CityFibre Aims for BT's Wholesale Business
Competitive operator CityFibre believes a merger between UK fixed and mobile giants BT and EE would open up a huge opportunity for it to sell mobile backhaul services to O2 and Vodafone UK.
Last November, the British fiber network operator, which is setting itself up as a major infrastructure rival to BT Group plc (NYSE: BT; London: BTA) in UK cities, signed a groundbreaking dark fiber deal with MBNL, the network-sharing venture between mobile operators EE and Three UK .
That arrangement could be at risk if fixed-line incumbent BT were to complete its proposed £12.5 billion ($19 billion) takeover of EE, but the tie-up could drive the UK's other mobile operators into CityFibre 's embrace, believes Mark Collins, CityFibre's director of strategy and public affairs. (See BT Offers $19.5B to Buy EE, Why BT + EE Makes More Sense and Convergence: All the Rage in 2015.)
"BT entering mobile would create a competitive environment where we could potentially lose one customer but gain three," he tells Light Reading during a meeting at CityFibre's London offices.
As Collins notes, BT's entry into the mobile sector would give the UK's other mobile network operators -- 3, Telefónica UK Ltd. , which trades using the O2 brand, and Vodafone UK -- a strong incentive to reduce their backhaul dependency on the former state-owned monopoly and avoid paying a rival for network services.
CityFibre claims its contract with MBNL represents the first ever dark-fiber deal in the UK mobile market and will give 3 and EE the means to cope with soaring demand for bandwidth-hungry mobile data services. (See Brighter Outlook For Dark Fiber in 4G Era.)
Rollout is already underway in the city of Kingston-upon-Hull but the dark-fiber service could be extended to other cities and towns in the UK under CityFibre's national framework agreement with MBNL.
Generating revenues of just £1.3 million ($2 million) during the first six months of 2014, CityFibre is clearly a minnow compared with BT, which made £9.1 billion ($13.8 billion) over the same period, but it is at the early stages of its business plan and looks determined to punch above its weight.
The operator is also intent on ending what it describes as BT's monopoly in the market for wholesale broadband services. Through a joint venture with broadband retailers Sky and TalkTalk , it is building a fiber-to-the-home network in the city of York that will aim to poach wholesale business from BT. (See TalkTalk's Small Fiber Beginnings.)
The idea is to match BT on price but offer much higher-speed connections. In a trading update published Thursday morning, CityFibre said the joint venture was on course to launch a 1Gbit/s service in York later this year: The highest-speed residential service currently available from BT provides just 76 Mbit/s.
Sky and TalkTalk have complained about the wholesale fees BT charges for broadband connectivity and see obvious attractions in part-owning an alternative network. Regulatory authorities concerned that BT has been squeezing its broadband rivals -- by setting wholesale prices too high or retail prices too low -- may also be encouraged by the prospect of more infrastructure-based competition.
Although the York service from CityFibre, Sky and TalkTalk will cover only 20,000 homes, the partners plan to extend their residential scheme to another two cities, should the York deployment prove successful, and could ultimately target some 10 million homes across the UK, according to Collins.
The companies have yet to indicate which other cities could be in the frame, but CityFibre now maintains infrastructure in more than 50 towns and cities in the UK and has announced "Gigabit city" projects in several, including Aberdeen, Coventry and Peterborough.
Using £46.5 million ($70.6 billion) in funding it raised last year, CityFibre aims to have launched Gigabit city projects in a total of 25 UK cities by the end of 2018. By teaming up with local authorities and stakeholders, it hopes to address the high-speed connectivity needs of public- and private-sector organizations, mobile operators and broadband retailers.
Skeptics have repeatedly questioned the business case for building high-speed access networks, but Collins says that CityFibre is in a very different position from other new fiber investors, such as Google.
"Google is starting out with no customers -- it has to spend capital to acquire them," he says. "In our case the customer acquisition has already been done by our partners so we are not competing to gain market share."
Due to report financial results for 2014 on March 23, CityFibre flagged revenue growth of about 46% over the first half of the year along with an EBITDA loss of about £2 million.
The company does not issue earnings guidance, but financial analysts expect it to become profitable -- on the basis of EBITDA -- in 2016, according to James Enck, CityFibre's head of investor relations.
Enck says that Stokab AB , a longer-established Swedish company whose business model closely resembles CityFibre's, is today reporting an EBITDA margin of about 65%. "Ours will [also] be a highly cash-generative business," he says.
— Iain Morris, , News Editor, Light Reading