Vodafone extends broadband reach with new Openreach agreement

Vodafone has broadened its fibre footprint to Birmingham, Bristol and Liverpool after signing a new wholesale agreement with Openreach.

The Vodafone business might be primarily known as a mobile business to most, though it has been making strides into the broadband world after signing an agreement with CityFibre last year. What this wholesale agreement with Openreach looks like is an effort by Vodafone to expand its fibre footprint in areas where its primary partner, CityFibre, does not have a presence.

With this wholesale agreement in place, Vodafone will soon be able to offer fibre broadband services in 15 locations throughout the UK.

“Vodafone is committed to a full fibre future and to creating the infrastructure Britain needs to compete and win in the digital era,” said Vodafone UK CEO Nick Jeffery.

“This initiative with Openreach builds on our existing commitments with CityFibre and underlines our belief in the power of digital technology to connect people for a better future and unlock economic growth for the UK.”

As part of the agreement, Vodafone’s Gigafast Broadband service will be available to customers in Birmingham, Bristol and Liverpool on the Fibre-to-the-Premises (FTTP) network from 2021. The first phase of the Openreach rollout is currently underway and the team plans to be able to reach as many as 500,000 customers on this network by mid-2021.

For Vodafone, this is a wholesale agreement which makes sense. The partnership with CityFibre looks to be one where the terms and conditions are very favourable to both parties, however Vodafone will want to be a service provider which can offer broadband to everyone. The CityFibre deployment strategy means secondary partners will have to be sought.

As part of the CityFibre agreement, Vodafone has made a minimum volume-based commitment for 10 years which increases over the period to 20% of the initial one million premises. In return, Vodafone has a period of exclusivity for consumer fibre-to-the-home services from CityFibre for 12 months, though the time-period is nuanced depending on location and the phase of network construction.

The CityFibre deployment strategy is also a point to consider here. CityFibre is targeting small and medium sized cities, as well as larger towns. These are areas which are generally not being targeted by the likes of Openreach or Virgin Media for fibre deployment. The idea is to create a scaled challenger, and targeting areas where rivals aren’t is a perfectly reasonable strategy.

In short, Vodafone will use CityFibre infrastructure as default, and Openreach in locations where it is not available.

For Vodafone, this partnership demonstrates something which many will see as a plus; ambition. The team is seemingly attempting to expand the fibre service offering to more regions across the country, which should add greater confidence in its pursuit of making a meaningful impact on the segment.

UK security chiefs reportedly warn PM against banning Huawei

The UK is much less likely to hit ambitious broadband targets if Huawei isn’t involved in the 5G network, Johnson has apparently been told.

The report comes courtesy of the Mail, which reckons the National Security Council has been warned that Prime Minister Johnson can forget hitting his 2025 fast broadband targets if the UK’s 5G network isn’t up to scratch. This would apparently be made inevitable if we didn’t let Huawei participate, the NSC has apparently conveyed to the PM.

When BoJo first announced his ambition broadband targets they seemed to be focused entirely on fibre, but it looks like he has been subsequently advised that there’s this thing called fixed wireless access that is really handy for connecting remote locations. His patient telecoms advisors will presumably have then pointed out that the kind of FWA needed to help him hit his targets would require a decent 5G network, hence the Huawei angle.

This leak to the Mail, presumably from somewhere in the government, seems designed to serve two purposes. The minor purpose is to rebrand BoJo’s pledge as being focused on outcomes rather than technology types. But the main reason for it is probably to provide cover for the decision not to block Huawei from the 5G network, which seems to have been made already but won’t be announced until after the general election.

US President Trump is a Johnson supporter, but that relationship will be strained if BoJo decides not to tow the US line on Huawei. Maybe BoJo is hoping to use his own broadband pledge as mitigation during the inevitable awkward conversation he will have with Trump after announcing he’s not blocking Huawei from the UK 5G network.

Vivo introduces FTTH franchising model in Brazil

Telefonica’s Brazilian brands Vivo and Terra have launched a franchise model for its fibre rollout plans seemingly to ease the financial demands of the digital economy.

Working with local partners, the initiative will focus on cities with populations between 20,000 and 50,000. The aim will be to add an additional 1 million households to the fibre footprint by 2021, taking the total north of 15 million.

“Population demand is for the internet, and Vivo is the only company in Latin America to invest heavily in a fiber project, promoting a unique experience for its customers,” said Fernando Duschitz, Senior Franchise Manager at Vivo.

“This new business model from Vivo is an opportunity for companies and investors who want to enter this market, as well as for those already acting as providers, to benefit from the strength of the Terra brand, with Telefonica scale, and Vivo quality, as well as of all our experience in expanding fiber, present today in 154 cities across the country.”

