• Infrastructure-based competition is the key to availability of nationwide gigabit broadband
• VMO2’s new Netco will be “a scaled network” alternative to BT Openreach
• X marks the spot where the treasure lies
• Altnet consolidation looms as logjam breaks

Suddenly, it’s all happening in the UK’s FTTP (fibre-to-the-premises) sector, where a long-term wholesale network services battle is brewing between Virgin Media O2 (VMO2) – aided and abetted by its parent companies Liberty Global and Telefónica – BT’s quasi-autonomous Openreach division, which manages the UK incumbent’s fixed access network, and major altnet CityFibre. 

The 2019 general election manifesto of the UK’s governing Conservative party included a pledge to deliver gigabit-broadband to the whole country by 2025. That goal was revised in November 2020 when it was watered-down to a sort of promise that gigabit broadband would be available to 85% of premises by 2025. Later, the ‘Levelling Up’ whitepaper, published in February 2022, again revisited the prospect and downgraded it to an ‘aim’ that gigabit-broadband would be available nationwide by 2030: That paper identifies infrastructure-based competition as the key aspect of that policy. 

Meanwhile, the UK telecoms regulator, Ofcom, seems to find itself on the horns of a dilemma, and seemingly caught a bit by surprise, as it tries to to weigh-up whether or not over-regulation (whatever that may mean) might lead to under-investment (however that might be quantified) in a fibre access network sector that has sprung to life during the past four or five years and spawned dozens of alternative network operators (altnets).

So who has put the latest cat amongst the pigeons? That’ll be VMO2, the entity formed in 2021 by the merger of Virgin Media and O2 UK and which is currently jointly owned by Liberty Global and Telefónica. It has further galvanised the UK’s FTTP sector by setting up a rival wholesale fixed-access broadband company (comprising its FTTP and cable broadband assets that currently reach 16 million UK premises) to compete head-to-head with BT Openreach and with CityFibre, the now fast-growing altnet that is the UK’s third-biggest network provider of wholesale gigabit-capacity FTTP connectivity.

Currently VMO2’s new wholesale venture rejoices in the unimaginative appellation of NetCo, though it is expected to get a snazzier moniker in the months to come. VMO2’s parent companies have created the new unit in order to seek additional funding opportunities for the high-speed access infrastructure and to be a vehicle for “potential altnet consolidation opportunities”. Meanwhile, VMO2’s consumer and B2B units, together with its mobile network, “will continue to serve millions of customers with a range of connectivity services. Through a wholesale agreement, NetCo will connect Virgin Media O2’s fixed customer base, providing revenue and attractive cash flow from day one of operation.”

A year ago, there was speculation that VMO2 was looking to buy CityFibre for £3bn, but it came to naught. At the same time, it was said to be “pondering” the purchase of Trooli, a small full-fibre outfit that operates in the south of England. The sum of £125m was mooted, but that deal also fell through and Trooli eventually went to Agnar UK Infrastructure Ltd for an undisclosed figure. Despite the knock-back by CityFibre, VMO2 has not been deterred and admits it is open to making acquisitions, has its eyes on “six or seven” altnets and openly espouses consolidation in the sector.

Real, countrywide competition for Openreach

And VMO2 isn’t nipping at Openreach’s heels on its own: Its owners, Liberty Global and Telefónica, each have a 25% stake in Nexfibre, a wholesale FTTP joint venture with Infravia, a European private equity company that focuses on investing in comms infrastructure and technologies, that was set up in July 2022. It also has a £4.5bn investment plan to reach 5 million UK premises by 2026 and potentially extend further to 7 million premises. 

As part of its rollout plan, Nexfibre has just announced it will invest £1bn in the UK’s broadband infrastructure in 2024 to “drive long-term competition in the fibre access market across the UK” as part of its efforts to reach its 5 million target. The £1bn investment will be a ‘challenge’ to a company with a “monopolistic position in the market”,  for which read Openreach. 

The news came immediately after VMO2 announced the creation of Netco. Eventually, the two separate NetCo and Nexfibre networks will reach a combined total of some 23 million UK homes, that’s approximately 75% of the total number of all domestic premises. Mike Fries, the CEO of Liberty  Global, claims that both the new NetCo and Nexfibre will be “vehicles” that will drive forward the consolidation of the UK altnet market.

Rajiv Datta, the CEO of Nexfibre, added, “The £1bn we are investing this year will be a major boost to the UK’s digital infrastructure. Backed by our world-class investors, we are bringing much-needed sustainable competition and next-generation connectivity to the UK. Our focus is on addressing the historical lack of investment that has left the UK lagging behind its European counterparts.”

Last September, Nexfibre separately acquired the UK altnet Upp and announced plans to invest £350m on networks in eastern England by 2026.

So, we are witnessing a trend whereby the separation of fixed network assets opens the door to significant market consolidation. As Matthew Howett, the CEO of London, England-headquartered Assembly Research said, “The announcement of a functional separation of VMO2’s fixed network is significant, not least because it sees VMO2 become a wholesaler for the first time. They will need to make acquisitions of other fibre builders if they are to try and match Openreach’s expansive geographic footprint, arguably adding further pressure to CityFibre. The UK’s broadband market has for a while now needed to enter an era of scaled challengers and this announcement gives a natural home for any future consolidation VMO2 has planned in what is currently a heavily fragmented altnet market.”

There are dozens of altnet service providers across the UK where a phase of major consolidation has been on the cards for some time. A few acquisitions have already been made, but the move by VMO2 could well break the logjam and allow pent-up demand to let rip. 

For years, industry analysts have been speculating about when a company might emerge that is able to stand competitively toe-to-toe with Openreach, and slug it out to the ultimate benefit of broadband subscribers while providing the retail ISPs that are the wholesale operators’ direct customers with fresh opportunities. It looks like it could be just about to happen. In a statement, Openreach, which certainly isn’t going to stand by and watch competitors eat its lunch, pointed out that it is “building further and faster than anyone else” and claimed, “We welcome competition as it’s great for customers and it’s what Openreach was established to enable.” 

We’ll soon see, and, in due course, find out how a radically changed landscape will, or can, be regulated.

– Martyn Warwick, Editor in Chief, TelecomTV