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Credit Suisse Warning – UK Full Fibre Investors See Growing Challenges

Saturday, Dec 10th, 2022 (12:01 am) - Score 4,264
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A recent report from banking giant Credit Suisse has warned that the availability of “cheap financing” for UK broadband infrastructure, which is helping to deploy a new generation of gigabit-capable Fibre-to-the-Premises (FTTP) networks, might be facing a growing squeeze that could impact future builds.

For some time now we’ve been highlighting the growing expectation of consolidation in the alternative network (AltNet) space, which is being driven by a number of factors. Firstly, there’s the rising level of overbuild between networks, which forces operators to build faster and cut prices in order to drive take-up – this in turn means it will take longer for investors to see payback (payback periods for FTTP can run up to 10-15 years).

NOTE: We’ve already seen some early consolidation. For example, CityFibre acquired FibreNation from TalkTalk (here), Swish Fibre gobbled up People’s Fibre (here), the 4th Utility consumed Vision Fibre Media (here) and CommunityFibre acquired Box Broadband (here).

On top of that, some AltNets are overbuilding in less competitive areas, where the local market may struggle to sustain more than one or two operators in the first place (e.g. sparse suburbs, smaller towns and sometimes rural villages), which tends to stretch the economic rational outside its comfort zone. Greater use of existing cable ducts and poles (PIA) does reduce the risk, but not completely.

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Lest we also forget that Openreach is placing further pressure on their smaller rivals by both speeding up their own deployments and continuing to reduce the price of their FTTP products for ISP (here), which is now the subject of a competition complaint by Cityfibre (here). Virgin Media (VMO2) are also expected to ramp up and expand their fibre build in the near future too, which is another challenge.

Finally, there’s the issue of rising inflationary pressure and interest rates, which Credit Suisse’s latest report predicts is “likely to worsen in 2023” (e.g. the impact of this is typically felt in rising energy costs, rising wage costs and other lease cost increases). “This should be partly offset by price increases and headcount reductions. But the net effect is likely to be negative,” said the report.

A Credit Suisse spokesperson told ISPreview.co.uk:

“Higher interest rates is in our view likely to lead to consolidation in the altnet space in the UK over time. Some – but by no means all – fibre challengers have financing that is exposed to higher rates. And there’s been a shift in investor focus from fibre buildout to penetration of networks deployed, and many of the altnets still have very low penetration rates.

However, how that consolidation plays out is less clear cut. Some altnets have owners with low returns thresholds or are well insulated from rising rates, so can hold out for a while. And more expensive financing for build also means more expensive financing for acquisitions. Plus some networks might be incompatible.”

The reference to some altnets having “very low penetration rates” above is key because operators need to show a respectable growth in take-up by consumers and businesses in order to satisfy their investors. Providers that fail to achieve this will face pressure from their investors, which tends to manifest as a tightening of the purse strings. In response, operators may slow their rollout in order to focus on building take-up.

However, if the necessary take-up fails to materialise, then an operator’s backers may turn to the option of consolidation, yet even this has its limits. At present the level of overbuild between networks is still fairly low and so the asset value of fibre in the ground remains high, which is good for those seeking consolidation (i.e. investors still stand a good chance of getting a return).

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On the flip side, trying to sell a network that is already being heavily overbuilt by several rivals will be more of a challenge (diminished value), and then there’s the issue of compatibility. Not all FTTP builds adopt the same hardware, software and approach, which can throw up obstacles to consolidation (i.e. the buyer has to factor in extra costs due to the need to upgrade/adapt the network).

In short, the availability of cheap financing for fibre optic deployments is likely winding down in the UK, which occurs at around the same time as investors will be starting to seek results from the many fibre deployments they’re already backing. One way or another, there will be some fallout to this, hence why we expect to see more consolidation. The latest opinion from Credit Suisse only reinforces this expectation.

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Mark-Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook and .
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25 Responses

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  1. Avatar photo Dodgy Suisseeeee says:

    Credit Suisse ought to be worrying about their own survival. If they’re not careful (or get some more shady money) they’ll be gone very soon. Look at their share price hah from $20 down to $3 and facing a ton of investigations into their dodgyness.

  2. Avatar photo Ex Telecom Engineer says:

    It isn’t very often I agree with analyst views, but on this occasion I believe Credit Suisse share my view’s.
    I have no idea about a possible squeeze on Altnet financing, but I agree with some of the other points.
    The Altnets need to build a customer base large enough to finance their day to day operations, otherwise they’ll burn through their cash reserves while also burning through capex building new network.
    As far as consolidating struggling Altnets, both geography and compatibility are critical, since integrating systems and financing backhaul are important considerations. Remote Altnets who’ve failed to build a good customer base will likely be an unattractive proposition for consolidation.
    Where Openreach overbuild the Altnets, who are ISP’s and not wholesale, they’ll be competing against all the CP’s using Openreach fibre, so they can expect fierce competition.
    CityFibre market themselves as offering a superior product at a lower price, they should just get on with competing rather than whinging to the CMA and OFCOM. If their marketing is correct, then they have nothing to fear from Openreach/BT and ISP’s should flock to them irrespective of Equinox, after all who wouldn’t prefer a “superior” product at a lower price?
    It isn’t just about building network, the cost of day to day operations are just as important. Operating costs soon take priority, like renting or purchasing building space, network monitoring, backhaul and cloud access, Field and NOC Engineering, admin, wages, etc. The costs will soon mount up for the ones that struggle to attract enough customers.

