Numis Report Warns BT Underplaying the Risk from UK AltNets
A new report from investment bank Numis, which was authored by analyst John Karidis, has today reiterated its sell recommendation on BT (inc. Openreach) and warned that the national broadband giant “keeps underplaying the risk” from rival alternative networks to its consumer and business units.
The latest research is being published just a few days after CityFibre scooped three major build contracts under the UK Government’s £5bn Project Gigabit broadband rollout scheme – for Hampshire, Norfolk and Suffolk in England (here). The deals are worth a combined £488m (public and private) and will help the operator to cover an additional 218,000 hard to reach premises, plus 283,000 premises within its existing commercial build.
Openreach has yet to secure any of the Project Gigabit contracts, which typically focus on helping to upgrade the hardest final 20% of premises, where commercial models quickly become unviable due to the disproportionately high cost to build and increasingly sparse communities. But that may change in the future, particularly with the plans for some of the trickiest areas to be covered by a single Cross Regional supplier (example).
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“Alternative FTTP networks are here to stay, and they are cheaper to resell than [Openreach’s] FTTP“, said the new report, before reminding readers that the operator also lost 210,000 broadband lines in FY23, and expects to lose c.400,000 in FY24. “In addition, BT will no longer report such key metrics quarterly, which adds to the already significant risk to its investment programme.”
Extract from the Numis Report
“In addition to increasingly bad news for ‘OR-only’ resellers BT & Sky Broadband in rural areas, we think OR FTTP remains absent from ~50% of the ever-growing AltNet footprint (this now reaches ~25% of the UK). OR is unlikely to correct this fast: (i) big AltNets are now expert at growing their networks further, and (ii) OR has prioritised connections over network build (hence why its build run-rate was c.3m new premises pa in 2H FY23, vs c.4m it targeted in May-22). This is more reason why BT should report key metrics quarterly.
For now, Sky must be poaching BT’s Consumer customers to remain an ‘OR-only’ reseller. In Apr-23, it raised prices 8.1%, whereas Consumer prices climbed 14.4%. Consumer cannot raise prices by less, because it is funding OR’s FTTP build and OR has effected deeper, ‘Equinox 2’ discounts to accelerate FTTP connections (and to keep Sky loyal, and stress AltNets).”
However, it’s worth remembering that deployments into the final 20% of premises (typically more rural areas and some sub-urban locations) traditionally carry more risk for everybody and small AltNets, with weaker balance sheets, may be more exposed to that. Making a profit in such tricky locations tends to follow a long payback window, which can run to 10 – 15 years, depending upon take-up and build costs.
At present the market is chocked full of over a hundred alternative networks (summary) and quite a few of them are overbuilding each other in areas that may struggle to deliver a viable return for everybody. On top of that, everybody is currently under pressure from a combination of other issues, such as rising costs (build, leases etc.) and the related need to secure a viable level of take-up by consumers.
Suffice to say, it’s perhaps no surprise that, in recent months, we’ve seen a spate of operators slowing their builds to focus on take-up and or announcing job cuts, most of which have come from AltNets. Openreach are not immune to some of these challenges and have also had to adjust their build plans to be more cost-efficient.
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So, on the one hand, Numis might be right in suggesting that BT is underplaying the risk from AltNets. But on the other hand, there are challenges for everybody involved in deploying gigabit broadband, and we don’t yet know precisely what the market will end up looking like in 5-10 years’ time (i.e. how many AltNets of scale will survive in their current form). But it’s still difficult to see Openreach maintaining the same level of dominance they’ve enjoyed before.
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, BlueSky, Threads.net and Linkedin.
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The AltNets need to get smart and come up with an agreement between themselves that there’s no need to build duplicate networks and allow full wholesale access to each other in return, it will save wasted investments.
It’s mind blowing that in the space of 18 months I’ve got 3 Toby boxes outside my gate, and now Openreach doing FTTP via the pole too.
Easier said than done. The phrase “like herding cats” comes to mind. Instead, we’re more likely to see natural market consolidation sort everything out, albeit not the cleanest of solutions.
That kind of ‘No compete’ agreement fails the cartel test and would see the managers of the altnets sent to prison. You can’t just ignore the Competition Act.
