• UK operator Virgin Media O2 is planning to overlay its cable broadband network with fibre as it pivots to a wholesale broadband operation
• It’s a big and costly job but one that is “needed for the future”, says CEO Lutz Schüler
• The economics of the swap-out haven’t changed, according to Schüler
• He confirms hunt for an external investor for the NetCo wholesale division
• And he’s also still looking for suitable altnet M&A targets to accelerate fibre coverage

LONDON, UK – Connected Britain 2024 – Virgin Media O2 (VMO2) is forging ahead with its near £1.6bn plan to overlay its extensive cable broadband network with fibre-to-the-premises (FTTP) infrastructure by 2028, a task that is “needed for the future” (though not immediately), according to CEO Lutz Schüler, who is also still on the lookout for further altnet acquisitions that could accelerate the company’s fibre access network coverage. 

Speaking today during the Connected Britain event (held at the soul-sucking ExCel exhibition centre), Schüler noted that VMO2 doesn’t need a fibre access right now because it has a very capable cable broadband network that has been upgraded to DOCSIS 3.1 technology that can deliver broadband speeds of up to 2.2 Gbit/s. He claimed the average downstream broadband speed that VMO2 broadband customers get currently is 380 Mbit/s, five times the average UK broadband speed. 

But as the company noted in July 2021 (shortly after Virgin Media and mobile operator O2 completed their merger to form a single operator), the long-term economics of sticking with cable broadband technology don’t add up and shifting to fibre connections over the coming years will future-proof the operator’s fixed broadband infrastructure. 

The company noted in 2021 that swapping out cable (and lines deployed using an alternative fibre tech called RFOG) for fibre would cost £100 for each premises passed and it now has about 16 million lines that need to be upgraded, putting the swap-out cost at £1.6bn. Schüler confirmed to TelecomTV today on the sidelines of this event that the cost per line hasn’t changed in the past three years, though he also noted (as VMO2 did in 2021) that those costs are for passing premises only, not connecting customers (so there will be more investment needed to take the fibre lines into customers’ homes and businesses). VMO2 currently has about 5.7 million high-speed broadband customers.  

“We are not building fibre for now – we have the coax [cable broadband] – we are building it for the future,” noted the CEO.

It’s worth noting also that those costings raised a lot of eyebrows in 2021, with many in the fibre broadband sector stating (albeit not on the record) that such an overlay could not be done at such a low capital cost, and the fact that VMO2 still believes it can come in at that outlay will no doubt raise more eyebrows. 

The technology of choice for the upgrade is XGS-PON, the same technology being deployed by VMO2’s sister company, wholesale FTTP network operator Nexfibre (they are related because both have Liberty Global and Telefónica as equity investors). 

That makes sense because VMO2 is effectively creating a new wholesale fixed broadband subsidiary called NetCo, comprising all of its fixed broadband assets, that will partner with Nexfibre to compete with BT’s quasi-autonomous access network business Openreach and growing wholesale network operator Cityfibre. Combined, NetCo and Nexfibre will reach between 21 million and 23 million UK premises with its fibre access infrastructure in the coming years, putting it almost on a par with Openreach’s planned 25 million to 30 million. 

But creating NetCo as a separate subsidiary is going to be tough and expensive, costing much more than the price of rolling out the fibre infrastructure. VMO2 said from the beginning it would court external investors to take a stake in NetCo and recent reports suggest that process is underway. Schüler confirmed here that an external investor is needed to help make that happen, but he wouldn’t be drawn on the sidelines of the event to share what size of stake might be up for grabs and at what valuation. Bloomberg recently reported that VMO2 is looking for a £1bn investment for a stake of between 20% and 40% of NetCo. 

Upgrading and building in new areas aren’t the only options open to VMO2 and Nexfibre, of course: The two companies combined just over a year ago to acquire fibre broadband altnet Upp, a move that added 175,000 passed premises, with Schüler noting that the companies are expanding the Upp footprint by a further 50,000 premises. According to the CEO, the Upp integration has gone smoothly and the Virgin Media and O2 integration was a success, although he noted that the “digitalisation process went slower” than expected. Industry observers, however, have a different perspective, pointing out that the VMO2 integration process is still ongoing and moving at “a snail’s pace”. 

And what about other M&A activity? Will VMO2 participate in further industry consolidation by acquiring other FTTP altnets, of which there are still more than 100 across the UK? 

It seems likely, especially as many altnets are in a perilous financial situation. He noted that to make a business case for all the operators that still exist, the UK would need a population about three times bigger than it is currently (the UK is home to about 67 million people). 

“There are still too many altnets. The business cases are not working and many are running out of money, building out much less, and they need to add customers… It’s like musical chairs, but the music hasn’t stopped yet and everyone is waiting to see what will happen. There is still lots of consolidation left to go,” noted the CEO.

But not all of these altnets are of interest. Upp was attractive for a number of reasons, one of the main ones being that Upp had deployed its fibre in an area where VMO2 did not already have its own network. “There are altnets that have overbuilt in our areas and they are not of interest,” noted the CEO. 

But with more than 100 still currently standing, there should be some in Schüler’s sights. 

- Ray Le Maistre, Editorial Director, TelecomTV