Fibre Penetration and Take-up with Eight Advisory – Interview with Jeremy Chelot

This time Chris Stening, Senior Advisor, and Nick Breadner, Partner, sit down with Jeremy Chelot, CEO of Netomnia and YouFibre, who believes that Altnet consolidation is an opportunity to shape the future of the UK market.

Chris Stening – Hi everyone, I’m Chris Stening, Senior Advisor at Eight Advisory and I’m really pleased today to be here with Jeremy Chelot CEO of Netomnia, YouFibre and with Nick Breadner who’s one of the Partners at Eight Advisory. Really pleased to be interviewing you Jeremy at this point. I think there is some exciting stuff going on, but I’ll hand over to Nick to start the questions. 

Nick Breadner – Thank you Chris and yes big news Jeremy, thank you for taking the time to talk through the white paper with us. Obviously before we get into that, we know a little bit from our side as we’ve been supporting you a bit on the Brsk transaction, but I know others won’t and they’d love to know what the plan is. 

Jeremy Chelot – Thank you very much for having me. I think it’s quite an important feature of the transaction, just the fact that both management teams are carrying on. Because you’ve got two great companies with fantastic growth trajectory just carrying on and that was part of what we wanted to achieve. So, we think it’s very positive news as you saw by merging those companies together. Now we believe that we have a single Altnet in the UK with more than 1.5 million premises all ready for service and with about 140,000 customers. 

But more importantly those two companies together; while the growth trajectory is fantastic, what we are even more famous about is the fact that we are very capital efficient. Combining our net debt position currently is about £300 million. Having spent only £300 million of debt while delivering 1.5 million premises and 140,000 customers put us in a very unique position in the UK and this is why we believe that the merger is creating a platform which will be on one hand fantastic from a wholesale standpoint. Because those two networks the Netomnia Network and the Brsk Network will be presented as a single network with the ambition to deliver 3 million homes by the end of 2025 but will also give us basically a platform that enables us to hopefully consolidate more the UK market. At the end of the day this is what everybody is looking for, a new scale platform of the third network in the UK competing against BT and Virgin Media. We think we’ve got the ability to deliver that with the growth that we’ve just talked about but also the capital efficiency that we are known for. 

NB  – That’s very exciting Jeremy, thank you for sharing that. Why don’t we get into the white paper and obviously you have the opportunity to read both versions of that paper now. What was it that struck you about the piece and what did you take from it. 

JC – The thing that strikes me the most is that BT is phenomenal at having basically take-up on their fibre network and somehow the Altnets are lagging. But it came across as Altnet is bad and BT is good. I disagree strongly with that statement and I’m going to explain to you why.  

First of all, just to be clear BT’s migrating customers they are not actually acquiring most of these customers, they are actually migrating them and if you look at the Openreach network they’ve been losing lines. They have lost half a million lines last year and I will expect them to lose a lot more this year. As far as I’m concerned, it doesn’t look fantastic but I’m a bit biased obviously. I’m on the other camp, so the one fighting the war on the other side. What I would say is that we should compare the Altnet take-up versus BT, Virgin Media, Sky, Talk Talk and to select them Vodafone so whether we call them the big 4 or the big 5 and from that standpoint, if you look at BT’s take-up in the UK it’s close to 9 million customers or something like that.  

