The UK fibre opportunity: six commercial considerations for investors
December 13, 2017
In the recent Budget, Chancellor Philip Hammond made clear his pledge to secure Britain as a world leader in technology and innovation through the commitment of £500m to a range of technology initiatives from artificial intelligence, to 5G and full fibre broadband.
In light of recent political, economic and regulatory changes, what is the UK fibre opportunity? And how can you make the most of it by building and creating sustainable value? How can M&A help your business to keep pace? In this blog I outline six key commercial considerations for investors looking to invest in the telecoms market.
So what is the UK fibre opportunity?
UK broadband networks are generally capable of supporting today’s demand in most areas
The UK has reasonably good coverage of ‘moderate speed hybrid fibre / copper and fibre / cable networks capable of serving today’s demand for most customers. Indeed, c. 90% of homes are connected by access networks capable of providing 30Mbit/s or better broadband.
There are, however, pockets of areas including in major cities which do not have 30Mbit/s broadband
In fact, c. 3 million homes in the UK (including hundreds of thousands in major cities) cannot receive 30Mbit/s broadband, highlighting a significant investment opportunity. The image below highlights pockets of opportunities in the UK.
Furthermore, copper networks are unlikely to be capable of satisfying consumers’ demand for capacity in the long-run
Customer bandwidth demands are increasing and copper is unlikely to continue to meet demand for a significant portion of the market - even if all of the UK was covered by the best available copper coverage technology, which is unlikely, our analysis suggests only c. 60% of households would be covered by 70 Mbit/s broadband through copper networks (although copper technology may continue to improve).
Fibre is the most future proof option with strong government support and very low current coverage
Despite strong government support and being the most future proof solution from a technical perspective, UK fibre to the home coverage is only around 2%. This is very low compared many European countries, where coverage exceeds 50%, indicating significant development potential for investors.
Ways to win in the market
Building the ‘best network’ does not guarantee success. It is critical to select the optimal area for network deployment and develop a robust sales strategy
Customer take-up rates are a key value driver for network deployments. We see significant variance in take-up rates achieved by European deployments with some networks seeing take-up as low as 10%. In order to maximise take-up, it is necessary to carefully select the network deployment area and develop a robust sales strategy.
We have identified a number of strategies to optimise the level and speed of take-up, these include:
- Pre-agreement with a wholesale partner, particularly one that has a significant broadband subscriber base);
- Targeting specific niches such as build-to-rent accommodation, multiple dwelling units or regions with limited alternative networks;
- Content differentiation; although this is typically difficult for smaller players.
There is a ‘sweet spot’ of medium density areas where it is highly attractive to be the first mover
High density areas, with lower costs per home covered, have traditionally provided the most attractive business cases for fibre deployment. On the other hand, these areas have the highest risk of over-build where a second fibre player may roll out a competitive overlapping network. Our economic analysis of UK fibre to the home (FTTH) roll-out, suggests there is likely to be a ‘sweet spot’ of medium density areas where the first mover can achieve attractive returns and a second entrant is less likely.
The UK fibre to the home market is entering the ‘land grab’ stage as alternative players are attempting to capture the market but the incumbents are starting to react. There are a number of specialist players deploying FTTH networks in an attempt to gain first mover advantage.
The winners in this market will be the players who not only move first to roll-out in the most attractive areas or segments but also develop a robust sales strategy to drive customer take-up.
To discuss any of the issues raised, please share your thoughts below or schedule a meeting with me here to talk about your situation in confidence.