How to scale-up your Alt.net – lessons from the UK’s first network cash tsunami
The wave of investment
Recent full fibre newsflow has been incredible. The scale of new investments is truly game-changing.
Investors are clamouring to buy into the UK Alt.net sector. Clearly convinced that infrastructure, rather than the more volatile full-service telco business model is a winner.
Take CityFibre, as an example. The business has invested around £25m capex per annum in its network in the last two years and done extremely well.
But assuming the bulk of its newly injected £2.5 billion investment will be spent connecting 5 Million homes to full fibre by 2025, CityFibre must ramp-up its annual network investment, by a factor of 15, or so.
Borrowing a golfing metaphor, this is not a ‘three-foot putt.’
Keeping the maths easy, this means todays’ capex level of £25m would rise to over £400m per year. That would demand standards of operational brilliance that would stretch even the most experienced management teams.
The list goes on and on.
Gigaclear, TalkTalk, euNetworks and Hyperoptic – they all have similar challenges.
The latest investor scramble has certainly driven prices and valuations sky-high.
This is brilliant news for Alt.net management teams who have travelled many hard miles in recent times. They’ve managed to successfully bootstrap their businesses when cash was one of many critical everyday constraints.
It’s really gratifying to see all their hard work validated and endorsed in this way. But now all these businesses have a once-in-a-lifetime opportunity to take the fight to BT on full fibre.
But some of us have seen this movie before. A familiar plot in a different setting – with a different cast.
Old things that seem new
At Mentor, we have a long corporate memory. And it’s one way we help clients to run the right programs in their businesses – and get wayward programs back on track.
Who remembers the dawn of the UK cable TV industry back in the early 1990s? There must be a few of you around.
It is an uncomfortably similar story to what’s going on today.
Back then, investment was pouring into companies. Only this time they were building cable TV networks in different franchise areas across the country.
The companies are marketing aggressively. They undercut BT on call charges by up to 20 per cent and have lower connection charges as well.
Mary Fagan “Better connections pay off for cable networks”. 11 October 1993.
It’s fair to say UK cable TV did not turn out to be the goldmine investors predicted. There was a lot of collateral damage.
Over time, this patchwork of networks merged, little by little, into one national network. It was bashed together over many years at titanic expense – and the result is what we call Virgin Media today.
But it’s worth remembering, it was a tempestuous time for most of these businesses. Assets were embarrassingly written-off at least twice – along the way.
We all want a scale full fibre competitor to Openreach – so what are the similarities and differences this time around. What can we learn to help achieve what we all want?
For simplicity, let’s call this new competitor ‘NewReach.’
Why the UK cable TV story is similar to Alt.nets
Today, UK cable and Alt.nets both face building totally new infrastructure networks on a very large scale – and at unparalleled pace – to deliver their business plans.
That’s pretty tough to do.
Both groups must plump for where to build and choose an architecture and a topology. If this isn’t difficult enough, they also need new vendors and street furniture.
Engineering contractors must be chosen – implementation teams appointed, permissions sought, and bulldozers unleashed.
Back in the 90’s, this was an unmatched new infrastructure build.
25 years later, a new generation of companies – the UK full fibre Alt.nets – are setting off down the same road.
The ‘forerunners’ of Virgin Media set up comprehensive IT systems to plan, build, and manage their networks.
This time around – full fibre Alt.nets have done the same.
In the 90s, the cable franchises and the Alt.nets always felt the competitive threat of BT. In the case of cable, BT eventually won the freedom to carry TV over its network and invested in DSL, which went on to become what we call ‘broadband’ today.
There’s little point in repeating BT’s unhelpful influence on UK full fibre today. But the resemblance to events 25 years ago is remarkable.
Back in the cable days, the entire country was divided into franchises – each franchise was allocated to one company. Naturally, some franchises were more valuable than others – and at least one American Telco investor tried to aggregate a series of franchises, covering the North West of England.
In another innovation, the winners of some London franchises tried to link together to pass traffic to each other across the capital.
Another crucial difference for cable was that the core business case was discounting old-fashioned telephone calls versus BT’s prices – not just the TV service.
Data was not a consumer product in those days, and the internet as we know it today, was still nearly 10 years away.
But thinking about lessons with 20:20 hindsight, eventually UK Cable did end up as one substantial and very effective competitor to BT, providing a full range of consumer services in the most lucrative areas of the country. Around 60% of it.
The Cable Television Association, predicts that cable networks will cover three-quarters of the population of the UK within 10 years.
Mary Fagan “Better connections pay off for cable networks”. 11 October 1993.
Today, this would be a very credible definition of success for UK Alt.nets.
If that’s accepted, it would make sense to start collaborating on key network and system standards now – simply to avoid the horrific network and IT integration problems that crippled the cable industry for years. These issues slammed the brakes on integration and trashed a lot of investor value on the way.
Back to the Future
Geography is the first consideration for infrastructure like this.
The most valuable districts will already have two providers – Virgin and BT. Both will strongly compete against any new entrant with full fibre services – including building their own new infrastructure, where necessary.
