Why investing in a 'full fibre utility' for Britain has become so attractive

The appetite for investment in full fibre digital infrastructure has transformed over the past few years. I began looking at the sector seriously from an investor perspective in 2014, when I was part of Macquarie Capital’s principal investment group. Although still pretty nascent then, some investments had been made: CityFibre IPO’d on AIM in early 2014; Gigaclear took their first investment from Woodford’s new fund that summer, and George Soros’ Quantum Strategic Partners had invested £50m in Hyperoptic as early as May 2013. But convincing investors that fibre should be thought of as being like other types of infrastructure, such as utilities, was tough. It meant that fibre businesses, at that time, were not getting the investment they needed to build at scale. I decided to focus on this area when I took up a role advising the UK government on infrastructure finance in 2015. The problem was that the industry was only a few years old and was a hard risk for investors to take at that time, with opportunities in the sector considered sub scale. Fibre builders need long term, relatively low cost capital to match the long term nature of the assets that they build. Infrastructure investor’s relatively lower risk/ return objectives though, mean they prefer to invest in platforms where they can quickly deploy a relatively large amount of capital. Without this, the absolute ‘return on effort’ is too low, particularly when coupled with the need to take some construction and demand risk. While working for government, I led on the development of a proposal to address this, which became known as the Digital Infrastructure Investment Fund (DIIF). The idea was for government to become a cornerstone investor in a new infrastructure investment fund (or funds) that would have a mandate to invest in UK full fibre infrastructure. Government’s willingness to become a large, initial investor gave fund managers an incentive to develop a full fibre investment mandate. Requiring managers to match government investment with private sector capital – and on an equivalent basis – was key, as it ensured a fully commercially-managed fund that would make best use of taxpayers money. That initiative, combined with other financings and projects across Europe, has encouraged infrastructure investors to take a closer look at the fibre sector and recognise it as a long term, future-proof investment. It could be argued that the DIIF has been a success in this respect, even before any tax payer money was invested. In parallel though, a greater understanding by both policy makers and investors that 5G will also require significant fibre investment, means that whatever one’s view of the future of digital communications, ubiquitous fibre coverage will be essential. While investors have developed a more sophisticated understanding of the risks and opportunities associated with fibre investment, there are number of different business (and regulatory) models across Europe that need to be considered. Some of these reflect the internal regulatory and market dynamics of a respective market, but others have been designed to mitigate demand risk and/or focus on a particular niche within a given market. I believe CityFibre’s business model – which is effectively building a full fibre utility – has four key components that are attractive to investors. 1. Open access, wholesaler. Across each vertical (public sector, business, mobile and consumer) CityFibre’s model invites Communications Providers/Internet Service Providers (CPs/ ISPs) to offer services over the infrastructure it builds. With respect to Fibre to the Premises/ Home (FTTP/H), it is also considered the most efficient way to deliver network at scale across the country. The model allows infrastructure builders to focus on rolling out full fibre networks, while ensuring that all CPs can serve (and compete for) customers over it, thereby ensuring demand. Earlier this year CityFibre began building a full city FTTP network in Milton Keynes (the first of seven announced so far). Customers will soon be able to buy broadband services from their anchor partner, Vodafone, and shortly after the build is finished, in 2020, the network will be opened up to all ISPs; allowing residents to buy the best broadband available from whichever brand they prefer. By providing equivalent access to all, the incentives for any other provider to overbuild the network are removed. 2. No speculative build. CityFibre only builds network when it has a contract associated with it. A typical model would be to enter a new town or city by signing a long term anchor contract – often with the local authority – to connect a number of sites across that city. This ensures the capex invested has a yield associated with it from day one. With an anchor network in place, CityFibre then focuses on adding connections and extending the network to businesses, other public sector sites and mobile sites. Each new connection increases the overall yield by using existing network – at least in part. The FTTH contract CityFibre signed with Vodafone at the end of last year is an extension of this same model into the consumer vertical. In exchange for a short period of exclusivity – which broadly runs during a city build-out phase – Vodafone has agreed to a long term minimum volume commitment whereby it guarantees to connect at least 20 per cent of the homes passed by CityFibre’s network to ensure a minimum yield. 3. Well planned city methodology. When CityFibre enters any new territory, the aim is to eventually take fibre down every street and pass every property (to the fullest extent possible) in that town or city. This is achieved by designing a network architecture from the outset that will support delivery of whole-city FTTP in the future, even if all that’s physically built to begin with is what’s needed to serve the first anchor contract. Each subsequent contract win or connection then grows the network. Once enough of the core network is in place, cost-effective delivery of the whole-city FTTP vision becomes possible – supported as it currently is, by CityFibre’s contract with Vodafone. 4. Attractive price point. Full fibre digital infrastructure is vastly superior to part copper ‘fake fibre’ that the vast majority of businesses and consumers have access to today. This is not just about download speed, although this remains very important (e.g. how many people will be able to enjoy world cup games in Ultra High Definition), it’s about reliability, latency, resilience and symmetry (e.g. being able to upload as fast as you download). By rights, full fibre should be considered a premium product, but CityFibre’s proposition does not ask ISPs to persuade their customers to pay up now. Instead the pricing of its superior, gigabit FTTP service competes with Openreach’s basic, part copper “up to” 40 mbps service. It’s not alchemy; CityFibre is able to achieve such a price point because it is building a new network for new customers. The incumbent, by contrast, needs to upsell existing customers onto more expensive services in order to justify legacy infrastructure upgrade. The end result is that ISPs gain access to a far superior product experience at an equivalent or cheaper price, giving them far better margins. For their customers it’s about “more for less”, and this fuels demand. Together, these four components are the reason I believe CityFibre’s ‘full fibre utility’ business model is able to attract significant infrastructure investment and why it is now well placed to deliver at least a third of the government’s 15 million home target.