CityFibre Aims High in BT Battle

CityFibre might be small but its efforts to create an infrastructure rival to BT are beginning to bear fruit.

Iain Morris, International Editor

May 23, 2016

9 Min Read
CityFibre Aims High in BT Battle

At CityFibre's office in London's plush West End, the phones have not stopped ringing since the fiber network operator sealed a £90 million ($131 million) deal for assets owned by KCOM, another infrastructure player, at the start of the year.

"It has felt a bit like being fired out of a cannon," says Will Brayne, CityFibre's head of marketing and communications. (See CityFibre Takes On BT With $136M KCOM Acquisition.)

As arguably the UK's preeminent "gigabit" player, CityFibre is building fiber network infrastructure in some of the UK's biggest cities and towns. The goal is to provide a higher-speed, competitively priced alternative to BT Group plc (NYSE: BT; London: BTA) in various broadband markets. Unlike the UK incumbent, CityFibre does not sell directly to end users, instead partnering with retail operators to serve businesses, public sector organizations and even residential customers. But its wholesale ambitions are lofty. (See CityFibre's Gigabit Vision.)

Figure 1: All-Fiber Diet CityFibre's Mark Collins speaks during Light Reading's Gigabit Cities event in Munich in late 2015. CityFibre's Mark Collins speaks during Light Reading's Gigabit Cities event in Munich in late 2015.

Right now, the gulf between BT and CityFibre is similarly vast. In its annual results for the year ending in March, BT's sales had risen to nearly £19 billion ($27.6 billion), and its Openreach access network unit alone generated more than £5 billion ($7.3 billion). CityFibre made just £6.4 million ($9.3 million) in 2015. But the purchase of fiber networks from KCOM Group plc in 24 cities and towns has given the small company a big shove. "This is starting to put us on the map as a national-scale alternative to Openreach," says Mark Collins, CityFibre's director of strategy and public affairs.

Indeed, the KCOM move enlarged CityFibre's "footprint" by 22 cities and towns, with the only network overlaps occurring in Sheffield and York. And since it absorbed KCOM's infrastructure -- a process that was "very easy," according to Collins -- CityFibre has increased that footprint by another two locations to a total of 37 metropolitan areas. Importantly, the transaction also included a long-distance network that has enhanced CityFibre's appeal. "Previously, large providers in multiple cities were saying it's not worth innovating in one city when they had to use BT in others," says Brayne. "This has tipped the balance."

Figure 2: Transformational Acquisition Source: CityFibre Source: CityFibre

The £180 million ($261 million) financing package CityFibre raised to fund the KCOM deal should also aid future expansion. Including £80 million ($116 million) in new equity and £100 million ($145 million) in debt facilities, the funding support gives CityFibre the wherewithal to extend its footprint to 50 cities by 2020, according to Collins, compared with a pre-KCOM target of 25 by the end of 2018. Birmingham and Liverpool, where CityFibre is not currently active, are likely to be immediate priorities.

In the meantime, KCOM is delivering a major boost to various performance measures. That is partly because the post-transaction KCOM has become an important "anchor tenant" for CityFibre, selling connectivity services that use CityFibre's infrastructure. Over a five-year period, KCOM business is expected to generate at least £25 million ($36 million) in so-called total contract value (TCV). But CityFibre claims to have signed additional contracts worth £15.7 million ($22.3 million) in the four months since the KCOM deal closed, putting overall TCV at £40.7 million ($59.1 million) so far this year. In 2015, TCV was just £23.2 million ($33.7 million).

Thanks largely to KCOM, CityFibre has also turned a corner on profitability, reporting positive quarterly EBITDA for the first time ever in the January-to-March period (but declining to publish the actual number). Analysts expect revenues will more than double this year, to £14.7 million ($21.3 million), after growing by 68% in 2015. Full-year EBITDA is forecast to reach £2.4 million ($3.5 million), which would mark a considerable improvement on the loss of £2.9 million ($4.2 million) in 2015.

Next page: Risks and rewards

Risks and rewards
This would still leave CityFibre ant-like next to Openreach, though, and the upstart is not short of challenges. Many of these relate to the UK regulatory environment and decisions affecting the structure of the market. For one thing, the takeover of mobile market leader EE that BT was allowed to complete a few months ago clearly threatens CityFibre's deal to provide backhaul services to MBNL, a joint networks venture between EE and Three UK , the smallest of the UK's four mobile network operators.

"While MBNL is an infrastructure-sharing vehicle, the fiber transmission is provided independently of that," says Collins. "Obviously we're now less likely to provide connectivity to the EE side of MBNL."

