Insights Regulatory challenges adding to burdens on UK altnets as full fibre coverage falters at 42%

UK full fibre coverage has only recently hit 42%, which is a way to go before meeting the UK’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.

The latest BT results show 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 INCA.

Alongside the 9.6m premises Openreach has announced, Ofcom states 12.5m premises (42% of UK premises) are now covered by a full fibre network. Notwithstanding increasing levels of overbuild by altnets and Openreach in its 9.6m premises passed, this means that almost 3m premises are being connected by altnets alone. It’s 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. Whilst no small feat, it’s a long way from the majority of UK premises benefitting from full fibre network connectivity and from meet the UK Government’s gigabit-capable coverage target of 85% by 2025. Coverage is also only half the story, as altnets need to also win customers to make a return on their investment. Without being able to demonstrate sufficient take-up on networks already built, it is unlikely altnets will continuing expand their network footprint at pace into what would be more remote and increasingly less economically viable areas.

With this in mind, altnets face a number of challenges in the UK as they go into 2023:

  1. BT Openreach’s commercial strategy: As we reported here, Openreach has recently introduced its ‘Equinox 2’ pricing offer, which sees wholesale FTTP prices drop significantly.
    • Altnet operators may struggle to compete against both the price levels and conditionality of the pricing offer.
    • While Ofcom is currently in consultation with 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.
  1. Ofcom and regulatory changes: several substantial regulatory changes are due being implemented this year presenting significant challenges to altnets:
    • The new broadband switching rules and General Condition (GC) obligations on operators, which come into effect 3rd April 2023. Ofcom requires 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 who 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. 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 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 Code of Practice and is currently working with industry to map out more detailed processes. Reporting and ensuring compliance will be no small task for industry, particularly for any resource-strapped altnets. Although some altnets will likely fall into the ‘Tier 3’ 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’s announcement reviewing inflation-linked retail broadband price rises. 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. Whilst its clear 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 to announce its new rules on net neutrality and what is permissible. Ofcom has recently been consulting on the issue of net neutrality and asked the question on whether it needs to refresh its approach. As part of its consultation Ofcom set out a number of proposals giving ISPs somewhat more freedom over traffic management and packaging services to end-users. Any significant changes however would require legislation (e.g. a ‘fair share’ payment regime). Any new rules following Ofcom’s final statement could have important implications for competition across the altnet value chain.
  1. Beyond Ofcom: it’s not just Ofcom that is seeing change this year.
    • The ministerial function overseeing the UK telecoms industry is moving from DCMS to the newly established Department for Science, Innovation and Technology (DSIT). 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 this year. 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 UK’s economic and digital future:

  • In recent research by the consultancy Hatch, it identified over £38bn in potential economic benefits, derived over a fifteen-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 CEBR 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.

Ofcom has a role to play in ensuring that altnets can continue growing and innovating, whilst ensuring 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.