    1. Avatar photo Spyder Lodge says:

      I suspect most altnets can’t cover their day to day operating costs from customer revenues, how long will investors continue to write cheques to cover them ?

      Cable is often quoted as the precedent for consolidation- didn’t most of the investors lose money then ?

    2. Avatar photo Supporting business connectivity says:

      It is the ongoing day to day running costs, support, reliability and further down the line added complexity and compatibility as these service providers are merged into one another.

      Then there will be the cleanup as networks fail financially. Lots of cable and infrastructure, who will pick up the task of cleaning it all up?

      In demand, needed quickly but I predict much of it will become a complex mess.

    3. Avatar photo Roger_Gooner says:

      @Spyder Lodge: “Cable is often quoted as the precedent for consolidation- didn’t most of the investors lose money then ?”
      The brief history is that there was a wave of consolidation in the 1990s: in 1997 there were 24 cable operators but by 1999 there were only three big ones (NTL, Telewest and Cable & Wireless) but this failed to provide the funds for debt repayments whilst there was heavy spending on digging up roads and pavements to install the cable networks. When NTL bought Cable & Wireless for £8.2 billion there were just two left standing. However the bursting of the dotcom bubble followed by a recession pushed both NTL and Telewest into dire straits with NTL having to file for bankruptcy protection in 2002 with debts of more than US$17 billion and Telewest, also on the on brink of bankruptcy, managed a £3.5bn debt for equity swap in 2004 which involved issuing shares to its creditors in a new Delaware-based holding company called Telewest Global.

      Many of the shareholders in Telewest Global were the same banks that held shares in NTL which emerged from Chapter 11 bankruptcy protection in January 2003, and it was the shareholders who approved the purchase of Telewest by NTL in 2005, with the deal finalised in 2006, to leave the industry with one big cable operator. When NTL finalised the purchase of Virgin Mobile in February 2007, Virgin Media was born.

      Of course the broadband industry today isn’t the same as the cable industry in the old days but there are some similarities such as underfunded altnets and a worsening economic situation.

  3. Avatar photo Jack says:

    So happy that Portugal made Swiss cheese out of their country

    They are clearly backing a losing horse in this race and are just burping this out to scare people off. Surprised they don’t mention ESG scores but I guess it would make it too obvious

  4. Avatar photo Bob says:

    A total free for all that we have is probably the wrong approach. Perhaps the governenment should have issued license on a Regional basis with a mazimum of two networks per region

    1. Avatar photo Name says:

      God no. There’s alot of problems with that approach too – namely that it locks out new networks who would then need to battle the bureaucrats just for permission to start building

    2. Avatar photo Pablo says:

      Why would the govt do that? All these works and salaries are generating tons of tax revenue and employment

    3. Avatar photo Roger_Gooner says:

      The free market works well here: if overbuilding won’t make money an operator won’t do it.

  5. Avatar photo Hungry Dog says:

    Elephants in rooms

    The 100+ Altnets building in the UK are clearly unsustainable in their current form. 2023 will be a shake-out / shake-up year, that has been overdue. Cheap money times are well and truly over.

    Take your seats….

    1. Avatar photo Winston Smith says:

      I think the altnets still have a couple of years before the crunch comes. There aren’t a lot of attractive places to put money at the moment.

      While fibre is going into the ground altnets can claim take-up rates are lagging the build. Come late 2025 when the attractive locations are all covered, take up rates will matter and the consolidations will start.

  6. Avatar photo Bob says:

    Many of these alt nets are targeting relatively small but prosperous market town which are quite low density, Whilst take up will be quite high they are unlikely to be able to surport 2 or more altnets plus openreach. The cost of finance has also increases a lot

  7. Avatar photo Badwolf says:

    I think that many investors are going to have a shock when their exit strategy plays out in the hands of a receiver rather than a profit making buy out

    1. Avatar photo CarlConrad W says:

      Absolutely right. The whole AltNet market will come crashing down in the next 18 months. Assets will be sold off for peanuts and the myopic investors who put money into them will lose substantial sums. It was never going to stack up. Far better they consolidate now than await their grisly fate. And I say this after years of experience in private equity and venture capitalism.

    2. Avatar photo GNewton says:

      @Badwolf: These small towns are often densely built up, too, and are therefore easy to serve with a fibre broadband via e.g. PIA arrangements.

      The real issue is the lack of business sense by many of the altnets which includes a lack of proper rollout plans (the same is true for Openreach), or investing in towns which already have fibre broadband by other altnets or Openreach instead of deploying in towns where there is no fibre yet. And finally lack of marketing, quite often people aren’t even aware about the availability of fibre.

