Fibre broadband: The need for speed

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)
EU fibre to the premises coverage (2018)
Source: ‘Broadband Coverage in Europe 2018: Mapping progress towards the coverage objectives of the Digital Agenda’, European Commission, 2019

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
Data Transmission Technologies
Source: Aviva Investors, August 2020
Figure 3: Relative strengths and weaknesses of data transmission technologies
Relative strengths and weaknesses of data transmission technologies
Source: Aviva Investors, August 2020

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
Risks in various fibre business models
Source: Aviva Investors, August 2020

Strategic considerations

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.

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Apologies, this content is currently unnavailble.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our Privacy Policy.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.

Related views