A new report from analyst firm Enders Analysis, which was today shared with ISPreview, has calculated that the 20 largest alternative UK broadband networks (i.e. BT / Openreach challengers) collectively suffered losses of around £1.304bn in 2023 (increased from £755m in 2022) – driven by high interest rates and rising build costs.
The news won’t come as much of a surprise to our regular readers, as ISPreview has often had to report on the challenges being experienced by network operators over the past couple of years. The situation has been fuelled by rising build costs, fierce competition from rivals (e.g. overbuild and the challenges of growing take-up) and the difficulties of securing fresh investment during a period of high interest rates (as well as tackling debt repayments).
NOTE: Only a very few operators feel 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 some others.
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. 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 (e.g. CityFibre).
However, consolidation is a complex business, not least due to the inevitably slow and often expensive process of needing to integrate networks that may not have been developed to the same standard. In addition, some operators, such as those that exist in more heavily overbuilt areas, may often have an inflated opinion of their own asset value, which can make it difficult to secure a viable consolidation agreement in the first place.
Despite this, the new Enders Analysis report (not available to the public), which echoes many of these challenges, predicts that the “music will inevitably stop, and consolidating before they are forced to will lead to a better result“. This is despite UK altnets being otherwise deemed “very successful at rapidly rolling out their full fibre networks, beating expectations to reach nearly 14 million premises passed to date“.
Weaker-than-expected penetration is naturally seen as one of the key problem areas, with the overall figure at just 12% at the end of 2023, versus 11% at the beginning. Enders suggests that most altnets are now heading for under 20% take-up, “even at maturity“. Brand recognition is a problem here too, particularly for unfamiliar altnets that aren’t able to attract any big-name retail ISPs (consumers tend to be less trusting of unfamiliar brands). Enders is thus “sceptical of the prospects for wholesale at the hybrid retail/wholesale altnets“.
Enders Analysis Statement
The UK altnets collectively lost over £1bn in 2023, with most metrics unrealistically distant from what they need to be for a sustainable model, particularly the smaller retail-focused operators.
Consolidation is essential for survival, and CityFibre at least has a reasonable case for long term sustainability with a wholesale model and Sky as a customer, and looks the most viable altnet consolidator in our view, with VMO2/nexfibre able to pick up the pieces should the sector fail.
A lack of long-term viability and related financing difficulties will dramatically slow network roll-out, reducing the altnet pressure on the rest of the sector even if consolidation improves penetration levels.
The report adds that the combined revenues of the largest altnets only rose by a third to £316m in 2023 (up from £251m in 2022). But the ability to achieve a positive EBITDA (i.e. earnings before interest, taxes, depreciation, and amortization), which usually indicates that a company’s core operations are profitable and likely generating positive cash flow, helps to underline some of the challenges.
For example, EBITDA margins did improve in 2023, rising from -132% to -107%, but this is “not a massive jump given the maturing state of the industry, and the losses remain very significant and actually grew in absolute terms“. Furthermore, only a handful of altnets currently “appear to be even making strong strides towards being EBITDA breakeven” (e.g. CityFibre, CommunityFibre and Hyperoptic are doing better on this front).
Overall, it’s a tough environment and there’s still a long way to go before we can see how all of this will pan out, but we expect the next couple of years to be fairly eventful.