You’re right but we can’t rely on the AltNets to do this themselves.
The streets are public property and this is where Ofcom/Government need to step in and prevent this FTTH gold-rush from leaving a legacy of rusting street furniture, flooded man-holes and a tangle of underground assets stamped with the names of flash-in-the-pan AltNets.
Far too late now, but they should have made it mandatory that if you are building FTTH, and disrupting everyones lives in the process, you have to provide some sort of open-access model to allow other operators to use your infrastructure.
A few European countries have gone down the ‘municiple’ fibre route where the local council essentially commission the fibre network build and allow operators to patch in (physically or even virtually). Personally I like the Swedish model where each customer is basically presented on their own dedicated fibre in a local Fibre Exchange. It would require a larger, more robust facility than a street cab (also means we don’t need endless street cabs) but most councils generally have land that would be suitable to plop a ‘Fibre ‘hut’. I guess it’s basically a publiclly owned, privately operated, version of OpenReach… now there’s an idea.
Any formal agreement could be considered a territorial cartel. Better publicising their plans to reduce the risk of overbuild would be better.
There is another angle that no-one seems to be taking into account – consumer behaviour. For example 2 years ago Openreach fibre went live on our street (which I have) alongside 36% of our street. Now Swish Fibre is overbuilding the area. The question is how many people really want to have duplicate installations to go with an alnet? Possibly not…
Round here Openreach changed from ‘next 12 months’ to ‘future’ and 2 altnets building in the next 2 months.
Numis are talking their own book, along with UBS (Polo Tang), in my opinion. Back in 2017, Numis had a target price of 400p on BT, but in March this year they reiterated Sell at 115p.
Telecom stocks have been pushed to rock bottom while private equity targets infrastructure all over Europe,for example Vantage Towers with KKR and GIP, or Telecom Italia with KKR. Reading between the lines, it’s clear to me that private equity have their eye on Openreach, and have for a long time, as well as other Telecom assets within the sector. While the vested interest controlled media is talking down current infrastructure owners, private equity is ploughing billions into new infrastructure, like the Altnets in the UK, anyone see the contradiction in this?
Personally I take anything John Karidis or Polo Tang say with a huge pinch of salt, as I see them both as BT permabears and view them as biased for whatever reason.
Nobody will feel sorry for BT, except for some hardcore fans. BT shares are in a longterm downwards trend, from over 450 in 2016 to the current 122 in 2023. And nobody forces BT to use Openreach.
Wait, there is still the farce of Openreach not being a genuine independent company, Openreach doesn’t even own the network assets.
GNewton, your hatred of BT/Openreach shines through in your post, I’ll just take everything you say with a pinch of salt too.
BT and Openreach will be just fine, at least BT isn’t a one trick pony like the Altnets, and there’s more to attracting Enterprise business than giving them a Fibre. In years to come security and encryption will become ever more important, especially serving entities involved in sensitive commercial/Government applications, which is why BT are developing products around Hollow Core Fibre, QKD, etc. Also BT own EE, which means they can offer products with mobile resilience at a cheaper prices, since they own both networks. Just to finish, BT’s combined Network resource is undervalued by any metric, so I disagree with your view that BT will remain at the current low valuation, the Altnets face a far more uncertain future in my opinion.
Is this Fleccy? WF?
@GNewton, Openreach have had it their own way for far too long, with no or little competition. that is one good thing about this fibre stuff, they are at last having competition. I don’t feel sorry for openreach at all. Ex Telecom Engineer says about hatred for Openreach, it is not hatred as such it is a dislike, but not hatred.
One of the problems I have with Openreach is that they are out of reach, we are supposed to rely on our providers to get problems sorted with the line or anything. even if the problem have nothing to do with a ISP like a damaged cable, you have to use something called EiVA on their website, this is why I call them out of reach.
Another reason is that they should never have been privatised, BT yes, but the main infrastructure should have stayed government owned. I know some people say that the money would not have been put into the infrastructure if still government owned, but we don’t know that and we may have had fibre years ago.
The pretence that Openreach is a separate company annoys me, because it is not separate it is still owned by BT.
There are more reasons i will not go into.