Let’s say that there are 28 million properties in the UK so across three brands BT, Plusnet & EE there is about a 32% take-up. It’s good, but not fantastic or maybe it is fantastic and in that case 32% is actually a measure of being fantastic in terms of take-up. Now if you do the same calculation and you take Virgin Media, it’s currently about 5.8 million customers on the network which is about 17 million premises ready for service, there is about 34% take-up. When you look at the measure of success, on the one hand you’ve got BT across three brands delivering about 32% take-up. You got Virgin Media across one brand delivering 34% take-up. Then if you look at Sky, they are also roughly the 5.6-5.8 million and divide it by 28 million premises, it gives you around 20% take-up maybe a bit more maybe 21-22 depending on the number that you’re using. If you look at those numbers as a benchmark of a very good retail provider, they own a very strong brand and the ability to capture customers (which was done that over several decades). And now you compare that against the Altnets. Let’s start with usually the one that we call the No. 1 in term of ISP, and you had Dana (Tobak) in one of your conversations. Hyperoptic blended take-up about 30% on a network. Seems very comparable to BT and Virgin Media, so from that standpoint she is doing fantastic. Then if you take Community Fibre or Gigaclear which are kind of the four horsemen that started with City Fibre, those four companies. If you look at Community Fibre and Gigaclear both have now a blended take-up of in the 20% region and therefore clearly indicating that their older cohort has to be above 30%. Therefore, also showing that they have the ability to deliver as much take-up as BT and Virgin Media which are much more established as a brand. And then after that if you finish with City Fibre and Netomnia YouFibre and Brsk, those two companies now have a blended take up above 10% despite a massive growth, if you look at the take-up percentage of Netomnia for example a year ago. A year ago, we had a blended take-up in the region of 6%, now our blended take-up is above 10% despite having added more than half a million premises ready for service on top of that. Again, if you want the number, it means that we’ve got a lot of older cohorts that under 20 and the 30% actually our oldest cohort which is our 2020 vintage is now at 34% and all of 2021 vintage they are now above 22%. When doing the same with City Fibre we know for a fact that Milton Keynes and some of their oldest cohorts are also in the 30% region if you believe that BT is the gold standard of in terms of take-up. And that’s something which is fantastic, whether you look at them doing migrations or just their customer base I would argue that the Altnets that represent currently 80% of the UK footprint are those five Altnets: City Fibre, Community Fibre, Hyperoptic, Gigaclear and Netomnia. YouFibre, and Brsk together are also demonstrating that they are getting into the 30% if they are not already there.  

Therefore, from that standpoint the take-up is fantastic and even if you were to extend that lease to more players; you could look at Zoom, you could look at Toob, you could look at all those companies. You look at that take-up for speed many of those companies have blended take-up of above 20% and they’ve got very good numbers. Thus, Altnets are fantastic at delivering take-up if you compare them against our competition and our competition is BT, Virgin Media, Sky, Talk Talk and Vodafone. That’s the part that struck out for me from your report. It sounds like you think that we are bad compared to both, compared to them. I think we are doing fantastic. 

NB – We don’t think you’re bad Jeremy, quite the opposite and a very convincing answer, thank you for that. A kind of secondary question to that is, where’s the limit. 

JC – That is a very good question that I don’t know. I had a very good answer for the first one, where is the limit. The limit I think would be a function of the Average Revenue per User that the Altnet wants to achieve. And the ability to bundle services and therefore for the main provider to actually retain the customer base or bleed actually as slow as possible. Because for example you would have lots of people who will never buy from an Altnet if you don’t have TV, if you don’t have mobile, if you don’t have something. You would have also lots of people who have been BT customers for 2 decades and who will never ever buy from any other company than BT. I don’t think that is a problem of Virgin Media. Virgin Media customers love churning and I would like to thank Virgin Media again for that. The limit will be when the ARPUs are actually starting to meet in the middle. What is interesting is, we can see that the BT ARPU keeps increasing a year on year and that is a very impressive thing. Whereas the Virgin Media ARPUs keeps decreasing and therefore there is a clear trend between ARPUs of the Altnet that are just increasing and the ARPU of the main providers that are, if you know BT, flatlining or decreasing and therefore at some point will merge closer to the middle and then it will start becoming more of a fight about customer service, the quality of your network, the speed that you offer and so on. Whereas currently Altnets tend to take that fight. Yes, we’ve got quite a network, we got quite a customer service – you can look at our Trustpilot score which is fantastic. But we win a lot of the fight also on price. It’s well known that we sell our services that are significantly cheaper than the incumbents and we keep those people for the customer service. The limit is hard to tell.  

So, our business plan has always been with taking a third of the market. So, whatever we told the banks or told our equity sponsor was okay. We expect to get into the 33% mark and the reason for that is we always felt okay. It looks like it is going to be a fight of three players with BT, Virgin Media and also the very least we should take a third so let’s aim for that. But obviously you should also lay your wholesale on top of that. So, there is still a big fight ongoing to attract Vodafone, Talk Talk and Sky and that can increase significantly your take-up if you’ve got very strong anchor tenants on one side and on top of that you can add the wholesale. I can see a path to getting to 40% or more when starting to combine the two. That is something which is very interesting with the UK market because I don’t believe that the UK market has a true wholesale platform, if you look at Openreach which is the number one wholesale platform. Let me rephrase, there is a true wholesale platform in the UK and its City Fibre but even then with City Fibre pricing is not transparent. For example some ISPs get one price, some other ISP get another price. For me this is not the definition of a true wholesale platform. A wholesale platform is supposed to be open, transparent, everybody gets the same pricing, everybody gets the same service, and the fight ends up being at the marketing sales and customer service but you can’t really do that on the City Fibre network because everybody gets a different price.  

