in this case.

According to the latest commentary from Michael Fries, they’re already in the midst of a 50,000 home XGS-PON upgrade trial, which is taking place at three unspecified locations across the UK. The goal of this is to validate their engineering and upgrade costs. “I’m happy to report that so far, everything is checking out, and we’ll certainly provide more information on that in our [next quarterly] results,” said Mike to investors.

FTTP Network Expansion

As well as upgrading existing infrastructure, VMO2 has also previously spoken of their ambition to harness some of the £10bn committed over the next 5-years (as part of the merger) to fuel the expansion of their FTTP broadband network to reach another 7 million UK premises (e.g. rural or semi-rural areas). In theory, this could extend their full fibre network to c.22 million premises by 2028, which isn’t far off Openreach’s 25 million.

However, we haven’t had a solid update on this ambition since the completion of their merger, which was starting to feel a bit like they intended to sweep it under the carpet in order to focus on the FTTP upgrade plan instead. The recent decline in their FTTP built rate to just 67,000 premises passed in the last quarter (here) has only fuelled such thoughts.

According to Mr Fries, VMO2 are “still doing some work” on that ambition and “have not yet made the determination as to how fast or how far we would take that.” The CEO concedes that any expansion of their footprint “might be more dependent on a wholesale outcome,” which we’ll touch on next. Despite this, Fries suggests that next year’s FTTP network expansion “might be a little more aggressive“.

Michael Fries, CEO of Liberty Global, said:

“It could be something more dramatic. I think everybody would appreciate that we would be looking at the financial implications of that kind of buildout. I mean we’d want to know there are additional revenue sources, partners, financing sources. So more work to be done there. Nothing to announce on the bigger expansion, and that, I think, more likely would come with a clearer announcement around where we are on wholesale.”

Fries then clarified that neither Liberty Global nor O2 (Telefonica) would be thrilled with the idea of funding Virgin Media’s UK FTTP network expansion by themselves, which brings us on to wholesale – “I think it’s safe to say that [we] would not be excited about funding a 7 million-home expansion “on our own,” meaning putting up all the equity capital with no line of sight to either third-party financing and/or wholesale.”

The Status of Wholesale

The operator is well known to have been planning to make some or all of their fixed broadband network available to rival ISPs via wholesale for some years. Indeed, we understand that pretty much all the technical and practical work on this has effectively been completed (it was nearly ready to go before the VMO2 merger was announced – triggering a long delay), but reaching an agreement with ISPs has been tedious.

Last month a number of reports revealed that VMO2 were still in talks with Sky Broadband, TalkTalk and Vodafone about the launch of a new wholesale platform (here and here), with Sky potentially coming in as an investment partner. But agreeing the details around this and the tricky problem of exclusivity arrangements, which tends to hinder wider adoption by more ISPs, aren’t easy things to balance.

Mike Fries said:

“On the wholesale question in the United Kingdom. There’s nothing to update on at this point and I’ll just remind everybody that the decision to upgrade our existing HFC plant was not based upon any wholesale arrangement. So our view is it’s accretive either way. But of course, if there were wholesale, that would be even more accretive. So it shouldn’t be an overhang. It’s only upside if we were to do something in wholesale on the existing footprint.”

We should add that Ofcom is likely to take an interest in any operator that grows itself into holding a position of Significant Market Power (SMP), which is something that could be triggered by a major network expansion from VMO2. One way of tackling that is for such operators to introduce a suitable wholesale product and/or to split off their network into a separate company (VMO2 has reportedly hired Accenture PLC to develop the latter).

Likewise, we know from the Building Digital UK programme that VMO2 have expressed an interest in the Government’s £5bn Project Gigabit rollout programme. But such contracts will also be contingent upon operators being able to offer a wholesale product to the market, which is yet another argument for launching such a solution. But the first contracts under that project aren’t due to be awarded until later in 2022, so there’s still time for VMO2 to get all their ducks in a row.