The CEO of Virgin Media’s co-parent operator Liberty Global, Michael Fries, has given a useful update on the progress they’re making with opening up their UK broadband network to wholesale (NetCo), the potential for consolidation within the alternative network (altnet) market and their position with respect to ISP TalkTalk’s debt problems.
Just to give a little context. UK ISP Virgin Media previously announced that their own network of 16 million premises passed will be opening up to wholesale via NetCo in H1 2025 (here), which Michael Fries told investors this week was still on-track to start during the first half of 2025, and they’ll begin “financing discussions probably commencing really Q4 this year“.
As a complement to that, Virgin Media’s Project Mustang is busy upgrading their older Hybrid Fibre Coax (HFC) and Radio Frequency over Glass (RFoG) based FTTP network – covering over 16 million premises (c.14.3m via HFC) – to harness XGS-PON based FTTP technology by 2028.
Finally, Telefónica, Liberty Global and InfraVia Capital Partners also setup a £4.5bn joint venture called nexfibre (here), which aims to deploy an open access FTTP (XGS-PON) wholesale network to reach “up to” 7 million UK homes (starting with 5m by 2026) in areas NOT served by Virgin Media’s own network of 16m premises. But Virgin Media, which shares some of the same parentage, is currently the only ISP on this network (here).
The rationale for the combination of their new NetCo and Nexfibre business was given a little more colour by Michael Fries yesterday. In addition, they also now seem to be expecting closer 21-22m premises passed in total, rather than the 23m maximum previously touted.
Michael Fries said:
“Together with our JV, which we call nexfibre, VMO2 will ultimately have access to between 21 million and 22 million fibre [FTTP] homes in the U.K. and that’s about 80% of the urban market. And the combined network would be available to third parties, potentially driving utilization and newfound wholesale revenue.
So why are we doing all this? What is the rationale for what appears to be from the outside of relatively complicated restructuring of our operations into NetCos and ServCos in these 2 markets? I think the answer is pretty straightforward, actually.
On the NetCo front, once the physical infrastructure is isolated in these platforms, they can generate made stable and high-margin cash flow driven primarily by the fixed monthly wholesale payment they receive from retailers for utilization of that network. As the utilization rate climbs, the cash flows improve, driving long-term returns to financial and strategic investors. These platforms also allow us to attract new capital which helps accelerate our network upgrade and extension plans and they can facilitate in-market consolidation of both network and operating platforms.
The remaining ServCo can also benefit from the separation which we end up with is an asset-light, typically a digital-first business model that prioritizes customer experience in order to differentiate from other retailers. There’s more focus inevitably on innovation to drive new revenue streams as well as the opportunity for end-market consolidation of other B2B and B2C service providers.”
The discussion later turned to consolidation, which is an area that the CEO of nexfibre, Rajiv Datta, has previously indicated (here) is something they were open to exploring further (i.e. like the deal they did to acquire Upp). But he also stressed at the time that their main plan was still based around build. Suffice to say that Michael Fries follows a similar line and seems to indicate that consolidation is a tougher sell for their approach.
Michael Fries said:
“I mean you are seeing a slowdown in build as financing and capital slowly dries up and I think that will continue. There will be winners and losers in that game. Some continue to raise capital. Others will consolidate and others will stop build. And so inevitably, one way to improve their prospects is to start selling more directly and perhaps more competitively, it’s still very early days.
It’s too soon to tell whether this will have an impact on the broader market, whether it will have an impact on their futures and — or our ability to consolidate or not in this market. But I think the trend is the same. There are companies like nexfibre, which is fully financed at GBP 4.5 billion that we own a piece of, that is going to be building, full stop and is going to get to 5 million to 7 million homes. No question about it. There’s VMO2 which is going already at 16 million homes and 3.5 million – 4 million of which are fibre and is going to get to full fibre, full stop. So there’s going to be platforms like ours with 21 million to 24 million homes and that’s a certainty and BT is a certainty. And the rest, we’ll see how it shakes out.
The writing is on the wall, so to speak but that doesn’t mean between here and there, it’s a straight line. There will be puts and takes. We look at M&A prospects along 3 or 4 levels. First of all, what’s the overbuild with us, if we can upgrade at £100 [per premises], what’s it worth it to us to acquire an existing fibre home that somebody spent £500 to build. Secondly, the quality of that network, obviously, what it would cost us to get to our sort of level of sophistication. And thirdly, is there a customer base. And maybe your main question is, does the existence of a customer base on an alternate change that dynamic materially. And I would say no. If there are customers and we would look to see how those could be integrated or required or migrated. That in and of its doesn’t change the principal analysis. It’s more about where they built, how much they’ve spent to build and how it fits with our broader strategy.”
Finally, Michael also touched on the thorny issue of TalkTalk’s spiralling debts and the possibility of Virgin Media (O2) acquiring part or all of that business (something they’ve repeatedly been linked to in the past), as well as any potential regulatory obstacles.
Naturally, the experienced CEO attempts to duck the question a bit by saying they’re “not assuming TalkTalk is doing anything but competing with us until they’re not,” before later indicating that we should assume they do still have some interest.
Michael Fries said:
“I mean we watch as others do, with great interest of what’s happening across the sector in the U.K. but obviously, with TalkTalk, they’re a competitor. And we certainly are watching what they’re doing and what they’re considering doing and with their B2B, with their network, with their consumer business, it’s really outside of our control. And if there were opportunities, you should assume we would be looking at them, but there’s nothing I can say about that today.”
Time will shortly tell on the TalkTalk issue, but otherwise that’s all we have for today.