Then on the other side you’ve got the Openreach network which is completely transparent in terms of pricing. But there is the big elephant in the room, the anchor tenant called BT, Plusnet and EE. If an anchor tenant is not there that performed well, it will basically be a lot weaker. And then you have basically this Virgin Media, O2 and Nexfibre which trying to do a netco and servco split and which is a wholesale only. But let’s be clear, the business model only works because they’ve got a very strong anchor tenant called Virgin Media. The wholesale market in the UK is still a bit broken as far as I’m concerned but maybe it’s not. And that’s why I believe the recipe in the UK for wholesale to work is by having a strong anchor tenant. Which is what for us we started first by building a very strong anchor tenant with YouFibre and now also Brsk ISP and expecting to have transparent pricing on our platform to then attract hopefully Vodafone, Talk Talk to Sky. Maybe BT and Virgin Media, no I’m joking, they will never use it. But the point is we are trying to do that. So, what is the limit when you have a strong anchor tenant that you control, and you add wholesale on top of that you should definitely get into the 40% plus. After that the question is how far you get to. It really depends on where the Average Revenue per User at the retail level and at the wholesale level operates and as they tighten basically reaching the competitors and the market share will stabilise but if they don’t tighten then we’ll just carry on grabbing as many customers as we are currently. Just to put it in context, YouFibre and Brsk ISP just at the end of May added more than 12,000 customers in a single month, this is significantly more than most of the large retailers that you can see and better than most Altnets. And that tells you what we are taking every month and June is looking towards being even a higher number than that. 

CS – Excellent. So, you talked a bit about the changes that you foresee in the wholesale market that are needed. Is there anything else that you think needs to change to really supercharge the take-up. 

JC – I’m a director of our TOTSCo, so I think one touch switch is going to be a significant help to increase take-up. Because it is still relatively difficult to leave one of the incumbents. I’m sure you’ve read the news several weeks or months ago with people staying in a queue for 45 minutes or an hour to try to speak to someone with Virgin Media to try to leave [the company]. And as soon as one touch switch gets rolled out, the gaining provider can just issue a cease and the service is gone. So obviously there would be more steps, you need consent, you need everything. But you no longer need to actually talk to a new operator, and I think it’s going to be a very interesting change. Obviously, there are ways around that so I’m not going to share all the secrets, there are ways to actually preempt and try to use that for your own advantage. But it’s going to be a big change when it’s going to be easier for people to switch. Otherwise, the market conditions are currently in a very good place, there is not a lot more to change, if anything I recommend usually for not too many changes and certainty. Because sometimes even when you see campaigns for example to fight mid contract price rises and all those things which I believe are terrible. If you sign a contract, the fight that the price in the middle of your contract can change and you don’t even know by how much, is completely insane to me. This is not how I operate. If you sign something that tells you it is going to be X you’re expecting it to be X, but somehow then the X become extra something which makes no sense. Trying to change the rules of the game by preventing this type of method is sometimes counterproductive, because it’s a huge USP for the Altnet, the ability to say you can trust us because we are not going to do that. We provide fair and transparent pricing; we are not going to do that. And it becomes a marketing tool while as soon as you get the regulator or you get somebody involved to actually stop this type of behavior, that I consider as very bad, the only thing that you do is you are making them fairer in terms of their behavior and therefore it removes actually some marketing tools on the outside. Because you force them to behave rather than not. So, I advocate for stability and please don’t change too much. For example, some people were talking about we did a lot more about fibre versus copper and why it’s not fibre. I’ve never been an advocate for that, so I believe what I sell is not fibre. I’m not selling fibre. What I’m actually selling is a service that has a speed or price and a quality of service. And if I were to sell just on the basis of fibre, while Openreach which is 25 million and Virgin Media, Nexfibre, then what do I have to say because they have fibre too. Then our leverage would be to remove everything, so I never believe that was a fight worth fighting. But you should be fighting each on your side as a retailer, I am not lying to you I’m telling you exactly what I’ve got. And this is a much better way to do marketing itself rather than trying to stop through the ASA or through the regulator. Try to have a level playing field where people talk to consumers. This is the job of the Altnet to spend their time educating the customers and showing that, if we didn’t exist, fibre will not even be a roll out in the UK. So, BT most likely will still be sitting basically rolling out G fast and try to work out when they will do fibre and Virgin Media will still be doing DOCSIS. And this is the job of the Altnet, to shape the market and shape actually how customers see us that they choose to take our service. I more advocate for the least change as possible but the OTS and the one touch switch process will be a quite significant game changer which hopefully will come early September. Because we’ve been waiting for it for a long time, and this is why I’m part of TOTSCo to try to make sure that it gets launched. 

