Lockdown measures imposed during the COVID-19 pandemic have highlighted the importance of digital connectivity. Tim Perry looks at the investment opportunities and challenges associated with European economies transitioning from copper to faster fibre broadband networks.
4 minute read
Data demand has exploded, and legacy copper networks are struggling to provide the data speeds households and businesses need. Full-fibre networks are widely regarded as the technology of choice to meet increasing demand, due to their reliability, capacity to provide high speeds and cost efficiency. Yet European coverage is variable; for instance, the UK has just 12 per cent coverage1 compared to 86 per cent in Spain,2 as Figure 1 shows.
Governments are increasingly aware of the benefits of high-speed internet provision, how it can facilitate growth and the importance of country-wide access to promote inclusive development, as set out in UN’s 9th Sustainable Development Goal.3 This is creating significant opportunities for private sector investment in underserved areas.
Figure 1: EU fibre to the premises coverage (2018)
Developing key infrastructure for data transmission
Between 2007 and 2017, global internet traffic grew more than 20-fold,4 driven by increasing applications of data. Recently, traffic has also been fuelled by large swathes of the population based at home during the pandemic, as our article here explains.
This voracious appetite for data means massive investment in infrastructure is needed to support transmission and storage. To achieve the European Union’s 2025 targets, an estimated €500 billion of investment will be required.5 A large part of this will be taken up by network roll-out.
Massive investment in infrastructure is needed to support data transmission and storage
There are several common data transmission technologies, as Figure 2 shows. They include satellite broadband and cellular networks (4G and 5G), which can deliver internet connectivity to buildings through fixed wireless access (FWA). Each technology involves different trade-offs between user experience versus installation and operating costs, as detailed in Figure 3.
Fibre-optic networks use light as a signal, allowing higher data speeds, lower latency (less delay between the data instruction and action) and less signal deterioration. Many networks currently employ fibre to the cabinet (FTTC), where fibre-optic cables run to the street cabinet and then make use of old copper cabling, reducing performance. In contrast, ‘full-fibre’ networks or fibre to the premises (FTTP) utilise fibre all the way to each building, enabling speeds up to 20 times greater6 and the best user experience of all the competing technologies.
FWA is currently rarely used, but the rollout of 5G across Europe over the next decade should substantially improve the service it can offer. However, 5G signals are largely short range so mobile networks will need to be “densified”, which involves installing many micro-cells and laying fibre to cell towers. The relative competitiveness of constructing a full-fibre network versus deploying FWA depends upon a range of factors, including the capacity of the existing cellular network and the density and distribution of housing. Nonetheless, where a full-fibre network already exists, the higher operating costs of 5G coupled with FWA will make it difficult for the latter to compete.
Figure 2: Data transmission technologies
Figure 3: Relative strengths and weaknesses of data transmission technologies
Fibre: A complex investment
As a result of the technology’s superiority, full-fibre networks offer the potential to generate long-term income. In the UK, the government suggests fibre investors are compensated over 15-20 years or longer.7 But the ability to generate stable income varies. Many businesses involve high demand risk, where revenues depend on customer take-up and subscription fees, both of which can be impacted by competition.
Nevertheless, there are mitigating factors; notably, the growing demand for data and the essential nature of the service. Experience in other countries suggests there is appetite for faster broadband. For instance, in Japan, where full-fibre is available to 99 per cent of premises,8 79 per cent have subscribed.9 In Europe, Spain leads the way with 86 per cent coverage and 63 per cent take-up,10 despite having some of the most expensive broadband services.11
There are likely to be greater benefits for users in rural communities from full-fibre networks
Additionally, investors can target specific business models to mitigate risks. For example, connectivity tends to be slowest in rural areas, where installation costs tend to be higher, but this disincentivises competition, leading to more monopolistic positions. There are likely to be greater benefits for users in rural communities from full-fibre networks, which may lead to a greater propensity to subscribe or willingness to pay higher subscription fees. As a lower priority for large network providers, the rural niche tends to feature more nascent alternative network providers (‘alt-nets’).
Utilising a retail or wholesale model also impacts the risk profile. Under a retail model, network providers sell internet and telephone packages directly; profitability is linked to customer take-up rates and subscription fees. Under a wholesale model, the network provider sells the use of the network to internet service providers (ISPs) under longer-term contracts, and the ISPs take responsibility for selling on. The wholesale model can provide longer-term predictable revenue from higher-quality counterparties, but it significantly reduces upside potential and networks must be sizeable to attract ISPs.
Investment opportunities and risks
Well-established networks tend to carry less investment risk, with demand, build and competition risks mitigated by their size and market position. That being the case, larger networks tend to trade at higher multiples, limiting potential returns.
It may make sense to delay rolling out new fibre loops until enough customers have confirmed their intention to subscribe
Greater upside is likely to be had in nascent ‘alt-nets’, which tend to be more exposed to demand risk. This can be mitigated by analysing the competitor landscape to ensure the take-up rate will justify any investment. In addition, it may make sense to delay rolling out new fibre loops until enough customers have confirmed their intention to subscribe, ensuring a strong return.
Construction risk also comes into play with greenfield strategies. Nevertheless, rolling out full-fibre networks is technically more straightforward than construction in many other infrastructure sectors. Costs and risk can often be mitigated by using existing duct and pole infrastructure and partnering with strong, aligned management teams. Once complete, individual network expansion projects can generate revenue immediately.
Details on the specific risk factors that various European fibre business models are exposed to are summarised in Figure 4.
Figure 4: Risks in various fibre business models
Investors contemplating full-fibre need to appreciate the idiosyncratic nature of the sector. Different regulatory and competitive environments, consumer demand drivers and business models all impact networks’ risk profiles.
Demand for data is growing fast, and full-fibre delivers significantly better user experience than other transmission technologies
Nevertheless, demand for data is growing fast, and full-fibre delivers significantly better user experience than other transmission technologies, with lower ongoing costs. Full-fibre is also a key enabler of faster mobile connectivity via 5G. This suggests it will be difficult for new technologies to compete with an existing fibre network and is supportive for the longevity and stability of cash flows.
History shows high levels of take-up in those countries that already have well-established full-fibre networks. This suggests exposure to demand risk will be well rewarded, with retail models offering the greatest upside potential.
- ‘Connected Nations 2019: UK report’, Ofcom, March 18, 2020
- ‘New fibre market panorama 2020 revealed’, Fibre to the Home Council Europe, April 23, 2020
- ‘Goal 9 infographic: Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation’, United Nations Department of Economic and Social Affairs, 2020
- ‘Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2017–2022’, Cisco, February 2019
- Laurence Monnier, ‘Intangible infrastructure: Storing and transmitting data’, Aviva Investors, February 4, 2020
- ‘UK Home Broadband: The performance of fixed-line broadband delivered to UK residential consumers’, Ofcom, May 8, 2019
- ‘Future Telecoms Infrastructure Review’, Department for Digital, Culture, Media and Sport, July 23, 2018
- Georgina Hutton, ‘Full-fibre broadband in the UK’, House of Commons Library, January 10, 2020
- ‘OECD broadband statistics update’, OECD, July 22, 2020
- ‘New fibre market panorama 2020 revealed’, Fibre to the Home Council Europe, April 23, 2020
- ‘Fixed Broadband Prices in Europe in 2018’, European Commission, November 5, 2019
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