Latest results
Challenges
Comment


UK full fibre coverage has only recently hit 42%, which is a way to go before meeting the United Kingdom's gigabit coverage target. Alternative fibre network providers (altnets), including CityFibre and Hyperoptic, are proving successful in both deploying their own networks and driving Openreach to upgrade its own, but face challenges ahead in the form of regulatory changes and competition from Openreach's Equinox 2 pricing offer.

Latest results

The latest BT results show that Openreach (its wholesale network arm) has hit another milestone in its rollout of fibre-to-the-premises (FTTP) network, now covering just under 9.6 million UK premises. Openreach has significantly ramped-up its deployment over the past few years, spurred on by competitive pressure from altnets such as CityFibre, Hyperoptic and members of the Independent Network Cooperatives Association.

Alongside the 9.6 million premises that Openreach has announced, Ofcom states that 12.5 million premises (42% of UK premises) are now covered by a full fibre network. Notwithstanding increasing levels of overbuild by altnets and Openreach in its 9.6 million premises passed, this means that almost 3 million premises are being connected by altnets alone. It is not just urban areas that are seeing altnet investment, as they are also bidding on, and winning, rural procurements under the government's "project gigabit" programme.

The altnets are proving successful in both deploying their own networks and driving Openreach to upgrade its own. UK full fibre coverage currently stands at 42% of UK premises. While no small feat, this is a long way from the majority of UK premises benefitting from full fibre network connectivity and from meeting the government's gigabit-capable coverage target of 85% by 2025. Coverage is also only half the story, as altnets need to win customers to make a return on their investment. Without being able to demonstrate sufficient take-up on networks already built, it is unlikely that altnets will continue, at this pace, to expand their network footprint into what would be more remote and increasingly less economically viable areas.

Challenges

With this in mind, altnets face a number of challenges in the United Kingdom in 2023.

BT Openreach's commercial strategy
Openreach recently introduced its "Equinox 2" pricing offer (for further details please see "Ofcom publishes response to the Openreach Equinox 2 offer"), which sees wholesale FTTP prices drop significantly. In this regard, the following can be noted:

  • Altnet operators may struggle to compete against both the price levels and conditionality of the pricing offer.
  • While Ofcom is currently in consultation with the industry on the matter, it has provisionally concluded that the pricing offer is not anti-competitive.
  • Notwithstanding Ofcom's final decision on the matter, altnets will no doubt be concerned with its signalling effects and the likelihood of future pricing offers.

Ofcom and regulatory changes

Several substantial regulatory changes are being implemented in 2023, presenting significant challenges to altnets:

  • There are new broadband switching rules and obligations under Ofcom's General Conditions (GCs), which come into effect 3 April 2023. Ofcom requires the industry to offer a one-touch switching (OTS) solution to make it easier for broadband customers to switch. Ofcom expects OTS to be ready for 3 April 2023, with the relevant updated GCs taking effect the same day. However, operators have recently said they will not have OTS ready by Ofcom's deadline. Ofcom has yet to provide guidance on any potential enforcement action. The delay is a particular issue for altnets, which face an uphill struggle when trying to switch customers across onto their networks; an OTS-style solution currently exists for intra-Openreach network switches.
  • The new Telecommunication Security Act (TSA) 2021 and Ofcom's compliance and monitoring regime will have to be taken into consideration. The TSA introduces enhanced telecoms network and systems security requirements, including stricter controls on network build, access and managing compromises. Alongside the TSA, the new Electronic Communications (Security Measures) Regulations and the Telecommunications Security Code of Practice set out further requirements and guidance for network security measures. Ofcom has published guidance on how it will monitor compliance with the TSA and the code of practice and is currently working with the industry to map out more detailed processes. Reporting and ensuring compliance will be no small task for the industry, particularly for any resource-strapped altnets. Although some altnets will likely fall into the tier three category of operators that will not be obligated to comply with these new requirements, they will still need to adhere to both the principal requirements of the TSA.
  • Ofcom has released an announcement that reviews the rise in price of retail broadband as a result of inflation. This follows preliminary research commissioned by Ofcom, showing that about one-third of mobile and broadband customers do not know whether their provider can increase their price. While it is clear that Ofcom will look at "whether tougher protections are needed", it is unclear what form this will take, as Ofcom "does not set retail telecoms prices". Several altnets have publicly stated they are choosing to freeze consumer prices without any mid-contract price rises. Any Ofcom intervention will have significant implications for broadband pricing and competition at the retail level.
  • Ofcom is to announce its new rules on net neutrality and what is permissible. Ofcom recently consulted on the issue of net neutrality and asked the question of whether it needs to refresh its approach. As part of its consultation, Ofcom set out a number of proposals giving internet service providers somewhat more freedom over traffic management and packaging services to end-users. Any significant changes, however, would require legislation (eg, a "fair share" payment regime). Any new rules following Ofcom's final statement could have important implications for competition across the altnet value chain.

Beyond Ofcom
It is not just Ofcom that is seeing change in 2023:

  • The ministerial function overseeing the UK telecoms industry is moving from the Department for Digital, Culture, Media and Sport to the newly established Department for Science, Innovation and Technology (DSIT). The DSIT's oversight over technology brings together "quantum, AI, engineering biology, semiconductors and telecoms". Ofcom will be reporting to a new ministerial department to align with its expanded digital role. The role and prominence of telecoms within DSIT's policy development is yet to be seen.
  • The Digital Markets Unit (DMU) is likely to receive its long-awaited statutory powers in 2023. The DMU will oversee a new regulatory regime for the most powerful digital firms, with the purpose of promoting greater competition and innovation in these markets and protecting consumers and businesses from unfair practices. The new legislation will allow the DMU to designate firms with "substantial and entrenched market power" with "strategic market status" and impose tailored conduct requirements on such firms, as well as provide the DMU with a range of enforcement powers.

Continued investment in fibre infrastructure remains crucial for the United Kingdom's economic and digital future:

  • In recent research, the consultancy Hatch identified over £38 billion in potential economic benefits, derived over a 15-year period, stemming from CityFibre's rollout of future-proof full fibre infrastructure in 285 cities, towns and villages in England and Scotland.
  • Similarly, in a 2021 study commissioned by Openreach, the Centre for Economics and Business Research report report showed that full fibre could provide a real boost to communities across the country and boost labour productivity by nearly £59 billion by 2025.

Comment

Ofcom has a role to play in ensuring that altnets can continue to grow and innovate, while ensuring that the market and consumers are protected from anti-competitive practices. The long-term benefits of increased competition include:

  • sustainable lower pricing;
  • enhanced innovation; and
  • service quality.

These benefits are starting to come through in the form of more affordable altnet retail pricing practices and network roll-out into areas not previously served by full fibre. However, competition is still in its infancy and remains vulnerable without sufficient regulatory protection. With the right support from regulators and investors, altnets will continue to play a key role in driving competition, innovation and economic growth in the UK broadband market.

For further information on this topic please contact Marcus Bagnall or Lorik Sekiraqa‚Äč at Wiggin by telephone (+44 20 7612 9612) or email ([email protected] or [email protected]). The Wiggin website can be accessed at www.wiggin.co.uk.