A new newspaper report has revealed what digital infrastructure investors think of the UK’s current market for alternative broadband networks (altnets). Suffice to say that, after a difficult couple of years, there still seems to be a fair mix of both strong pessimism and optimism for 2025, which perhaps reflects the different states of the market’s many providers.
ISPreview’s regular readers will already be familiar with the many challenges being experienced by network operators over the past couple of years. The current situation has been fuelled by rising build costs, fierce competition from rivals (i.e. overbuild and the challenges of growing take-up), the problem of growing brand familiarity and the difficulties of securing fresh investment during a period of high interest rates (inc. the rising cost of debt repayments).
In response, we’ve seen many network operators adopt a more protectionist strategy, which often involves scaling-back (or even halting) their deployments of new full fibre (FTTP) gigabit broadband networks and switching their focus to growing customer take-up (i.e. commercialisation).
At the same time, some other network operators and investment firms have gone on a consolidation drive in an effort to capitalise on the difficult climate. But we didn’t see as much consolidation occurring during 2024 as many expected (this is partly suspected to be due to disagreements over valuations) and it remains to be seen whether that changes in 2025. For some, an inability to consolidate could mean a greater risk of failure, which might cause even bigger losses further down the road if their assets get hoovered up on the cheap (i.e. during administration).
Back in October 2024 Enders Analysis published a report that calculated how the 20 largest altnets had collectively suffered losses of around £1.304bn in 2023 (increased from £755m in 2022), while also suggesting that most altnets were now heading for under 20% take-up within 5 years of build completion, “even at maturity“ (here). But Enders also estimated that altnets needed a 40% take-up rate to deliver a reasonable return, which in reality will vary dramatically between operators as the cost to build and maintain such networks varies significantly (some could get a reasonable return with sub-20% and others will need more). Location is also a factor (rural vs urban).
What do investors think?
One thing missing from our above analysis is what the infrastructure investors themselves think of today’s market and its prospects for 2025, which is particularly relevant since these are the very people and organisations who will ultimately decide the fate of many altnets. Thankfully, the FT (paywall) has published an article that includes a mix of feedback from various investors, which we’ve summarised and paraphrased below.
However, we do have to sound a note of caution on the below remarks, as investors will always be speaking from a position of their own vested interests and that will be coloured by where they currently have their money. For example, investors with a strong altnet position won’t want to talk the market down too much, unless they’re planning to drive some consolidation themselves. So keep that in mind for context.
Summary of Thoughts from Altnet Investors
➤ Vicente Vento, CEO of investment management firm DTCP (they back CommunityFibre in London), warned that banks had in recent years financed some projects that, in hindsight, they probably should not have done.
➤ Ben Terry of Amber Infrastructure (they back toob, CommunityFibre etc.) expects altnets to continue their focus on commercialisation instead of new infrastructure build in 2025 so as to demonstrate a clear trajectory toward profitability and self-funding. Ben added that consolidation was still firmly on investors’ agendas and “many discussions are underway“, albeit with sticking points like valuations tending to slow that process.
➤ Max Gilbert, MD of investment bank Houlihan Lokey (they’ve advised on deals, like the one between CityFibre and Lit Fibre), does not expect investor sensitment to materially improve during 2025. But he was cautiously optimistic after the sector had gone through somewhat of a “reset period” and a good number of altnets were now expected to be break-even, in terms of ebitda, during the next year or so.
➤ Cesar Bravo of Hamburg Commercial Bank (altnet investor) said they’d taken a step back from the market, but were now looking at potential deals and increasingly baking key performance indicators into covenants from the beginning. The bank still sees the sector as having strong fundamentals and businesses that make for attractive investment opportunities.
➤ An anonymous senior investor at a asset manager that specialises in digital infrastructure warned that a “large chunk” of altnets are uneconomic (mostly due to limited take-up) and is predicting a lot of failures, with lenders sitting on a big pile of material losses and trying to avoid write-downs.
➤ A second anonymous industry investor felt the challenges of what altnets were trying to do had been underestimated during the “gold rush” period and that some may go bankrupt, with assets being sold off for a lower price than they cost to build. But they also said that the characteristics that attracted them to the market in the first place still remain (i.e. the networks are expensive build, but they’re cheaper to run).
➤ A third anonymous executive at a digital infrastructure investor said they had declined ten different proposals to invest in UK altnets over the past 3 years, usually because the there were risks in the altnets assumptions on pricing, profitability and competition (e.g. one altnet it saw had been valued at half the amount of invested capital). The executive felt more consolidation was inevitable.
The comments above, which are quite varied but do seem to agree on some shared points of view, broadly reflect our own impression of today’s market. But it shouldn’t be forgotten that, for altnets, there are still signs of optimism, at least for those operators that are in the best position right now to capitalise on it.
For example, Ofcom’s new One Touch Switching (OTS) system, despite its challenges, is making it easier for consumers to change broadband ISP, particularly between those on physically separate networks (doing this was much more tedious before). The dominant market player, Openreach (BT), is also continuing to lose a sizeable number of broadband lines each year to rivals (line losses in H1 were 377k, a 2% decline in their broadband base).
On top of that, we’ve been seeing a rise in the number of debt raises by altnets over the past year. In addition, there are signs that we could see greater infrastructure sharing occurring between networks in the future, which if done well could reduce deployment costs and increase coverage. Some of this may come via INCA’s efforts to encourage it (here) and possibly also Ofcom’s new Telecoms Access Review (TAR). But it’s still a bit uncertain, due to the difficulty of bringing so many competing interests together.
Finally, it’s important to remember that not all network operators have felt forced to slow their pace of build to focus more on commercialisation. Some operators have felt confident enough to keep building at the same or even greater scale than they were before the current climate established itself, such as Openreach, Netomnia (inc. Brsk), Nexfibre (Virgin Media) and a few others.
The future direction of the market is thus far from being set in stone, and there are plenty of big developments expected during 2025. Not forgetting Virgin Media’s move to open up their existing network to wholesale. The next 12 months are thus sure to be eventful.