Just to paint a bit of context to the situation, Telefonica is a company which is not in the most comfortable position when it comes to debt. While debt had been reduced to €41.785 billion, this is still seemed too steep for investors. Various other strategies have been introduced, such as a new business model for the tower division, though this franchise idea also aids the pursuit of a future-proofed network.

This is the conundrum being faced by Telefonica. The management team does need to reduce debt, though it also needs to find investment for fibre and 5G deployments. Without these investments, rivals would gain the upper hand and potentially erode profits as customers elect for better services. Franchising certain localities in Brazil is a compromise, lessening the financial impact to fuel the mission for future-proofed networks, but weakening control.

Franchisees will be responsible for developing all necessary network infrastructure, as well as managing the operation, including sales, service and installation. On the other side of the deal, Vivo will offer agile processes, managerial and technical training, access to tiered qualified suppliers, unique central call centre, network topology ensuring stability and scalability.

Although not many telcos are facing the same debt challenges as Telefonica, finding cash to fuel network upgrades and deployment is an industry-wide conundrum. Compromises will need to be made, and this is certainly an interesting idea.

UK’s Zen Internet gets a £20 million overdraft to take on the incumbents

Independent UK ISP Zen Internet wants to take on the big operators and has secured £20 million in credit from the NatWest bank to help with that.

The announcement is full of fairly vague, generic pledges to invest the money in growth and that sort of thing. Among those investments will be Zen’s network infrastructure, but no specifics were offered. Zen’s ‘independent network’ currently covers less than a third of the country, so the most obvious area of investment would be to increase that coverage, although even £20 mil won’t get you that far.

“This is a very exciting time for everyone at Zen, including our customers and partners,” said Paul Stobart, CEO of Zen Internet. “As an organisation we will continue to focus on sustainable growth, rather than short term profit, ensuring that we do the right thing by our people, customers and partners.

“A portion of the funding will be used to refinance debt, whilst the balance will be reinvested into our network infrastructure, people and product offerings. We believe that through our exceptionally dedicated people, award-winning services and leadership, we are in a great place to do things differently and achieve our ambitious business targets over the next few years.”

Zen also got a few city types to say how great it is that it can now borrow more cash. Around half of it is apparently earmarked to install Zen gear in 250 exchanges, which will bring its total number of exchanges to 700. Some reports have said that will cover 80% of the country but Zen itself only claims to cover 500,000 of the 1.7 million postcodes. Either way it’s good to see indies giving the big four a run for their money.

Revenues are down, but BT looks ready to do battle

Total revenues and profits might have slipped slightly at BT, though it met expectations and it seems the business is lining-up its pieces for an assault on the UK market.

With the assets the telco has at its disposal, BT should dominate the market leaving the scraps for rivals to fight over, but this has not been the case. There have been some lavish spending sprees over the last few years, though the refreshed management is taking a more network-orientated approach as opposed to the ‘bells and whistles’ of the previous regime.

“BT delivered results in line with our expectations for the second quarter and first half of the year, and we remain on track to meet our outlook for the full year,” said CEO Philip Jansen.

“We’ve invested to strengthen our competitive position. We’ve accelerated our 5G and FTTP rollouts, introduced an enhanced range of product and service initiatives for both consumer and business segments, and announced price and technology commitments to deliver fair, predictable and competitive pricing for customers.”

Capital expenditure for the first six months of 2019 was £1.88 billion, up £225 million year-on-year, although this excludes the grants from the Broadband Delivery UK (BDUK) programme. Such increase should come as little surprise as the team has been enthusiastically shouting about 5G launches across the UK (now up to 20) as well as new homes which are being passed with fibre (23,000 per week) in pursuit of the Government’s lofty full-fibre goals.

In years gone, BT looked like a telco which was defined by its challenge to Sky in the content market, while few could recognise the synergies with EE. The BT of today looks very different, thrusting the connectivity assets to the centre of the business. With the convergence business model proving its worth in various European markets, see success at Orange for evidence, BT is taking inspiration.

With the fixed network in the UK, which is being aggressively fibred-up, 30 million mobile subscribers, five million wifi hotspots and a new TV proposition to be launched at some undefined point, the cross-selling opportunities are abundant should BT be able to nail the experience on the assets. This seems to be the focus of investments under Jansen, instead of going for the glamorous, the team is concentrating on delivering the core connectivity experience and then bundling on additional added-value options.

Across the business, the Average Revenue per Consumer (ARPC) for broadband remained relatively flat at £38.5 per month, while postpaid mobile decreased to £20.8, down 5.5% though as this has been attributed to new regulation and the SIM-only trends it is nothing too be too concerned about. Interestingly enough, the number of Revenue Generating Units (RGUs) per household has increased to 2.38. This is where the convergence strategy could make a very positive impact.

