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UK's alternative fiber providers set for race against BT, Virgin Media O2

The U.K.'s smaller fiber broadband providers are winning new investment as they race to beat industry leaders BT Group and Virgin Media O2 into underserved areas of the country.

CityFibre Infrastructure Holdings Ltd. raised £1.13 billion in mid-September, including from Abu Dhabi's Mubadala Investment Co. PJSC and infrastructure investor Interogo Holding AG, as it works to roll out fiber to a third of the U.K. by 2025. Smaller competitors including Grain Connect and Trooli Ltd. have also found new backers this year.

So-called altnets' funding efforts have been bolstered by pressure from the government to roll out gigabit-capable broadband to 85% of premises by 2025. Industry regulator Ofcom has also this year ordered BT's broadband infrastructure unit Openreach to provide rivals with wholesale access to its network in areas where there is "potential for material competition," making it cheaper for altnets to offer fiber services.

The policies have "opened up the purse strings," Malcolm Corbett, CEO of altnet trade body the Independent Networks Cooperative Association, or INCA, told S&P Global Market Intelligence. "A lot of investment has flowed in since then."

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Altnets like CityFibre are targeting underserved areas, as these likely offer the best markets for capturing new clients. The firms are in a "race" against the incumbents in these parts of the country, Simon Holden, group COO at CityFibre, told the Connected Britain conference on Sept. 21.

As of May, only 40% of U.K. homes (11.6 million) had access to gigabit-capable broadband, according to Ofcom. Just 24% were covered by full fiber — where no copper is used in the network, allowing it to reach faster speeds.

The companies could be set for "huge success" if they arrive first in areas with slow and unreliable broadband, Robert Grindle, an analyst at Deutsche Bank, told S&P Global Market Intelligence.

BT aims to cover 25 million premises with fiber-to-the-premises, or FTTP, by the end of 2026, having previously raised its target from 20 million. Virgin Media O2, a joint venture between Telefónica SA and Liberty Global PLC, aims to upgrade 14.3 million cable broadband premises to FTTP by 2028.

Altnets intend to cover 29.9 million premises by the end of 2025, according to a report prepared for INCA. Coverage more than doubled last year to 2.58 million premises, with the number of live connections surging 130% to 845,000. The nation's largest altnets behind wholesale provider CityFibre include Hyperoptic Ltd, Gigaclear Ltd., G. Network Communications LTD and Community Fibre Ltd.

Bumps in the road

Risks for the altnets include arriving late in previously underserved markets, as few parts of the country can sustain more than two operators, Enders Analysis analyst Karen Egan said at the Connected Britain conference.

"Anything beyond that is an accident waiting to happen," Egan said. "Our concern is that many of those investors will turn out to be disappointed."

Other challenges facing altnets include gaining permission to install gear on private land.

Another rapidly evolving concern for the altnets is BT's proposed "Equinox" pricing plan, through which Openreach would offer internet service providers discounted prices if they use its fiber network, in exchange for staying locked in to Openreach for a minimum of five years.

"It is not easy for smaller operators to compete at these price levels," said Pantelis Koutroumpis, lead economist at Oxford Martin School, who has carried out research on behalf of Ofcom. Altnets expect to sell services to both ISPs and end users.

Openreach did not respond to a request for comment on Equinox.

Ofcom has said it expects the main ISPs to sign up for Equinox, given the discounts available. The regulator has provisionally approved the pricing plan, with a final decision due at the start of October.

INCA described Equinox as "a thinly disguised anti-competitive initiative" in a response to an Ofcom consultation on the plan.

Altnets are preparing for these industry challenges through both fundraising and consolidation. There has already been 11 altnet deals in the U.K. this year, including London full fiber provider Community Fibre Ltd.'s acquisition of Box Broadband Ltd., a Surrey-based full fiber network operator, in August. That follows 18 deals last year.

Further consolidation is "an inevitability," INCA's Corbett said.

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