Figure 3: Upwards Trajectory (Figures in GB pound M) Source: CityFibre Source: CityFibre

The upside is that BT's tie-up with EE could drive other business CityFibre's way, as operators scout for wholesale alternatives to an increasingly powerful rival. Vodafone Group plc (NYSE: VOD), the country's third-biggest mobile operator and an outspoken critic of BT, has already signed a "framework" agreement with CityFibre that could pave the way to service provision in future. "Vodafone has been looking at options for fiber on a national basis and there have been lots of discussions, although nothing has been publicly announced so far," says Collins. (See Eurobites: CityFibre Hooks Up With Vodafone.)

Although a backhaul arrangement is likely to be uppermost on the agenda, Vodafone could conceivably be interested in a fiber-to-the-home (FTTH) partnership with CityFibre. In York, an FTTH pilot rollout that CityFibre is pursuing with Sky and TalkTalk , the UK's second- and fourth-biggest broadband retailers, now covers some 8,500 homes, against an ultimate target of 20,000. According to Collins, the deployment has already proven that initial business-case assumptions were correct, which should fuel interest in CityFibre-led FTTH rollouts elsewhere. "We build all networks with the intention they are expandable to FTTH and KCOM gives us a good footprint across urban markets to do that," he says. (See TalkTalk Unveils Cut-Price Gigabit Service and TalkTalk's Small Fiber Beginnings.)

The rollout of gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.

Besides allowing retail service providers to wean themselves off their dependency on BT, CityFibre may hold other attractions for prospective partners. Its dark fiber technology is said to offer more control over connections than customers get on BT's wholesale products, and therefore more opportunity to innovate. Under regulatory pressure to introduce dark fiber services of its own, BT has previously argued there is limited demand for such offerings and complained about the additional investments it would have to make to provide them. Collins smells a rat. (See BT Kicks Up Stink Over Dark Fiber Proposals.)

"The problem for BT with dark fiber is that it cannibalizes a lot of what it does," he says. "You are putting more of the power into the hands of the service providers, but as we are starting from that point we are not eroding anything in our own business."

Yet because regulation might eventually force BT to enter the dark fiber market, it poses risks for CityFibre. Pricing controls on BT could damage the investment case for rival dark fiber providers, as CityFibre has emphasized on several occasions. "We need to make sure the intervention of Ofcom [the UK regulatory authority] doesn't undermine the willingness of others to invest in dark fiber," says Collins.

Next page: The integrator

The integrator
Other measures Ofcom is considering have also stoked concern within CityFibre. By requiring BT to make its ducts and poles available to rivals on more favorable terms, the regulator hopes to foment the kind of infrastructure-based competition that is taking root in Spain and Portugal, where similar moves have persuaded several companies to begin deploying fiber networks. Collins is not convinced. (See Telefónica's Fiber Fix.)

"BT's infrastructure is quite old and based on outdated tree-and-branch-type architecture," he says. "It's clear you can't build a modern fiber network based on Openreach."

That does not mean CityFibre is not interested in a duct and pole access (DPA) arrangement with BT. Indeed, in the seaside town of Southend, the two operators are already carrying out DPA trials, Collins reveals to Light Reading, following reports in the UK's Telegraph newspaper earlier this month that discussions between BT and CityFibre were taking place. The unresolved question is about the extent to which BT's ducts and poles are usable -- not only in Southend but across the whole of the UK.

With that in mind, CityFibre executives are now eyeing a potential future role for their business as a kind of "fiber integrator." The job of that player would involve piecing together passive network infrastructure to provide fiber services over a much bigger geographical area. In practice, this could mean BT's network gets used in some places, through a DPA deal with the incumbent, while CityFibre's assets are relied on elsewhere. But Collins does not rule out further takeover activity -- albeit on a smaller scale to the KCOM acquisition -- to support CityFibre's ambitions. "There needs to be a duct integration company in the market to unite resources and we are keen to play that integrator role," he says.

Figure 4: Partner Development Source: CityFibre Source: CityFibre

Ultimately, the emergence of such an integrator might silence those calling for a carve-up of BT. Operators including Sky, TalkTalk and Vodafone are still urging Ofcom to make the incumbent spin off Openreach as an entirely separate company, even though regulators decided against this "structural separation" during a recent sector review. "Structural separation is like the independence vote in Scotland -- it won't go away," jokes Collins. (See Eurobites: BT Avoids Openreach Split.)

For CityFibre and others building competing fiber networks, the danger of structural separation would be that it creates an infrastructure monopoly. Far more preferable from Collins's perspective would be improved governance of BT, perhaps preventing profits generated in one area from being used to support activities in another.

"We need a contestable market where there is innovation from different suppliers," he says. That's an aspiration that any regulatory authority will share.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

Read more about:


About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like