A marriage between Vodafone and cable group Liberty Global has been reportedly on the cards for years, but in the MNO’s home UK market, it may have found another option for improving its access to all-important fibre – a tie-up with Openreach, the wholesale arm of incumbent telco BT.
Mobile-only operators round Europe are seeking fiber partnerships so they can participate in one of the region’s few areas of consumer growth – quad play bundling. It has been assumed for years that this trend would finally drive Vodafone to agree a merger or joint venture with Liberty, which runs cable operations in several key European markets including the UK (it owns Virgin Media). So far, despite many rounds of talks over the years, the only deal is in The Netherlands.
Vodafone’s need to team up with Liberty/Virgin in the UK may not be so urgent after all, The company is reported to be in talks with BT Openreach to co-invest in extending the latter’s fiber network to become far denser and reach a large number of premises. That would compete directly with Virgin, which has the biggest fibre network after BT and has been expanding its fiber-to-the-premise (FttP) reach.
A Vodafone-BT deal would address several issues in the UK market. It would give Vodafone more extensive fibre to support quad play services and to backhaul its small cell and 5G networks as those evolve over the coming years. Although Vodafone has made major fiber acquisitions or partnerships in some markets, notably with its purchase of Kabel Deutschland in Germany, in the UK it has only bought Cable & Wireless Worldwide, which has limited reach and mainly addresses enterprises.
Vodafone badly needs a stronger wireline base in the UK, where its mobile business is struggling to regain growth and is third in the market. In its first fiscal quarter, ended in June 2017, the UK was the only subsidiary where service revenues fell, and Vodafone has pressed the pause button on plans for a pay-TV offering. The Openreach deal could complement its relatively strong spectrum position and help it move into the multiplay segment for real.
The purported deal would help accelerate Openreach’s FttP roll-out, which has been criticized for it slow pace, but an investment partner would clearly improve the economics. By investing, Vodafone can dictate the pace of change and the pricing points for future broadband. And by not taking on all the investment itself, it will keep down the cost of building its network.
That might allay the fears of Vodafone and its fellow MNOs, Telefonica O2 and Three UK, that BT’s acquisition of their largest rival, EE, will lead to preferential access to fibre for that operator. Regulator Ofcom has taken various steps in the past year to ensure separation between BT’s retail and wholesale operations, but stopped short of a full break-up, so MNOs remain wary of being too reliant on a BT-owned subsidiary for their fibre, as this becomes ever more important to their network plans.
They do have other options, such as Virgin itself and a rising number of wholesale or dark fiber providers such as CityFibre and Fibrenet (the latter is focusing on dark fiber-to-the-antenna services for dense mobile networks).
And of course, Three and O2 may have even deeper suspicions about preferential access – for Vodafone rather than EE – despite any safeguards Ofcom may impose to ensure a fair market.
The regulatory situation in the UK is likely to be the stumbling block for a deal which otherwise has some logic for both sides. Leaks about the talks from Vodafone were clearly meant to sow the seeds of an arrangement which would see Vodafone get preferential access to Openreach fibre, in return for its investment.
The regulatory regime for fixed broadband in the UK is complicated. Openreach has been obliged to ensure arm’s length relationships for BT as well as all the other broadband providers, which offer unbundled or wholesaled broadband – including Sky, TalkTalk and to a far lesser extent the UK’s only cableco, Virgin Media.
Finding a financial formula which will allow a Vodafone/Openreach deal past the regulators is going to be tough. Ofcom has repeatedly had to push BT back into line in a market where competition is almost entirely based around the unbundled nature of broadband, with Openreach ultimately responsible for most broadband lines. The vectored nature of the newer high speed technologies, VDSL and G.fast, means that one player has had to take over all crosstalk cancellation at each telephone exchange, and that role has mostly been carried out by BT, which then supplies services to the other broadband providers on a virtual or wholesale basis.
Only Virgin stands out as a company that has its own end-to-end cable network, and currently it enjoys being able to offer the fastest broadband. BT, using first generation G.fast chips, has only managed to launch a 300Mbps service – which second generation G.fast chips will only take up to 600Mbps. This is because of the distances between cross-connect cabinets and each home, and extending fiber another few hundred feet closer to homes would see these speeds go up and over 1Gbps.
Not only is that plenty for next generation broadband access, but the extension of such lines would also mean that many more cellular small cells – a requirement of LTE Advanced and 5G – would be supportable from more backhaul points, and that’s what Vodafone really needs.
But by spending its own money, Vodafone would want privileged access to this fiber, and under regular Ofcom’s watchful eye, Openreach must treat every customer equally. About the only way we could see this working is if BT were ‘loaned’ funds to build out fiber and repaid the cost of financing the build to Vodafone over time, a move that would ensure that not only BT and Vodafone got all the bandwidth they want, but all of the other cellular and fixed broadband partners of Openreach also got an upgraded service.
In Spain, Telefonica has managed to reach deals with Orange and Vodafone to share fiber costs, and Vodafone has done similar deals in Portugal. But any deal that BT and Vodafone manage to agree will certainly be frowned upon by Liberty Global, since Virgin would likely see much of its speed advantage in fixed line broadband eliminated if this partnership goes ahead.
Only the ‘Brexit factor’ may push this past regulators, with a promise to get UK broadband ahead of the remainder of Europe, to support the idea that a decoupled UK will still be an attractive place to do business.
Sky UK has already said that it plans to deliver full TV services over broadband during 2018, and it should therefore be in favor of any plan to upgrade UK fixed line connections. It has previously supported what it calls a ‘take or pay’ approach to fiber upgrades where it identifies postcode areas where it can sell faster broadband, and offers to dump copper lines in favor of fiber, giving Openreach both a roadmap and the confidence to invest. This could be a blueprint for Ofcom, to offer all fixed lines customers, if it cannot be persuaded of the merits of one MNO getting so close to Openreach.
DT boasts of fibre lead in Germany:
In Germany, Vodafone spent about $10bn in 2013 on acquiring Kabel Deutschland (KDG), but according to incumbent Deutsche Telekom, the UK firm has some catching up to do.
“We have by far the largest fibre optic network in Germany, stretching over 455,000 kilometers,” corporate spokesperson Philipp Blank said in a media briefing last week. “Vodafone, in comparison, doesn’t even have 60,000 kilometers.”
Answering criticisms of the pace of its fibre-to-the-home (FttH) roll-out, Blank said: “In this year alone, we will connect a further 3m households to the super-fast Internet. Each year, we invest more than €4bn in Germany, which is a record amount.”
However, DT was being refreshingly honest about the real potential for FttH. Blank said discussions focused too narrowly on FttH and that “the benchmark is taken to be the stark figure of households with optical fiber lines (FttH), with no other factors taken into account. This misses the very important point that the actual objective is slightly different: providing people with high transmission speeds as quickly and as comprehensively as possible, something that is working very well in Germany.”
“We are committed to vectoring, because it is the only way to provide people in rural areas with faster lines, quickly,” said Blank. “If we are fixated on FttH, those in the countryside will remain left behind for years. It is simply impossible to roll out fiber lines to homes everywhere in the country. Neither the construction capacity nor the funding is available for that. Plus there is quite simply no demand for it.”