Intelligens Consulting asks: how will the cost crisis affect UK fibre operators?

Last month, Iqbal Singh Bedi moderated a discussion panel with Kevin Murphy, CEO of G.Network Communications, Catherine Colloms of Openreach, Rob Gilbert of HFCL Limited and Carlos Lopez of Prysmian Group at Connected Britain to review the industry’s progress to building a gigabit Britain. 

This article reflects on the discussion and considers how operators might respond to the UK’s financial and economic crisis; how rural areas will be impacted; and what opportunities can come out of this crisis. If any.

Disclaimer: This article does not necessarily represent the views of the panel nor of the organisation they work for.

With everything that’s going in in the world it was inevitable that the discussion centred around one thing: the cost-of-living crisis, increasing inflation, and rising energy costs.

Fibre prices are increasing and this may be partly due to demand and partly due to a rise in energy costs

Optical fibre networks consume less energy than copper-based broadband networks. That’s a fact.

However, creating the glass fibre strands from raw materials in the first instance is an energy intensive process. Research shows that rising energy costs are already impacting the cost of fibre. Fibre prices in Europe have risen from USD 3.70 to USD 6.30 per fibre km. Fibre spot prices in India and China have also increased but to a lesser extent.

It’s not clear if the fibre cost hikes are purely down to rising energy costs. The demand for fibre is high, particularly in the UK, which may be contributing to the price hikes. Of the EU27 countries, the UK is one of the least mature markets for fibre coverage, and is a key reason why UK is currently a hotbed for fibre investment and is driving demand.

Rising costs don’t seem to be holding back gigabit ambitions

Operators could absorb a hike in costs as we suspect they may already be doing to avoie price increases. This will inevitably affect network build rates and profitability at some point in the future.

However, you may recall earlier this year we estimated that the top 10 fibre altnets in the UK have committed over GBP 10 billion to serve circa 20 million premises with fibre availability. To this date, those operators seem on course to meet their gigabit ambitions, undeterred. And, we have not seen any altnet, at least publicly, reverse their broadband ambition.

In addition, Openreach, which is passing some 60,000 premises per week, remains confident on reaching its 25 million homes passed by fibre by 2026 target.

Operators should develop pricing strategies to manage the impact of ARPU of ‘tier dropping’ and churn particularly in competitive areas.

Operators could increase broadband prices to accommodate rising costs. However, of the EU5 countries, the UK is already one of the most expensive countries for broadband.

This combined with the fact that UK incomes have also fallen significantly behind Europe may make increasing prices problematic as UK consumers will have less disposable income.

In addition, growing altnet and ISP presence will increase competition and consumer choice further limiting ISPs abilities to increase prices particularly in urban areas.

Then there is a small body of evidence that suggests consumers are already feeling the pinch and may not be able to absorb broadband price hikes given the decline to over-the-top (OTT) streaming subscriptions.

It is too early to say if the OTT decline will result in broadband churn given the current importance of high-quality broadband connections to enable home working and learning.

Consumers are more likely to switch to other operators with more competitive packages particularly in urban areas where there is competition. However, churn is less likely in rural areas where competition and choice are constrained. Rural ISPs may therefore be able to protect themselves better than urban ISPs.

Consumers may drop down to lower tier broadband packages to reduce monthly outgoings.

Operators may need to develop social tariffs to mitigate against churn

Just a few weeks ago, Ofcom issued a request to telecoms operators to better support customers as a record number of households struggle to pay bills calling on more operators to introduce social tariffs.

Our analysis shows that operators such as Community Fibre, G.Networks, Hyperoptic, BT and Virgin Media already offer social tariffs starting at GBP 10 per month. Depending on the operator the prices will not be subject to a price increase as a result of inflation subject to a 12-month contract.

According to Ofcom many operators still do not offer social tariffs concerned that this may erode currently monthly ARPUs. However, it may be a better strategy than losing customers to rivals.

Operators should refine their marketing propositions to emerge with a loyal customer base and review their operations to mitigate against future energy price hikes and reduce CO2 emissions

First and foremost, this cloud has a silver lining and presents the telecoms sector with plenty of opportunities.

ISPs that respond rapidly to evolving market conditions and those that develop compelling propositions will mitigate the impact of churn and ARPU decline better than those that do not. They will also develop a stronger and committed customer base presenting stronger growth opportunities in the future.

Operators can take this opportunity to work with their supply chains and civils contractors to seek out innovative low-cost approaches to deploying fibre networks particularly in rural areas to reduce the cost of deploying fibre networks, improving financial returns.

Operators should also use this as an opportunity to reduce energy consumption and CO2 emissions by identifying high energy consumption network components such as servers, batteries and cooling systems, replacing them with modern and more energy efficient components.

To further mitigate against future energy price hikes, operators may wish to invest in alternative renewable energy sources to power their offices, networks and data centres further reducing CO2 emissions.

This also presents an opportunity for new a new breed of wireless technology entrants; Whitehaul comes to mind - which is developing a long-distance gigabit capable wireless technology that can overcome line of sight limitations of current wireless gigabit solutions to unlock the rural gigabit opportunity for ISPs.