One thing I will say about openreach, that is good or was for me, when I had a problem with my FTTC a few years ago they did come out pretty quick to try to sort it, 3 times they came, sadly they could not sort it, for some reason they had no idea what the problem was as even their equipment would not sync. They went to the cabinet and had problems there. The only device that would sync here was a Huawei modem, Plusnets own router would not, even the original ECI modem that I had when I first joined plusnet would not, just a Huawei modem I borrowed from my next door neighbour, in the end I got a second hand one from Ebay.
so yes, they were quick to try and sort the problem out. for me anyway, I heard different stories from other people and local news.
As i said before, I am glad that we are getting more competition and not just providers using Openreach network, hopefully this will be more of a challenge for Openreach than they had with Mercury.
@Ex Telecom Engineer
“In years to come security and encryption will become ever more important”
Both IT/network security has always been fundamentally critical for the safeguarding of one’s data, regardless of whether one is a business or an individual.
However, security was never taken seriously by businesses in the 1990s and noughties, with security budgets always being the first to be cut in times of economic woes.
Only within the last decade have the boards of directors and the C-suite recognised the importance of security.
OpenReach is like speaking English, everyone kind of does it, and if you are going to learn another language, which one do you chose? There are so many different ones and none of them really work everywhere.
It takes time to learn another language, but once you do, you know it forever and can start learning another one.
As more and more operators become ‘multi-lingual’, then will be less need to speak OpenReach.
Using your metaphor, Openreach is already multilingual. Openreach aren’t the consumer facing company, the ISP’s utilising Openreach’s infrastructure are, like Sky, Plusnet, Talk, Zen, etc. If you’re talking from the wholesale point of view, it’s debateable whether Altnets will be able to undercut BT/Openreach once all the future cost savings are baked into cost of operations. All this has a Deja Vu feel to it, and the same narratives were aired in the 90’s with reference to the CATV companies.
I have no idea why BT aren’t winning Project Gigabit build contracts, I can only assume they’ve decided not to competitively bid for them; Maybe BT are looking at alternatives to Fibre, like 5G solutions, it’s anyone’s guess?
Or, hear me out here, BT can’t actually bid competitively on these contracts and thats why they aren’t winning them. I know you are (incredibly) biased towards BT, but Occam’s razor applies here just as much it does anywhere.
@Ex Telecom Engineer – I was meaning from the point of view of OpenReach customers and the work involved in integrating with OpenReach in order to order/assure their services. For many of ORs customers, they did a load of IT integration with OR many years ago. To start consuming services from one of ORs competitiors can be a daunting process to the point where they just don’t bother.
But, once they solve that problem, it is never going to result in more sales for BT, it’s only ever going to reduce their lucrative customer base. So BT should be worried about AltNets (especially if ‘AltNets’ includes VM) and their current stance does seem to underplay the risk they present.
@John: BT-Openreach simply doesn’t have competitive fibre products compared to CityFibre, as simple as that. E.g. it doesn’t have symmetric fibre. And BT broadband has a very poor reputation, as can be seen on Trustpilot (https://uk.trustpilot.com/review/btbroadband.co.uk), as opposed to e.g. CityFibre (https://uk.trustpilot.com/review/cityfibre.com).
Interesting sample sizes you got there, Mr Newton. I doubt any analyst is going to take much out of that.
@FibreBubble: You are right. These reviews are just the tip of the iceberg. There are fundamental issues which BT/Openreach need to address, without relying on taxpayers money.
“Numis are talking their own book”. Until c.3 years ago, almost to the day, BT was telling everyone that it would lock Sky et al into long-term contracts, obliging CPs to deliver pre-agreed line volumes by certain dates. But, on 31-Jul-20, during the meeting to review BT’s Q1 FY21 results, BT’s CEO said (according to publicly available transcript): “I think the truth of it is it is very challenging to sign long-term contracts that links basically significant volume commitments. I mean that is proving more challenging than we would like. But we’re working really, really, really carefully with our CPs to try and sort of thread the needle, as it were. So what’s the right way of approaching that, that works for everybody and sits comfortably with competition law”. Because of this, I turned from buyer to seller of BT. My job is to help institutional investors consider whether to buy or sell stocks. No one would care for my view if I was ‘talking my own book’. In addition, I don’t hide between nicknames like ‘Ex Telecom Engineer’!!
