CityFibre Model Heading to US, Says CEO
LONDON -- Cable Next-Gen Europe -- Stateside investors are ready to pump money into a wholesale, nationwide city fiber network operator that would serve broadband services companies addressing residential and business customers, according to Greg Mesch, the CEO of CityFibre, which is building the same type of wholesale network in the UK market.
Mesch said the number of funds interested in taking the CityFibre model into the US market is "way out of proportion to the assets available."
Founded seven years ago, CityFibre has acquired and built fiber networks in about 50 UK towns and cities outside the London area, striving all the time to achieve the kind of scale that would be attractive to potential users of the network. It has increasingly positioned itself as a challenger to the Openreach networks division of UK telecom incumbent BT Group plc (NYSE: BT; London: BTA), and after growing through strategic acquisitions during the past few years was acquired in a £538 million ($704 million) deal by a Goldman Sachs-led consortium in April this year. (See Eurobites: Investment Group Makes £538M Bid for CityFibre.)
"Our model is 100% classed as an investable asset in infrastructure funds and five years ago it was not," said Mesch at today's Cable Next-Gen Europe conference in London. "That has opened up a pool of capital that is 10 to 20 times larger than the pool of capital for private equity and at half the return rates expected."
The same investment groups are now exploring rollout opportunities across the US market, where the open fiber model has until now been limited in scope, said Mesch.
He reckons there are roughly 12 US companies that operate in a similar way to CityFibre but have networks in just two or three cities each. The lack of scale largely explains why the approach has not yet taken off in the US, according to Mesch. "People are trying to build in one city here or there, and it creates a fragmented market." What would really light a fire under the market would be if one company could offer wholesale fiber capacity in many US cities with a consistent proposition and processes.
Meanwhile, back in the UK...
While it remains relatively early days for CityFibre in the UK, its rise to prominence seems bound to have attracted attention in other parts of the world. Having started out with a business and public sector focus, the company this year announced plans to build all-fiber networks to approximately 5 million UK homes -- about 20% of the country's total -- at a cost of roughly £2.5 billion ($3.3 billion). It has landed Vodafone, one of the UK's biggest telecom operators, as an anchor tenant for these networks in several major towns. (See Eurobites: UK's CityFibre Announces $2.5B FTTH Investment Plan.)
"Once you have scale, you shift the revenue model, and that is what has got Openreach in a bit of a bind right now," he said. "Other mobile operators are all doing tests and services with us."
CityFibre claims that its all-fiber networks provide substantially faster connections than Openreach's lines, which mainly rely on a mix of copper and fiber to support end-user services. Connectivity is also 50% cheaper, claimed Mesch, with a fiber line into the home costing about £12-14 ($16-18). "That is less than the cabinet price for BT," he said. "It is the death model for them."
Under pressure from competition and the UK's regulatory authorities, Openreach has said it will extend all-fiber networks to as many as 10 million UK premises by the mid-2020s -- if the investment conditions are favorable. It is already at work on extending fiber to around 3 million properties by the end of 2020 and covered about 680,000 of those properties by the end of September, according to its latest set of earnings. (See BT's Jansen: We Need to Talk About Openreach.)
Seeking to improve conditions for BT's retail rivals, telecom regulator Ofcom has forced BT to manage Openreach at arm's length from the rest of the business. Critics say authorities should go further, mandating a "structural separation" that would turn Openreach into an entirely separate company with a different owner.
Mesch denied that a structurally separated Openreach would spell trouble for CityFibre if it adopted the same approach. "Openreach should be divested," he said. "It will take years to do that, but it should be divested, and they should concentrate on saving market ground."
He also played down the suggestion that Openreach might swallow up CityFibre, arguing that regulatory authorities would not want to see any reduction in infrastructure-based competition.
— Iain Morris, International Editor, Light Reading