Market Insight

Vodafone and CityFibre announce FTTP partnership

November 09, 2017  | Subscribers Only

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Vodafone UK and CityFibre have signed an agreement to deploy a fiber-to-the-premise (FTTP) network to up to 5 million UK premises by 2025, representing the biggest commitment to FTTP technology seen in the UK to date.

Under the agreement, CityFibre will build, operate and own the FTTP network. It estimates that the cost involved in the construction of the FTTP network will be £350-£480 per home passed. For CityFibre, the agreement with Vodafone helps reduce the risk of its initial capital outlay. Vodafone has made a minimum volume-based commitment for 10 years, which scales over the period, maturing at 20 percent of homes passed. As a consequence of this commitment, CityFibre has allowed Vodafone a period of marketing exclusivity for homes passed by its FTTP network.

The agreement splits the deployment of the FTTP network into two phases. As part of phase one, CityFibre will roll out the FTTP network to 1 million UK homes in 12 existing CityFibre towns and cities. Construction of the first phase of deployment is scheduled to start in H1 2018 and is expected to be completed in 2021. CityFibre management said that it would prioritize deployment in areas without a significant cable presence.

Depending upon the success of phase one, both parties have the right to extend the commercial terms of the agreement in order to deploy the FTTP network to an additional 4 million premises by 2025. This would result in a total of 50 towns and cities being served by the FTTP network.


Our Analysis

Today’s announcement underlines Vodafone’s commitment to the UK following several years of underperformance in the country, which has led to a steady decline in the operator’s mobile subscriber base. The move from Vodafone to invest in next generation access (NGA) networks in the UK, via its strategic wholesale partnership with CityFibre, aligns Vodafone’s UK business with the rest of its Western European operations. In this region, the operator has heavily invested in NGA through a mix of acquisitions, wholesale agreements and its own builds. The most recent announcement came in September 2017 with the launch of its EUR 2 million Gigabit Investment plan in Germany. 

In terms of UK fixed-line performance, Vodafone’s market share is growing but remains small. As of June 2017, the operator reported that it had 245, 000 fixed broadband customers. The agreement with CityFibre will improve this figure; however, Vodafone remains well behind other major UK internet service providers (ISPs) in terms of fixed broadband customers. As a result, the phasing of the agreement, whereby both parties have the right to extend the commercial terms of the agreement to a further 4 million homes after phase one, provides Vodafone with strategic flexibility. This is important as it allows Vodafone to monitor the success of its joint venture with Liberty Global in the Netherlands, with the possibility of concluding a similar deal in the UK. In addition to the Netherlands, Vodafone has acquired cable operators in Spain and Germany and, in our view, despite the agreement with CityFibre, still lacks the scale needed to be a major converged operator in the UK.

Under the terms of the agreement, Vodafone is not required to contribute to the costs of the network build or operation. Instead, Vodafone is responsible for the marketing costs and has made a minimum volume-based commitment for 10 years, which scales over the period, maturing at 20 percent of homes passed. CityFibre’s previous joint venture with TalkTalk and Sky saw the companies achieve a 27 percent penetration rate as of 31 March 2017, albeit on a much smaller scale (14, 000 homes). Neither Sky nor TalkTalk decided to expand the trial beyond York, with Sky prioritizing its investment in content acquisition and TalkTalk lacking the financial resources to support a mass rollout.

The agreement with Vodafone marks a significant moment for CityFibre

The partnership with Vodafone marks an evolution in CityFibre’s strategy, as it embarks upon the first mass scale consumer rollout of the company’s FTTP network. Previously, CityFibre’s efforts have been limited to the aforementioned small-scale trial with TalkTalk and Sky, as well as an agreement to deploy FTTP in a limited number of rural areas with Gigaclear.

The rollout of FTTP networks under the Vodafone agreement will utilize CityFibre’s existing infrastructure, boosted by acquisitions of several smaller wholesale providers. The most recent of these acquisitions came in September 2017 with the purchase of Entanet for £29 million. This followed the purchase of Redcentric in September 2016, as well as large chunks of KCOM’s national infrastructure in December 2015.

Through this acquisition strategy, City Fibre has core metro networks in 42 UK towns and cities, which will be extended to customer premises in order to deliver consumer FTTP services. CityFibre estimates that the total capex costs of this deployment will be in the region of £500-700 million. This will be partially funded by CityFibre’s listing on the London Stock Exchange in July 2017, which aimed to raise £200 million.

Vodafone-CityFibre partnership provides a much-needed boost to UK FTTP deployment

The UK has fallen well behind other European nations in terms of FTTP rollout, reflected in IHS Markit’s Broadband Coverage in Europe 2016 study conducted on behalf of the European Commission. The study showed that the UK’s FTTP networks passed just 1.8 percent of UK homes, which was behind only Belgium and Greece in terms of the proportion of households served by FTTP networks in the EU28. Vodafone and CityFibre’s FTTP rollout will reach 17 percent of UK households if the FTTP network is rolled out to 5 million premises, highlighting the value of this agreement to the development of UK’s fixed broadband infrastructure. 

For the UK government, the agreement between Vodafone and CityFibre vindicates its decision to support the deployment of FTTP networks within its 2016 Autumn Statement, which outlined plans to incentivize FTTP deployment through a £400m Digital Infrastructure Investment Fund and 100 percent business rate relief. However, given the time it takes to deploy an FTTP network, the government will require further announcements of network deployments to materialize in the upcoming months if it is to reach its target of passing 10 million premises with FTTP technology by 2022.  

BT Openreach’s NGA investment plans should soon become clearer

As the largest provider of wholesale broadband in the UK, BT Openreach ran a consultation with UK ISPs from July to September 2017 in order to understand the demand for FTTP networks. The outcome of this consultation is expected by the end of the year, and should provide some clarity on Openreach’s investment plans.

Previously, the organization had avoided committing to the mass deployment of FTTP networks, instead stating its preference for using a mix of technologies to deliver ultrafast broadband speeds. This mix involves the deployment of VDSL and technologies, which use existing copper infrastructure to achieve ultrafast speeds. These technologies are, therefore, cheaper and faster to deploy than FTTP, but they are less reliable in terms of speed because they are dependent upon the loop length. As a consequence, the agreement between Vodafone and CityFibre increases the pressure on Openreach to shift its deployment plans toward a technology mix that focuses on FTTP in order to maintain speed parity on its network.  

UK Western Europe
Vodafone UK
Research by Market
Mobile & Telecom
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