The only narratives I ever read in the media, is talk about debt of which nearly a third is lease liabilities and the pension deficit which is being resolved under a plan; And speculative opinions implying that Altnets will somehow wipe out BT, from commentators who’ve never worked in the industry so probably have a little idea of the nuts and bolts side of things.
No mention of the cost savings from Exchange closures, cloud convergence, PON and PSTN switch off leading to much reduced energy costs, etc. I see many negatives aimed at BT and few positives highlighted, and yes I’m a BT shareholder so I have a vested interest in BT and the same right to express an opinion as anyone else.
Another narrative I’ve seen, is that Telecom companies are constantly locked in CAPEX cycles, and suggestions they’ll never turn a significant profit due to the need for constant upgrades; Well FTTP and 5G will likely be the last major infrastructure upgrade for generations, since FTTP and 5G are reaching the limits allowable within our current understanding of physics; And high bandwidth 6G applications will be for short range high population areas like shopping centers, etc, with more longer range 6G applications likely reusing 5G infrastructure and Frequencies, so there nothing much left to upgrade once the current infrastructure cycle completes, so no more big capex spend after this cycle’s completed.
Also, BT cannot part-sell or fully dispose of Openreach because the BT pension deficit will skyrocket. As an aside, I meant to say ‘behind, not ‘between’ nicknames like Ex Telecom Engineer.
John, I’m just someone who’s recently retired after working in Telecommunications for nearly 40 years, though not for BT; So I’ve had a front row seat to the CATV issues in the 90’s, seen the various upgrade cycles and evolution’s of network hierarchies all the way from FDM through to the current DWDM and Cloud Networks of today. My username is Ex Telecom Engineer because I’m an ex Telecommunications Engineer, nothing anonymous about it.
BT doesn’t want to sell or part-sell Openreach.
If that ever happens it’s because they had to. That much should be clear by now.
meanwhile, back in reality land, the altnets are struggling to make a real impact and are having to slow down their builds / cut jobs / seek buyers, while ISPs are by and large happy to continue with Openreach (especially now that they’re getting price cuts).
It all feels very 1990s where the cable companies promised the earth and failed to deliver – would John K have been screeching about the looming threat to BT’s monopoly back then? Or when mobile phones / fixed wireless solutions like Ionica were supposed to be the BT killer!
What would happen to its FTTP network if a reasonably-sized AltNet goes bust? Would this infrastructure be mothballed, or acquired for pennies to the Pound by another player? If you believe the latter, as I do, is this incrementally positive or negative for Openreach?
Geography, Engineering cover, cost of operations and integration costs will all play into any decision to takeover a failed Altnet; Things like size of customer base, backhaul costs and ongoing Maintenance/Provisioning costs will feed into the decision, some may not be worth taking over.
indeed, and we can again look to the cable companies to see how it might go. A patchwork quilt of equipment, systems, processes and procedures based on who originally built it. Issues that Openreach will never have to contend with, as they’ll build rather than buy.
To this day Virgin’s landline phone user guide mentions multiple “colours” of phone network; there’s so many that I assume that it’s not just equipment vendor but configuration also. “Purple” is of course their VoIP network that will eventually replace it all.
Where takeovers of existing FTTH networks have occured in other countries, it’s been a long and arduous process as those integrations are made. e.g. in Australia, Telstra sold its fibre networks to a competitor (unrelated to the NBN project), who has been struggling to integrate them into its own network, and prompting a swap out of every ONT. Not exactly “cents on the dollar”!
If an altnet goes bust and there are already two other altnets and Virgin and Openreach in the same ducts, the assets are worthless in my view. Just an expensive draw rope that has to pay rent.
Customer base and presence in the area might be very useful to another altnet, depending on integration costs to bring network to the purchaser’s standards.
Scale is very, very important too. If you’re not rural/niche the bigger your coverage the better you’re able to compete with the big 2.
Either your shares are depressed like BT and Voda or you are drowning in debt and poor take-up like the altnets.
Final point from me. Ex Telecom Engineer, of course you’re entitled to your opinion. I must substantiate my opinions, when I express them, and more so when I criticise others…
“Consumer cannot raise prices by less, because it is funding OR’s FTTP build”
That makes no logical sense. BT Consumer raises prices by as much as the retail marketplace allows, pure and simple.
