When news broke that Virgin Media O2 (VMO2)’s parent company Liberty Global (NASDAQ:LBTYA) and CityFibre were in talks of a £3bn combination, some commentators noted a "material threat" to the dominant position of BT Group PLC (LSE:BT.A)'s Openreach in the full-fibre broadband arms race.
VMO2 and CityFibre, the third and second-largest full-fibre, first-to-the-premises (FTTP) broadband infrastructure providers in the UK behind Openreach, have both been highly critical of Openreach’s wholesales pricing practices, so the pincer movement seems to make sense from a strategic viewpoint.
But is Openreach’s "material threat" legitimate, or a defensive act of desperation against the FTTP superpower?
Fighting over footprints
BT Openreach has an indisputably dominant footprint among FTTP providers, having reached 10 million homes by the end of 2022.
That’s a penetration of more than a third of the estimated 28 million homes in the UK, as per the Office of National Statistics (ONS), with three million of these households having hooked their broadband connections to the network, making for an uptake of about 30%.
It needs to be mentioned that VMO2’s broadband footprint is huge - around 16 million premises, but only a fraction of these are FTTP enabled.
In fact, VMO2 isn’t even the second-largest FTTP provider; that honour goes to the largest of the so-called ‘altnets’ CityFibre, which has a footprint of around 2.5 million homes (as of the end of January 2023).
Even under the discussed combination of VMO2 and CityFibre, i.e. Openreach’s two largest competitors, Openreach would still have the largest national footprint.
Openreach has a target of 25 million homes by 2026, which should be achievable given how the group smashed targets in 2022.
CityFibre has a target of eight million homes, while VMO2’s target is less clear - parent company Liberty Global (NASDAQ:LBTYA)’s chief executive Mike Fries has suggested that VMO2’s entire broadband footprint of 16 million homes could be upgraded to FTTP by 2028.
Add another seven million homes targeted by VMO2’s joint venture with InfraVia Capital Partners Nextfibre and you have around 23 million FTTP premises by the end of the decade, or 31 million if the VMO2-CityFibre deal becomes a reality.
This is all speculative and contingent on deals going through, regulators giving the nod and the various stakeholders actually managing to achieve their targets.
Let’s say it all goes to plan and the FTTP market comprises two major players - Openreach on one side with 25 million premises and VMO2-CityFibre with 31 million homes, or pretty much every home, obviously with significant overlap.
Indeed, that sounds like a material threat to BT, at least in terms of diminished market dominance, but the future is so uncertain, not to mention confusing, that there’s no way of making an accurate prediction for how the arms race will play out.
Will Equinox 2 bite BT in the butt?
One wonders if the VMO2-CityFibre flanking attack could have been avoided if Openreach wasn’t so wedded to its Equinox 2 wholesale discount offer to internet service providers.
For the uninitiated, Equinox 2, initially scheduled to come into effect on April 1, is designed to encourage broadband providers like Sky, TalkTalk and Vodafone to move customers from outdated copper connections to FTTP.
To do this, Openreach wants to make it cheaper for them to switch, with the Equinox 2 pricing plans acting as the carrot on the stick.
They have proved highly contentious among Openreach’s competitors.
Fries has called BT’s proposed price cuts to internet service providers under Equinox 2 “desperate and premature” and “an overreaction” to market competition.
CityFibre has been even more critical of Equinox 2, going as far as to challenge Ofcom’s initial approval of the offer through the courts.
Ofcom has partially backpedalled, delaying the offer for two months in order to address anti-competitive concerns.
On the one hand, introducing Equinox 2 appears to be a valid step towards revitalising Britain’s outdated broadband infrastructure.
On the other hand, Ofcom has a mandate to ensure fair competition among the altnets and has a vested interest in making it so.
The gloves, it seems, are off in the full-fibre arms race.