BT CEO on the Full Fibre Threat from Virgin Media O2 and TalkTalk

The CEO of BT Group, Philip Jansen, has given a more detailed comment about the likely impact on their full fibre plans of broadband rival Virgin Media (VMO2) acquiring budget UK ISP TalkTalk, which he admitted would “knock off some cream of the FTTP case” but it apparently won’t “touch the fundamentals of it at all“.

Just to recap. Openreach are currently investing up to £15bn to make their Fibre-to-the-Premises (FTTP) broadband network available to 25 million UK premises by December 2026, and they’ve already completed 8 million. The operator is currently building at a pace of around 59,000 premises per week and expects to reach 10 million by the end of the year (i.e. adding 3.5 million premises in the year, which would be up from 1.9m in 2020/21).

However, the national incumbent faces growing pressure from VMO2, which is not only starting to upgrade around 15m of their existing premises to XGS-PON (10Gbps symmetric capable full fibre) technology, but also planning to roll out the same technology for up to another 7 million premises as part of a new Joint Venture (here). The latter will be offered to rival ISPs at wholesale, while their existing network is also expected to go wholesale at some point.

Most recently, VMO2 is also known to have proposed the £3bn acquisition of TalkTalk (here), which – if confirmed – would give the group a similar number of broadband customers to BT’s retail base of c.9-10 million; that could be used to support their own plans for wholesale. Naturally, such a prospect caused BT’s stock price to take somewhat of a hit last week, but Jansen isn’t worried.

Philip Jansen, CEO of BT Group, told investors:

“I think we’ve always assumed over the sort of 10 – 15 years of this fibre build, there will be some losses over time. So in our investment case, we made a set of assumptions around that. I guess the real answer here is the economics of this investment decision, when we took it, had a sort of wide fan of outcomes.

Obviously, the risk profile was significant. That has dramatically changed in the last 2 years. And the fact that we will have 10 million homes built in less than a year is crucial in terms of determining how we get a return. So that’s why we said today, and I said in my prepared comments, we feel very confident about making a fair return and a very good return on our FTTP investment. That’s not in doubt anymore.

The question is, can we get to the higher end of the range? And I think there are lots of situations where we do. If I take your specific, if hypothetically, [example of] TalkTalk with somebody else, [then] of course, we’d lose some lines. Of course, that might knock off some cream of the FTTP case. But it doesn’t touch the fundamentals of it at all, and the returns, by definition, will be strong, because you can imagine under all scenarios that TalkTalk business will always have a big chunk of their activity with us for obvious reasons.

So look, we’re not worried about it. Obviously, we prefer it to stay where we get the majority – the vast majority of TalkTalk business. But we can’t be complacent. It’s a competitive market out there. We’ve taken into account all the different dynamics. And on your overbuild point, right now, there’s a lot of building going out there, not that much connected.”

The need to generate take-up isn’t just important for BT and Openreach, but their rivals too, and this is where at least some of those smaller alternative networks may start to run into trouble, if they can’t convert their builds into a product that consumers adopt. Investors will be expecting a certain level of progress and if that isn’t achieved then it could impact the release of future funding etc. This is partly why market consolidation is going to become a more familiar feature in the near future.

Openreach’s take-up rate of 26%+ is very strong for an operator reaching its peak rate of build (a high build rate would normally suppress the take-up figure), although how much take-up an operator requires for an economically viable build can vary between locations. Much also depends on the methods of build, which impacts the cost of deployment (the cheaper it is to build, the more you can tolerate a lower take-up).

Building to a remote rural village may require much higher take-up (hence why commercial builds in these areas are often demand-led), while rolling out to a big city means you can survive on a lower figure because there are still lots of potential customers to go around, and all are within a smaller space. Average figures like 20%+ are often mentioned as being safe to break even, but it varies, and take-up may fluctuate over time due to competition.

Suffice to say, VMO2 can sidestep some of this by ensuring that they have a larger customer base to begin with, which would be ripe for conversation to the new network. Jansen is naturally playing the threat from VMO2 down, but over the longer-term there’s no guarantee that TalkTalk will always “have a big chunk of their activity” with Openreach. VMO2 would naturally want to move them away from that. CityFibre may also lose out a bit from this.