Given that BTR is in a dominant position, there’s no need to attempt to undercut the retail competition – especially since most of the competition is paying BT Group to use the same underlying Openreach network anyway.
The altnets certainly keep BT on their toes though – they wouldn’t have started investing in FTTP if it weren’t for them. In turn the altnets and BT are keeping Virgin Media on their toes, who wouldn’t have started upgrading their legacy HFC network either.
BT Group hold and in turn repay the debt incurred building out the Openreach network. The highest level of income is when BT Group is the retailer for obvious reasons. Money leaves the customer’s pockets and goes into BT Group, not via one or two more third parties taking a cut with 40% of it ending up with BT Group.
I don’t know the exact numbers and have neither the desire or time to go through accounts but that’d presumably explain it.
I say let’s give BT a run for their money. Let’s overbuild 3 or 4 FTTP networks to every house. It will be used in the future. No dark fibre remains dark for ever. The dotcom bubble created the infrastructure for the next wage. It doesn’t matter and if Altnets go bust, the fibre will remain.
Those that really need fibre to the home, rural properties should be the priority. Most people within close range of a cabinet have more than enough bandwidth even for HDTV (~20Mbps). Whereas once you’re a kilometer or so from the nearest cabinet fibre would make the biggest difference. Especially those places that require a land line with little mobile signal. So bt should prioritise those it’s given a rubbish service for years.
If the maths add up Openreach deploy. They aren’t there to provide a service beyond their regulatory obligations. If you’re too far from a cabinet for VDSL/FTTC to help you or are remote enough that you only have ADSL getting full fibre to you is going to be expensive for little extra income. Repeat a million times and you’ve spent a couple of billion and years of effort for virtually no extra money a month.
Urban areas are, generally, cheaper and faster to deploy to and provide the income that’ll cover the more expensive parts, with the taxpayer and alternative solutions covering the most expensive parts.
It’s brutal but that’s the basic calculation. Plenty of underserved urban areas, too, that come down to cost.
And they’re doing it “All for you darling” . . the consumer . . . .what a mash-up.
Made over complicated with the object of generating lots of duplicate jobs . . the phoney economy.
It’s time BT/Openreach level up! Make FTTP broadband affordable, equalise download/upload speeds, and see off the altnet competition. Their legacy thinking is a sinking ship, dragging business and stocks down.
BT/Openreach are huge contributors to the UK economy paying the wages of nurses ,police ,teachers etc though the taxes it pays .Most Alto nets pay little tax and the profits if and when they materialise will go to private equity. As a nation we should be careful for what we wish for!
If that’s the case it’s the fault of the tax laws. Perhaps if we didn’t have a tax code that is more like a library than a code there’d be fewer opportunities for profitable businesses to avoid tax.
The altnets are investing heavily and, rightly, receive tax treatment that incentivises that. Their investments are putting money into the UK economy and some of that money ends up with the Chancellor.
Reference XGS:
Many of BTs competitors such as Virgin Media, owned by Liberty Global are based outside the UK and do legally avoid paying some UK tax .Other companies outside telcos that are renowned for this are for example Amazon and StarBucks.BT has many faults in the way it operates but on balance I would rather they stay in business!
I agree. They probably offer the worst service of any incumbent I’ve dealt with (in Western Europe), but better they stay in business. Some competition won’t hurt, but I just hope it’s not a race to the bottom on price.
Liberty Global is headquartered and incorporated in the UK, Terence. For now at least: might be moving.
3rd biggest FTTP provider, CityFibre, is also headquartered in the UK.
4th Hyperoptic, again based in the UK.
BT Group aren’t going out of business any time soon.
If an altnet goes bust, who’s responsibility is it to tidy up the left over infrastructure. Will we have suppliers of last resort that will pick up the leftovers, will BT being the largest be forced to take on the supply? Will councils be responsible to removing fibre from the street. Will OR have to cover the cost of removing stuff installed PIA?
They may end up owning infrastructure via this route.
Unsure about the rest but ‘Will councils be responsible to removing fibre from the street.’ absolutely not, no. The Openreach ducts and what’s in them are private property not causing a hazard to the public forcing a local authority’s hand.