CS – Excellent. One thing you did say Jeremy is that YouFibre and Brsk are having really good months and you are getting some really strong take-up. What is the sort of secret to that success in that consumer ISP space. 

JC – I think we genuinely care about the people we roll out to, that’s maybe the first thing. If you look on Twitter, I reply to a lot of customers. I still have customers of mine that are on WhatsApp with me, and I talk to them. Both teams generally care about the people who use the service. Those two teams also have been very focused on the quality of what we provide. I was one of the first doing XGSPON when everybody thought that XGS was too expensive that was not worth time. I started properly doing it in 2018 at Community Fibre. Why, because I thought that okay if I can provide a much higher speed and therefore a better service. Why not. Yes, it’s a bit more expensive to do it. Especially with the equipment that you’ve got in the home but why not. Last year I was maybe the first one in the UK or one of the first ones launching an 8000Mb service when everybody felt, that everybody needs only 100 meg, why would I be selling that. That’s true, most people don’t need much more than 50 or 100 meg, depending on what you’re doing if you’re a gamer and you need to download the game that makes a big difference to other 8000 meg connections. You’re not launching the thing and going to sleep, you’re actually launching it and five minutes later you’re actually playing with it. There are some benefits, but both teams have been innovators, both teams genuinely care. And that’s one of the things your report is showing which is quite interesting, with the Altnets first they were only focusing on building and then one day they woke up and realised, they need to put customers on the network. I don’t believe it has ever been like that at least if you talk to Community Fibre but I used to run right from when they were only 342 premises passed so it was tiny. Or Hyperoptic or Gigaclear. Those networks started with customers in mind first. This is why usually when you look at the cohorts (which are the oldest cohort) where you see the strongest take-up. Everybody was focused on that, there was never that shift but somehow the market has considered what has happened, so the CEO woke up one day and said oh now I need customers, I need revenue, nobody had told me to do it now. It was always the first thing that we had in mind. I would argue that this is what makes us so successful with Brsk and YouFibre is: we are not losing that focus, we actually look after our customer like when we only had a handful of them. I have not changed particularly my focus on that. And this is the single most important thing that you can do as you grow is to never stop caring. That’s what we do best 

CS – That’s a good advice for business. So always care about your customers. I suddenly feel very old because I remember launching the 8 meg service on UK online. And you and I talk about 8000Mb service which shows you how the world has changed, doesn’t it. 

JC – That’s correct. 

CS – Jeremy thank you very much for that. Anything else you wanted to say. 

JC – That merger with Brsk is phenomenal for the Altnets. Because the UK market is really fragmented. And that is technically true, there are lots of Altnets. But in reality, when you look at the size of the footprint or the amount of customer it’s actually very concentrated on the handful of those player who potentially could have at least of about 10. And it’s down to that list of players to actually shape the market in a way that we become that third player. That we become that new fibre company that can forever challenge BT and challenge Virgin Media. And this is why that consolidation is quite meaningful. Because this is not like the consolidation we’ve seen with Upp for example or consolidation like what we’ve seen with Lit Fibre. This is a consolidation of companies that are hungry, companies that are growing very fast, companies that have a lot of capital. And therefore, that can really create a new platform in the UK that is fantastic for wholesale, fantastic for consolidation. That can really rival on the two main incumbents. And people will look back to that event and realise our importance. That event was in the Altnet history and if one day somebody writes a book, maybe me, I don’t know, it would be a very important moment. And people need to remember it. 

CS – You heard it here first. Jeremy thank you ever so much for that, really appreciate it. There is going to be some very exciting stuff to be watched between Brsk and Netomnia and YouFibre in the coming months and years, thank you. 

JC – Thank you very much again for having me and obviously thank you very much for supporting us now with the transaction with Brsk in the future, thank you again. 

CS – Pleasure. 

NB – Thank you. 

CS – That’s all for today, but we look forward to publishing our next interview in the series soon.

Stay tuned!