Over the past 15 years, alternative network providers, or “altnets,” expanded significantly in the UK, driven by the ambition to compete in the nationwide rollout of full-fibre broadband.
Despite reshaping parts of the telecoms market, many of these challenger companies have struggled to meet their initial objectives while competing with established giants BT and Virgin Media O2.
Mounting Losses
In 2023, collective losses for altnets reached a staggering £1.3 billion, according to an analysis of financial data by Enders Analysis.
The outlook for 2024 appears even bleaker, with James Barford, the firm’s director of telecoms, warning that rising interest costs could exacerbate the situation.
Investors have funnelled billions into the altnet sector, but increasing interest rates, operational costs, and financing challenges have created a difficult landscape.
Many altnets are finding it hard to attract customers away from the incumbent providers, further adding to their woes.
Investor Concerns and Fears of Consolidation
A senior executive at a digital infrastructure asset manager expressed serious concerns about the financial viability of many UK altnets.
They noted that a significant portion of these companies are “uneconomic” due to limited customer uptake and predicted numerous failures in the sector.
The executive also highlighted potential losses for lenders unwilling to write down their investments.
Consolidation in the altnet market is widely expected, but there is fear that such deals will come at valuations significantly lower than the initial capital invested.
Vicente Vento, CEO of investment firm DTCP, criticised some banks for financing projects that, in hindsight, lacked sustainable business models.
Penetration Rates Lag Behind Expectations
Enders Analysis has identified weak penetration rates as a critical issue for altnets. They estimate that a 40% customer take-up rate is necessary for reasonable returns, yet many providers are achieving far less.
For example, Community Fibre reported more than 310,000 customers by October 2023 out of 1.3 million premises passed, while Hyperoptic gained just over 340,000 customers from 1.73 million premises passed.
A senior infrastructure investor described the initial enthusiasm for altnets as a “gold rush,” with many underestimating the challenges of building, operating, and achieving sufficient market penetration.
They anticipate bankruptcies among weaker players, with their assets likely to be acquired at discounted rates.
Glimmers of Optimism
Despite the challenging environment, there are reasons for cautious optimism. Ofcom’s introduction of the “One Touch Switch” policy aims to simplify the process of switching broadband providers, which could boost altnet adoption.
Additionally, some altnets are beginning to focus on achieving profitability and cash flow self-sufficiency, rather than expanding infrastructure.
Ben Terry, senior investment director at Amber Infrastructure, emphasised the importance of demonstrating a clear path to profitability. He also noted that consolidation discussions are actively taking place, although disagreements over valuations remain a barrier.
Sector Reset and Future Outlook
Max Gilbert, managing director at Houlihan Lokey’s technology group, acknowledged that the sector is undergoing a “reset period.”
He expects a meaningful number of altnets to reach EBITDA break-even within the next year, though broader investor sentiment may remain subdued in the near term.
As the sector grapples with financial pressures, market dynamics, and consolidation, the future of UK altnets will depend on their ability to adapt, attract customers, and demonstrate long-term sustainability.