    3. Avatar photo Badwolf says:

      @G Newton there is only one real issue and that is the majority do not have enough take up to service their debts and in their haste to deploy most have higher costs per prem than they expected . All of this adds up to runing out of money very soon or handing the company over to the investors as they will not pump any more in under current management.

    4. Avatar photo XGS Is On says:

      Unless you’ve access to the Openreach plant maps alongside the network maps of other network providers you can’t make a blanket statement on how easy any particular area is to serve via PIA.

      Getting backhaul is often problematic: the options from Openreach are limited and they may be the only ones. The quality of the plant is often questionable as smaller towns have been small for a while so plant is pretty old and has degraded. The benefits of density for PIA quickly disappear when having to constantly unblock or overlay Openreach plant.

      Locally to me Netomnia and CityFibre are busy building to smaller towns and villages within the metropolitan districts of cities: easy backhaul, not too much dead space digging with no premises served.

      It’s tricky.

      According to Bob: ‘Many of these alt nets are targeting relatively small but prosperous market town which are quite low density’

      According to GNewton: ‘These small towns are often densely built up, too, and are therefore easy to serve with a fibre broadband via e.g. PIA arrangements.’

      A fair few smaller towns are planned, in progress or are complete. Especially those in the suburbs and exurbs of cities and larger towns and hence close to existing network and fibre alongside those that are hubs for smaller villages and towns nearby. The enabling of some of them seems to border on being every bit as economically suicidal as overbuilding Openreach, VMO2, CityFibre and another altnet.

      Areas across the board in villages, towns and cities of all sizes presently have no full fibre plans. Whether it’s backhaul, condition of Openreach plant, costs to dig, whatever there are many reasons for them to not be in the early stages of altnet coverage.

      Overbuild makes perfect sense. I’m in the ‘burbs and have a third full fibre option coming online shortly. There is nothing wrong with an altnet overbuilding Openreach, VMO2 and CityFibre. It only really gets sketchy when one genuine altnet, which CityFibre aren’t anymore, overbuilds another.

      People may not like it as in their mind it means they get covered later but it makes perfect economic sense if the build and operational costs are right.

      Also: once you’ve a network built in an area you can use it as a hub for the surroundings, and altnets do. If the backhaul route is short additional options open up making exurbs more viable.

    5. Avatar photo Andrew G says:

      I agree with the majority of the comments already made about the poor economics – the unfortunate thing is that underlying all of this is a colossal and continuing failure of regulation. For all the money being spent, far less would have been required putting in modern high capacity multi-user ducts in urban/sub areas under a regulated investment model (Openreach or anybody who wanted to invest in regulated assets), and a proper open access system including shared backhaul for areas where that wasn’t realistic. Use the savings to offer FTTP for all hard to serve properties. That would offer faster national roll out, lower costs, and complete coverage. Instead, as a nation we’re building duplicate, triplicate (and I suspect in a very few areas, quadruplicate) infrastructure that wastes capital that could be better invested in other needs, and is producing a plethora of often non-compatible standards (again, technical network standards could and should have been set and enforced through regulation). I suppose the lesson is a simple one, that anybody with knowledge of asset-regulated industries could have told prospective investors – the telecoms sector is being set up to fail again, through poor policy and regulation. With what, 13 ministers at DCMS in the last 12 years, that’s hardly surprising. They arrive knowing nothing, they sign off a few changes knowing nothing, and they leave knowing nothing.

  8. Avatar photo AKK says:

    Is there a link available to this report to read it in full?

  9. Avatar photo FibreBubble says:

    If a failed Altnet’s assets are kit in Openreach ducts and they haven’t paid the rent on them. Who actually owns the assets?

    1. Avatar photo XGS Is On says:

      Openreach are just another creditor. Assets follow the usual routine for a failed company.

  10. Avatar photo Ad47uk says:

    I like the fact that people will have a choice on the network they go to, for far too long in many places it has been Openreach and that is it, even here now in this small city, people will have a choice of Openreach Fibre or Zzoomm Fibre if they want to go for fibre. But I have said before, Openreach is a big organisation with a lot of money behind them and with people using their ISP of choice on FTTC, they will more likely just stay with their ISP and use Openreach fibre. I would love to see more people using Alt networks. I did it a few years ago, I changed to a wireless network as I could only get ADSL then, and it was awful. The wireless network started off well, but sadly could not cope with the amount of people signing up to it. By the time my 24-month contract was up, we had FTTC. But I had to go for 8 months with broadband that was not much better than my old ADSL.

    This is one of the reasons I don’t want a 24 month contract.

    I hope alt networks do well, I would consider going to Zzoomm if they had a cheaper, slower package of say 75Mb/s for around £23-£25 and was 18 months contract.

  11. Avatar photo JoJo says:

    If you got into this game to raise money, build a half decent hyper-local network and then sell up for a tidy payday – well done

    If you got into this game thinking you were going to change the economics of FTTP/Broadband and take down OR…what were you thinking!?

    There is a reason why OR were eeeking every last penny out of copper infrastructure

    1. Avatar photo Dio says:

      From someone with a JoJo name I would expect a more bizarre adventure rather than playing it safe

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