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27 May 2022

Ofcom wanted new businesses to enter the broadband market. Now it’s waiting for them to fail

In the late 2010s dozens of “altnets” arose to supply full-fibre broadband to rural areas, but they are threatened by competition.

By Emma Haslett

It’s fair to say that the UK has not, historically, been good at building broadband infrastructure. Until 2017, just 3 per cent of households had access to full fibre (the fastest type of connection), making this country the worst of Europe’s largest five economies for ultrafast broadband.

In an effort to circumnavigate apathy about improving that situation by Openreach, BT’s infrastructure arm, and its rival Virgin, in 2018 Ofcom introduced measures to open up the sector to smaller entrants. Since then, dozens of small suppliers, known as “altnets”, have entered the market, covering the UK in a web of full-fibre infrastructure, and boosting coverage to 19 per cent of UK households in the process.

But now the regulator appears to be having second thoughts. On Monday, just as the glitterati of Europe’s broadband sector were flocking to Vienna for the annual FTTH (“fibre to the home”) conference, the Telegraph reported that Ofcom was working with BT to draw up contingency plans to prevent internet “blackouts” as it braced for a “wave of bankruptcies”. “It seems to be a bit of a red flashing light,” an unnamed source told the paper. At the conference, altnets expressed their displeasure: why, when Ofcom had celebrated their entry into the market just three years ago, was it now bracing for them to fail?

It is hard to be sure how many altnets exist in the UK. More than 150 have registered for a scheme allowing them to use parts of BT’s infrastructure, although not all have begun operating. Some industry insiders put the actual figure at between 60 and 80. While the largest “pass” up to eight million premises (ie, are capable of serving them) in the UK, most are small, community-led initiatives, like B4RN (Broadband for the Rural North), which has almost 3,000 shareholders and serves 9,000 premises.

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Private investors have ploughed billions into these small providers: CityFibre, the largest altnet, has raised £2.6bn, according to Crunchbase, a business insights platform, and in 2018 was bought by Goldman Sachs; another of the largest altnets, Hyperoptic, was acquired by the private equity giant KKR a year later.

According to the Independent Networks Cooperative Association (Inca), altnets cover 2.5 million homes and businesses in the UK, and are expected to hit 29.9 million by 2025. Once you add in Openreach and Virgin Media, many parts of the UK will find themselves over-served, with several operators to choose from.

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So where do the rumours of bankruptcy come from? Mark Jackson, the founder of the trade publication ISP Review, has pointed out that there are two potential causes. One is too much competition making it hard for smaller players to acquire customers; the second is that so much infrastructure is built that its value falls.

There are echoes of the energy market, where the number of suppliers rose from 13 in 2010 to 40 in 2020 as the government encouraged competition – then plummeted at the beginning of this year, when the price of gas spiked suddenly. So far 31 companies have gone out of business and the survivors have taken on millions of their customers. But such comparisons are unfair, says Gita Sorensen, a spokesperson for Inca. “The energy market is subject to very volatile input prices, which telecoms just isn’t,” she says. And though rising energy prices are affecting everyone, one of the largest suppliers says the cost of electricity makes up no more than two or three per cent of its costs.

Admittedly, the “land grab” taking place at the moment could lead to some small providers failing, says Sorensen. “There is a real urgency to build as quickly as you can before somebody else builds there,” she says. “Some of them are not going to be commercially successful in the long term.”

She says the most likely outcome, however, is not a “wave of bankruptcies” but rather a “wave of consolidation”. At the conference in Vienna, “everybody was in violent agreement that there will be consolidation”, she says. Greg Mesch, the founder and chief executive of CityFibre, says that by the end of the decade he believes the UK will probably be back to three or four large networks.

To some extent that is already happening: in January 2020 Cityfibre bought its rival Fibrenation for £200m, while in November last year the Essex-based People’s Fibre fell into administration and was promptly bought by Swish Fibre.

Even if some do go under, blackouts are unlikely, adds Sorensen. In the worst-case scenario, customers should easily be able to “move to another network, or, in extreme circumstances, maybe take a mobile connection in the short term”. “We just don’t understand where [Ofcom’s] alarmist approach has come from,” she says.

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