Megabuyte Chief Analyst Philip Carse digs deep into the latest FTTP and altnet market developments and with a scientific eye provides important insights into how this key segment is shaping up.
The last three months has been another interesting and evolving period for UK fibre altnets, the main headline being Sky’s new partnership with CityFibre. Otherwise, sorting the wheat from the chaff is ongoing, with new debt raises for Netomnia, Community Fibre, Fibrus and Ogi (mainly public money), while Spring Fibre is going through a pre-pack administration/sale to Harmony Networks. A lack of M&A/consolidation this quarter is surely temporary given the tough environment (a strong BT, ambitious VMO2, funding challenges/interest rates, cost inflation etc) with many altnets rethinking their rollout and go to market strategies. More commercially successful altnets are now adding up to 1pp of customer penetration per month.
Developments in the last quarter include Openreach setting the pace. The September 2024 quarter saw a record Openreach performance in terms of premises upgraded (1,086k) and FTTP subscribers added (446k), to 15.9m and 5.53m respectively for a 34.8% penetration rate, versus BT’s premises target of 25m by end 2026. It increased FY25 upgrade targets by 0.2m to 4.2m premises within the same capex budget. Meanwhile, VM02 is maintaining the pace, adding 281k full fibre premises via nexfibre, just off Q4 23 and Q2 24 levels (295-298k) and helped by the first Upp integrations, taking full fibre to 5.6m of its 17.8m premises.
The FTTP outlook remains challenging given a tough macro environment for altnets resulting in distressed situations, consolidation and tweaked or rewritten business plans
Altnets are gaining ground with Openreach and VM02 collectively losing 165k broadband subscribers (of all flavours) in the September quarter, a decent proxy for altnet gains, but down on Q2’s record 208k losses. Annualised, this is just 3% of the incumbents’ bases. The last quarter also saw CityFibre sign up major ISP Sky as a partner. Sky is likely to favour CityFibre wholesale over Openreach where available (lower cost and better, symmetric, product), but CityFibre has had to commit to reaching 8m premises – which will require new funding – and a rapid and full roll out of XGS-PON.
Despite a tough funding environment, some altnets are still raising new debt. Most comes from public sources – the National Wealth Fund/formerly UK Infrastructure Bank providing £55m of £100m for Fibrus and £25m for Netomnia, and Cardiff Capital Region providing £45m to Ogi, while Community Fibre raised £125m from five private banks. On the flip side, Spring Fibre is the latest altnet to fail, being sold for £1.5m to Harmony Networks (backed by network constructer SDC), having spent £37m on 12k premises passed.
Here’s a snapshot of more new data from Megabuyte...
Roll out: It is estimated that altnet premises passed numbers circa 16.5m (CityFibre 3.8m), up from 14.9m last quarter. This compares with Openreach’s 15.9m upgraded premises (Sept 2024) and VMO2’s 5.6m upgrade/new build FTTP (out of 17.8m). Annualised build rates are led by BT’s 4.2m (up 0.2m), Netomnia’s 1.2m and VM02’s 0.85 (which includes Upp integrations).
Spend: The altnets had collectively spent £8.5bn Gross Book Value as of latest accounts (versus £7.5bn last quarter); we estimate this is now £9.1bn+.
Customers: Openreach has 5.5m FTTP customers (across BT Retail and ISPs such as Sky, Vodafone and TalkTalk) versus 1.99m combined altnet customers (1.96m last quarter), led by CityFibre (400k) and Hyperoptic (340k). Some altnets have yet to report customer numbers with circa 10k a typical reportable milestone.
Cumulative cost per premise passed: This ranges from circa £2,000 for early stage altnets and Gigaclear (£1,803, rural focus) to £543 for Community Fibre (London focus) to £460 for Hyperoptic (MDU focus) and £303 for brsk. Openreach quotes the lower end of £250-350 for its upgrade though reported capex implies more like £475 all-in (FY24).
ARPUs: There are few data points but ARPUs are typically in the £25-£40 per month altnet retail range (lower for wholesale); with a variety of inflation-driven price rise strategies, from zero to single digit (eg Gigaclear 5%) to CPI+ double digit (eg BT, VMO2).
Business models: Most altnets are unsurprisingly EBITDA loss-making and heavily cash consuming. They are now focused on cash preservation/breakeven through improving marketing and sales resources and build optimisation/pause.
Asset turnover: Altnet commercialisation ranges from 15% for Hyperoptic (well established, MDU focus) to 2% for G.Network, compared with BT Group on 35%. FWA players score well though shifts to FTTP once critical mass is achieved will dilute their ratios.
Implied payback periods: Based on CPPP, penetration and ARPUs payback periods range from 80-90 months for toob, Community Fibre and Hyperoptic to 250 for Gigaclear and >1,000 (>80 years!) for G.Network.
Customer additions: The latest subscriber data suggests altnets can add up to 1pp of penetration per month.
Outlook
The FTTP outlook remains challenging given a tough macro environment for altnets (consider cost inflation, higher interest rates, constrained new funding) resulting in distressed situations, consolidation, and tweaked or rewritten business plans, with a clear shift for most from network build and land grab to adding customers (with the obvious exception of Netomnia which is doing both). For some, there is a clear path to cash flow breakeven (helping attract new debt funding), though whether investors will recoup their money in the inevitable consolidation remains to be seen.
There is plenty of M&A being discussed (the latest rumour is Zzoomm/Freedom Fibre, but many combos would have strategic merit). The challenge is agreeing all-paper deals that work for all parties. In the meantime, Openreach continues to upgrade its network (at ever falling costs) and customers (retail and wholesale) to FTTP to secure medium term FCF gains; while VM02/nexfibre will continue to undertake new FTTP build and upgrade the cable network while evaluating M&A opportunities.