As a business model, convergence is more efficient and creates higher customer loyalty and NPS. Bundled at a suitable price-point, and it looks like a very attractive offer to steal subscriptions from rivals also. However, experience does have to be very high across the entire portfolio, hence the increased spend on the network over recent months.

This is where BT could be a very interesting business over the next couple of months. The ‘Halo’ converged products could attract interest, especially when the hotspots are bundled in also. Rivals might be able to compete with BT with a few bundles, but no-one can offer the same breadth across mobile, broadband, wifi and content. This is a massive advantage, and BT should be shouting and screaming.

We might have to wait a couple of months before the refreshed TV proposition is fully polished, but this is another reason why no-one should worry too much about the slipping revenues for H1. BT is still lining up the various pieces before an aggressive push with the full convergence offer. It has been suggested the TV proposition will not be ready until the new year.

With its assets, BT should be untouchable. It still has work to do on the fibre rollout, 5G deployment, finalising the TV offer, improving the wifi experience and aligning the BT and EE brands, but the ‘Halo’ converged offer could create some serious noise.

2019 First Half Financials
Total Revenue £11.467 billion (1%)
Profit before tax £1.333 billion n/m
Profit after tax £1.068 billion n/m
Basic earnings per share 10.8p 2%
Capital expenditure £1.882 billion 3%
Business units
Consumer £5.194 billion (1%)
Enterprise £3.055 billion (5%)
Global Services £2.196 billion (6%)
Openreach £2.356 billion n/m

n/m = not-meaningful

Government policy has held UK back in pursuit of digital economy

While the investment climate for connectivity infrastructure has certainly been improving in recent years, a proactive and prioritised government is critical to ensure rapid evolution to the digital economy.

Across the world, the climate for investment in connectivity infrastructure is improving. There is plenty of demand from both the consumer and governments to build the business case for deployment of fibre infrastructure, though more could still be done in certain markets.

“The digital economy does not work without the government, especially in the rural areas,” said Dick Van Schooneveld of Mahler Corporate Finance at Total Telecom Congress this week.

This is the challenge which some telcos and governments are facing when it comes to attracting investment; the political and regulatory environment is not always very helpful. There are some bright spots across the world, Portugal for example as well as Sweden or South Africa, but some are lagging considerably.

According to Mikael Sandberg, Chairman of VX Fiber, the political and regulatory climate in some nations, such as the UK, has been a point of suffocation when it comes to investments in connectivity infrastructure. This has allowed other nations to leap-frog the UK in pursuit of the riches promised by the digital economy.

The difference between these nations which have made strong progress and those who are lagging, is the ambition of the governments involved and the ability to see the bigger picture. In Portugal or Sweden for example, public/private partnerships to invest in full-fibre infrastructure might expensive but it is very attractive in the long-run.

Sandberg suggested more than 50% of Swedish enterprise organizations have adopted full-fibre connectivity products and the benefits are significant from a productivity perspective. The more successful these businesses are, the more jobs which are brought into the economy and the more tax which is contributed back to the government.

The gains are quite clear both in terms of revenue for the public coffers and political capital gained in the eyes of voting citizens.

And while there are clear and measurable benefits through prioritising such investments, the likes of the UK and Germany have suffered. There have been policies in play which have steered the government away from such lavish spending, austerity measures in the UK for example, though the repercussions of these decisions are perhaps being felt now.

There are still many questions which need to be addressed to fully understand and appreciate the impact of the digital economy, and of course many areas which need to be tackled to mitigate the risks. However, will the right political climate, connectivity infrastructure is looking like an attractive investment to the money men. Unfortunately, there are still countries which haven’t balanced the equation.

Verizon unveils mixed bag as media continues downward spiral

Verizon has released its third-quarter financials with the mobile business growing, broadband middling and media dropping.

Total revenues for the three-month period ending September 30 stood at $32.09 billion, a 0.9% increase year-on-year, though it has racked up $97.093 billion across 2019. As with previous quarters, there are positives to take away though the media business is still weighing heavy on the prospects of the group.

“Verizon continued its momentum in the third quarter by driving strong wireless volumes in both our Consumer and Business segments, while delivering solid financial results, highlighted by continued wireless service revenue growth, increased cash flow, and EPS growth,” said CEO Hans Vestberg.

As many would have imagined, little attention was given to the fragile media business. With each financial statement, the $5 billion bet on Yahoo’s media assets looks a little bit more like a waste of funds. Revenues in this business totalled $1.8 billion, down 2% percent year-on-year.

What was supposed to be the pursuit of alternative revenues in the ever-growing digital advertising segment is seemingly turning into nothing more than an Elephant’s Graveyard for assets in the digital economy. Aside from divesting interests in Flickr, Moviefone, MapQuest and Tumblr, Verizon is also reportedly on the search for a buyer for the Huffington Post. Perhaps executives have just had enough and are searching for a way to elegantly backtrack.

