Market Insight

UK FTTP competition heats up, with TalkTalk's £1.5 billion investment plan

February 08, 2018

James Joiner James Joiner Senior Research Analyst, Service Providers & Platforms
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On the day of its Q4 results presentation (8 February), TalkTalk has announced plans to deploy a fibre-to-the-premise (FTTP) network to 3 million homes across the UK. It follows similar announcements in recent months by BT-owned Openreach as well as Vodafone and CityFibre.

As part of the FTTP deployment plans, TalkTalk has formed an independent company with Infracapital, an infrastructure equity investment firm, which is part of M&G Prudential. TalkTalk estimates that the deployment will cost £1.5 billion, or £500 per premise passed. Infracapital will fund 80% of the roll out, with TalkTalk providing the remaining 20%.

In order to fund the FTTP deployment, TalkTalk plans to raise up to £200 million through a proposed equity placing. TalkTalk will also reduce its dividend for the second time in nine months, in order to raise further funds.

TalkTalk did not provide details on when the FTTP deployment would start or finish. 

 

Our Analysis

TalkTalk’s FTTP investment is part of the provider’s wider strategy reset, which is to return to its roots as a value-for-money fixed broadband provider. This strategy began with the introduction of fixed price plans on all broadband contracts. After this, TalkTalk moved to exit the MVNO business, as it abandoned ambitious plans to build an inside-out MVNO. This move led to significant CAPEX savings, which have helped TalkTalk make way for its FTTP rollout. TalkTalk, nevertheless, remains under pressure in its core fixed broadband business. Whilst it has returned to positive net broadband additions, increased price pressure from the likes of Vodafone (which has added 133k broadband households in the last 12 months), has caused TalkTalk's profit margins to slump and profit expectations to be cut.

TalkTalk is the only wholesale customer announced so far for the FTTP network. The provider has made a minimum volume-based commitment with regard to FTTP take-up. It is likely that the volume-based commitment is based on TalkTalk’s involvement in a small-scale FTTP trial (14,000 premises) in York, alongside Sky and CityFibre. Six months after the trial was completed, TalkTalk reported a take-up rate of 27% and build costs of less than £500 per premise. Sky have subsequently exited the trial, whilst TalkTalk is in the process of extending the number of homes passed by FTTP services to 54,000.

With the exception of York, TalkTalk’s announcement did not include any details around which UK locations would receive its FTTP service, but the provider did state it would target mid-sized towns and cities. As Vodafone and CityFibre’s FTTP deployment will target similar sized towns and cities, with Milton Keynes revealed as the first location, there is a risk that the FTTP deployments could overlap in certain areas. Any FTTP network overlap could have a detrimental impact on service take-up, which threatens to undermine the business case of both providers. Therefore, collaboration between Vodafone, CityFibre and TalkTalk will be required. In comparison, there is unlikely to be any network overlap with Openreach’s FTTP rollout, which will target eight of the UK’s largest cities (Birmingham, Bristol, Cardiff, Edinburgh, Leeds, Liverpool, London and Manchester).

In terms of the wider impact of TalkTalk’s FTTP investment, IHS Markit believes that it weakens Openreach’s negotiating positon with the UK regulator, Ofcom. As outlined in IHS Markit’s report, Openreach accelerates its FTTP investment, Openreach may increase its FTTP rollout beyond 3 million homes after 2020. This is largely dependent upon favourable regulatory conditions, with Ofcom currently reviewing the wholesale price Openreach can charge broadband retailers for access to its network. However, following TalkTalk and Vodafone’s recent commitments to invest in FTTP services, it is less likely that Ofcom will significantly increase Openreach’s wholesale price cap in order to maintain favourable competitive environment. Investments from alternative providers suggest the UK infrastructure market is competitive, and does not require intervention from Ofcom to provide an incentive for Openreach to boost its FTTP investment.  

Geography
UK Western Europe
Organization
Talk Talk
Research by Market
Mobile & Telecom
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