We can’t afford to have 4 providers in the same streets, can we? Ethically, we must somehow arrive at one ‘NewReach’ forerunner in each patch.
Another important difference is that the ‘NewReach’ forerunners are focused on wholesale business.
Many Alt.nets are delighted they don’t have the call centres, systems or people complexities required to provide services to end users.
But let’s be clear, Alt.nets desperately need revenue that only customers can bring.
So, partnering with the large, independent broadband service providers – like TalkTalk, Sky, and the mobile operators – would seem the logical conclusion of their wholesale play.
Realistically, it’s a good bet that no one will easily win wholesale business from BT and Virgin.
BT is fighting back, promoting itself as the most experienced and credible provider of telephony and emphasising much-improved quality of service over the past few years.
Mary Fagan “Better connections pay off for cable networks”. 11 October 1993.
In part, the current ‘wall of cash’ is a reflection of backers viewing these businesses as utility infrastructure. This implies they are seen more like monopolies – and less like dynamic retail businesses.
But to secure steady long-term wholesale revenues these wholesale businesses need customers just as much as retail businesses.
In the end, there is only one source of revenue.
Getting customers on the network really accentuates our IT standards point. Different wholesale integration requirements for each Alt.net will cause a great deal of unproductive complexity. Embedded complexity hobbled NTL and Telewest performance for many years.
Simply put, unravelling pointless complexity means high cost, operational difficulties and delayed revenue too.
Final comment on execution
This is the most ignored and trivialised challenge in this whole scenario.
Execution is one of those words that managers make light of and consistently gloss over. These network builds will be a huge challenge – and one that is beyond many management teams. But many companies say “this is what we do!”.
But they don’t “do” anything close to this.
It shouldn’t be a surprise – that the demands of this particular scale-up are, in a word, colossal.
Specialist contractors are needed to build these networks. We know from full fibre builds we are involved with, firms with proven execution track records are few and far between.
The truth is they are modest sized businesses, working on wafer-thin margins with limited capital to expand. Some are already booked solid with work for months – even years to come.
They’re much more likely to push prices up than they are to dramatically scale up.
Even if these firms could step up, the ‘black sheep’ of the industry, Openreach has been busy recruiting and training people for its own full fibre build for many months already. They currently employ 22,200 field engineers and, in the last year, hired 1,800 new engineers.
Where will the rest of the resource come from for the Alt.nets?
Bear in mind that no one has attempted a scale-up like this in the last 25 years – except, ironically, Virgin Media. Reports of their ‘Project Lightning’ debacle – run by ‘experienced’ industry veterans – reads like a script from a disaster movie.
We have a huge opportunity in front of us. The Alt.nets have received the best possible endorsement of their strategy. Investment capital is pouring in freely and that’s usually the most difficult resource to get.
Going forward – let’s learn from the past
The medium-term goal should be to build “NewReach” – a scale, modern, efficient, full fibre utility – fit for the 21st Century.
But for now, there are three essential things we need to work on together:
1. Well-designed and executed implementation programs that combine the lessons from the past with new innovations. And create the momentum we need to keep all stakeholders in harmony – investors, service providers, customers and the government.
2. Sensible, compliant, geographic organisation to avoid futile overbuilding
3. The minimum set of common standards that will make the Alt.nets ‘easy-to-do-business-with’ and ultimately, easy to merge. There should be no superfluous differentiation.
At Mentor, we know what it takes to deliver these programs. We are already working with some and ready to step in to help others.
But here’s a few sobering thoughts.
Most management teams were not around when the last major builds were done. Even if some of them were involved, they certainly weren’t ‘accountable’ for building them. The really battle-hardened people who knew how to do this have retired, moved on or passed away.
Tough as it may be to hear – many of the current generation of managers ‘don’t know what they don’t know.’ Naivete with a dash of arrogance is a deadly cocktail and won’t sit well with the scaling-up challenge.
The truth is there’s a ton of investor money chasing the same opportunities – in exactly the same places – in the same time-frame.
If you sum up the aspirations of all of the fibre business plans around at the moment, it’s clear that some businesses will take an absolute hammering. Just like most of the cable franchises 25 years ago – who tried, in vain, to ‘wish things into place.’
But few think their particular business will get hammered.
What’s going to prevent it? Only flawless execution plans – rooted in reality – will nip it in the bud.
It’s worth remembering that targets are not plans.
There’s a world of difference between a target and a properly constructed execution plan that can – and will – deliver.
The good news for those with execution challenges is there’s a wealth of battle-tested wisdom around to help companies who don’t want to be bayoneted in the first skirmish.
Mentor is a business that truly understands what needs to be done. It’s in our DNA.
A ‘dead duck’ is entirely preventable.
There’s absolutely no reason why your business should not capitalise on the astounding financial rewards that full fibre offers. No reason why your business should not be a runaway success – provided you don’t skimp or sleepwalk into a needless crisis.
While several Alt.nets would like to be ‘the consolidator’, CityFibre has the biggest opportunity to be the ‘NewReach’ consolidator – but strangely enough, they also have the highest risk/reward execution challenge.
What do you think? Get in touch at enquiries@mentoreurope.com and let us know!