The failings of this business unit have been well-documented, so we do not want to invest too much time here, but Verizon was always going to fighting a losing battle. Winning a slice of the digital advertising profits requires out-of-the-box thinking, the ability to make money out of nothing. This is what Google, Amazon, Facebook and other innovative digital players can do.

But Verizon is not that type of business. It is a functional, engineering-focused, traditional beast. From a culture and risk-appetite perspective it was always going to struggle to compete with the lateral thinking Silicon Valley residents, and this is further evidence.

That said, when Verizon focuses on what it does best it can make money. The mobile business unit boasts of 193,000 retail postpaid net additions over the quarter and revenue growth of 2.6% year-on-year. Revenues for the broadband business are down year-on-year, but the number of Fios subscriptions are up 2.3%. It might not be as exciting to talk to investors about the world of connectivity compared to digital advertising, but it is what the company is very good at.

The team should of course attempt to secure new revenues to bolster the bottom line as the business of connectivity becomes increasingly commoditised but taking on the likes of Facebook and Google for digital advertising revenues always looked like too much of an ask.

Although this is a dampener for the Verizon business, there is more than a glimmer of hope around the corner; 5G.

There might be some questions regarding the coverage of its mmWave spectrum, but Verizon is making progress with 5G deployment. Alongside the financial results, the team also hit the go button for 5G in Dallas, Texas and Omaha, Nebraska. All of the launches are very limited from a coverage perspective, but momentum is gathering very quickly.

5G can form the catalyst for growth is the telcos force themselves through their own digital transformation. Let’s be clear, the telcos will not escape the utilitisation trends with 5G alone. The business needs to be transformed to offer new connectivity solutions to enterprise and consumer customers alike. Digital transformation is a more pressing concern for telcos than any other vertical.

But there is hope on the horizon. The lure of 5G contracts are proving to be tempting for consumers, which will help the bottom-line as data tariffs quickly surge towards unlimited as standard, and enterprise customers are enthusiastic about the connectivity euphoria. There are of course companies who want to steal the profits from the telcos, but the opportunity is still there.

Investors scupper Sunrise expansion plans

Sunrise has cancelled an Extraordinary General Meeting (EGM) to secure acquisition funds to acquire UPC Switzerland after investors rejected the move.

Announced back in February, Liberty Global proudly proclaimed it had offloaded its Swiss business unit, UPC Switzerland, for $6.3 billion. At the time, the acquisition looked expensive, and it now appears the investors aren’t prepared to foot the bill.

“We regret cancelling the EGM,” said Peter Kurer, Chairman of the Board of Directors of Sunrise.

“We have spent a significant amount of time engaging with our shareholders and continue to believe in the compelling strategic and financial rationale of the acquisition.”

To fund the acquisition, Sunrise was attempting to force through a 2.8 billion franc rights issue, though this was opposed by Freenet, Sunrise’s biggest shareholder, as well as several other investors. With the opposition from such weighty investors, the writing was clearly on the wall for the Sunrise management team.

While the deal had already received regulatory approval, the usual stumbling block for consolidation in smaller markets, all the opposition arguments come back to the price of the acquisition.

For Sunrise, this was supposed to be a deal which would allow it to compete on a more level footing with market leader Swisscom. With UPC Switzerland introduced to the mix, Sunrise would have inherited mobile subscribers to boost market share, but also a fixed business unit which passes more than 50% of homes across Switzerland.

Theoretically, the inclusion of such assets would have enabled the business to create an attractive convergence model to challenge the leadership position of Swisscom, but it was too expensive.

Just to put things into perspective, the current market capitalisation of Sunrise is roughly $3.57 billion, less than half of the value of the acquisition. This is not necessarily unusual, though when you look at what is being acquired the numbers start to look a bit suspect.

UPC Switzerland has passed just over 2.35 million homes with its fixed network, roughly 50% of the country’s total households. It has 1.07 million broadband subscribers, and 1.04 million video customers, 599,400 of which are premium. The mobile business currently has 173,400 subscribers.

In the three-months ending June 30, revenues at UPC Switzerland stood at $315 million, a year-on-year decrease of 5.2%. The revenue dip was attributed to poor performance in the fixed business unit, though this might be down to decreased marketing activity as management team cast its eye towards the Sunrise transaction; it isn’t necessarily a dip to read into too much.

Investors clearly do not believe these numbers justify a cheque worth $6.3 billion. Just to put it into context, BT acquired EE for £12.5 billion in 2016 and inherited 30 million mobile subscribers at a very similar ARPU.

For Liberty Global, this would seem to be back to the drawing board. The team is attempting to reduce exposure in Europe, refocusing attention on South America, and this will be a disappointing outcome.