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BT investors worry about the proliferation of alternative network providers — “altnets” in industry speak. For evidence, see the near 8 per cent decline in the UK telecoms group’s share price since Sky struck a deal with rival CityFibre on Tuesday to deliver broadband services on its network. Signing up Sky is something of a coup for CityFibre, underlining its now decent scale. Yet fears that such challengers will truly damage BT’s business look overblown.
A closer look at the deal itself helps explain why. Sky’s agreement with CityFibre complements, rather than replaces, its existing arrangement with BT’s Openreach network. Sky has indicated that it intends to use its new partnership to offer fibre-based services in areas in which Openreach is not present, rather than migrating its Openreach customers en masse.
That may change over time, of course. But Sky’s seeming lack of enthusiasm for a mass shift, despite CityFibre’s likely more competitive pricing, highlights the stickiness of customer relationships. Bringing a new line into a customer’s home involves a lot of upheaval. It is not easy to sell that to customers who can already benefit from a speedy connection.
That stickiness, in turn, points to the fundamental problem facing altnets today. Their rise was predicated on BT’s slowcoach approach to fibre rollout. The hope was that if they could lay down their networks first, they would dissuade the group’s regulated Openreach platform from overbuilding and achieve scale, high market shares and profitability.
Faced with this threat, however, BT embarked on a furious investment programme: Openreach fibre is today available to 46 per cent of UK premises, rising to 76 per cent by 2026. While altnets as a whole are a force to be reckoned with — available to 12.9mn premises versus BT’s 15mn, according to a sector report — sector-leading CityFibre only reaches about 3.8mn.
That leaves altnets, as a category, struggling to build enough scale to achieve profitability. Coupled with high capex requirements, the result is serious cashburn. Even CityFibre, which turned ebitda positive in the first quarter, will have negative free cash flow of £900mn this year, according to James Ratzer of New Street Research. A tougher financing environment further clouds prospects.
BT is not immune to some altnet needling. Some market share loss is inevitable. And, while the prospects for the existing crop of altnets look challenging, once an alternative fibre asset is in the ground it poses a risk to the incumbent. But the group’s strategy of embarking on its own rapid network rollout safeguards it against the worst of the threat.
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