Fibre to the Home and Take-up Tracker – Interview with Jeremy Chelot

In this episode, Mark Menzies, Director at Eight Advisory and Chris Stening, Senior Advisor at Eight Advisory, sit down with Jeremy Chelot, Group Chief Executive Officer (Netomnia, YouFibre, and Brsk), who talks about Netomnia’s take-up rates, overbuilding concerns, ARPU sustainability, and future strategies for growth in the competitive fibre market.

[Chris Stening]  

Hi, so I’m here today with Jeremy Chelot, Group CEO (Netomnia, YouFibre, and Brsk), and also Mark Menzies one of our Directors here at Eight Advisory. I’m very happy to be with Jeremy as one of our clients at Eight Advisory and also to talk to you about our Take-up Tracker.  

Jeremy thanks for talking to us today. Those who’ve read the report will know you had a pretty good Q4, you’re one of the few Altnets that’s both growing penetration take-up but also growing your footprint as well. I’m sure we’ll get into that, but we wanted to start with our first question which is, should we as an industry be concerned that Altnet take-up has risen 1% in the last six months, and Openreach has risen 3%. What’s your views on that? 

[Jeremy Chelot]  

First of all, you have to compare apples with apples. Openreach take-up is not growing they are actually losing lines on their footprint. Their migration and FTTP take-up is going well. As you can imagine a migration effort is significantly easier than adding new customers on the network. Those two numbers, = you can’t really compare them.  

Now if you look at the growth of customers on the Altnets it’s actually growing relatively fast. Because if you look at the churn on the network of BT, Virgin Media, Sky and so on, the churn is in the region of 15% per annum. It means that on average they lose about 1.2-1.3% per month. The growth in terms of adds for an Altnet on average in the region of 0.6-0.7%. My ISP is faster than that, so on average we do more like 0.8 to 0.9%.  We had a fantastic November where we managed to do 1%.  

Overall, it shows that as a percentage of the churn happening in a month, the Altnets take a disproportionate amount of all the customer churning. That will be a more interesting metric to look at the performance of the Altnet vs the larger guys. Because if it carries on like that, we are going to take all their customers.  

I will expect at some point some form of equilibrium in the market but maybe not. We haven’t seen any slowdown even in cohorts that are already more mature i.e. 3 to 4 years old.  

No, I don’t think we should be worried at all. If anything for companies stopping their build the focus on take-up becomes even more important and therefore your redirect all your energies and effort in filling up the network with as many customers as possible and therefore competition becomes a lot more intense for the larger guys, so no everything is fine. 

[Chris Stening]  

Okay, well I think it’s a good call on churn, we’ll have a look at that in our next iteration probably in about four- or five-months’ time.  

[Mark Menzies]  

Jeremy,I  wanted to change tack a bit. How concerned are you about overbuild both in terms of by Altnets by Virgin Media, Nexfibre and also Openreach? How does this impact on where you plan to build in future? 

[Jeremy Chelot]  

As I’ve always said many other CEOs and Investors believe that overbuilding with Altnet is just stupid. It should never happen. We’ve seen in the news recently the debate around Nexfibre being the second largest Altnet in the UK. The key question is are they actually an Altnet? You could argue that they are not.  

I think they are not an Altnet, but happy to add them into that category and they are not the second largest Altnet either. Because we are! 

If you look at also Nexfibre and Nexfibre overbuild, the argument there is do you want to become exactly the third fibre operator in an area? Because this is really what Nexfibre and VM O2 are looking at potentially doing in the future. This is not just overbuilding an Altnet it’s most of the time overbuilding an Altnet with fibre in an area where there is Openreach FTTP and therefore becoming the third fibre operator in an area. Should we be concerned about that? 

I’ve got some areas where Nexfibre overbuilt me. My take-up is completely fine. My oldest cohort that you’ve seen on the chart has now actually a lot of Nexfibre and we’ve reached now 40% in those areas. In general, overbuild is a bad thing and I think two fibre operators, fine, three fibre operators starts becoming a lot. Three fibre operators in an area when you do not have a strict control on how you manage pricing on your debt stack becomes a very hard proposition, and we’ll talk about ARPU later. Because in reality it can be very hard if you don’t have the right levers to pull. For us it’s not a problem, we operate all the time in a three-operator scenario where we’ve got Openreach, we’ve got Virgin Media and there is ourselves.  

But in general, overbuild for an Altnet should never happen. If Nexfibre is an Altnet they should equally not overbuild. Arriving the third in an area with fibre, you have to be ready to take on a fight which is going to be intense.  

And finally, versus Openreach FTTP, I haven’t seen a major difference. Yes, there is a little bit of inertia at the beginning, and you would expect so. They migrate, they recontract, people just got a new install. They’re not going to switch immediately. 

Give them couple of recontracting cycles or couple of mid contract price rises, when they see the bill increases and then you talk to them and then they want to switch which completely makes sense as a customer. When you go through that you start looking at alternatives. I’m not worried at all about Openreach FTTP and so I think in general overbuilding is a bad thing. 

[Chris Stening]  

So, for Openreach it’s bit of a timing thing.  

[Jeremy Chelot]  

A bit of it. There’s a little bit more inertia at the beginning but then as soon as the inertia is gone, it rolls.  

[Chris Stening]  

Let’s talk about pricing and ARPU. Then you saw in our report that pricing has come down by about 4% but there’s still some people who can charge a premium if they’re in a rural area with very low levels of competition or slow copper speeds. Do you think that current pricing an ARPU is sustainable for long term business success and then is it possible to walk it up?  

[Jeremy Chelot]  

The more fundamental question is not what is the ARPU level it’s more, which ARPU do you need to achieve a return on your capital that can justify the capital that we spend in terms of upgrade and making sure that all the investors and the lenders make the return that they expect.  

It’s more a function of the cost of what you’re doing not so much a function of what is the average revenue per user. It’s the difference that you see with the UK government currently where it’s all about growth when you listen to the story which is when you talk about ARPU, it’s all about ARPU growth.  

People should be a lot more focused first on managing your cost because if you’ve managed your cost very well it gives you a lot more levers that you can pull in order to invest to deliver growth, and it gives you the ability to be a lot more patient in term of ARPU growth.  

You don’t have to beat inflation like any of the price increases that you see in the UK because you don’t have that pressure to potentially meet some covenants or any other issue that you be faced with. With a £25 ARPU for us, we’re completely fine, we are in the right place. When we look at our older cohorts the ARPU is more the region of £28- £29 sometime as high as 30. For us as long as by the end of the decade we get into the low thirties, we’re in a very good place.  

Therefore, the requirement in term of inflating our pricing for the next five years is pretty modest to get into that, because all these cohorts are already there. The newer cohorts are more than £25, therefore it’s not an issue. But if you have not managed your costs very well, you have to increase your ARPU. The problem with increasing your ARPU too fast is then you impact your take-up. If you impact your take-up then it becomes a vicious circle which is why you can see among the largest operators that drive towards trying to find a way to increase the ARPU to negate basically the effect of loss of customers.  

Overall, I think if right now you’re in the region of £25 with a clear path to the £30 mark by the end of the decade assuming obviously inflation and everything stays what they are currently it’s perfectly fine and it’s perfectly justified in terms of competition that you might face from larger operators.  

Getting into some of the ARPUs that you see potentially low £20s or even sub £20s, it feels a bit too low for the UK but at the same time if you get to 90% take-up with an ARPU sub £20 that still works because the question do you have the capital and can you sustain those costs?  

That number is hard to answer because it depends on the cost, depends on the level of take-up that you’re targeting but for us with £25 even now also it’s similar to Vodafone similar to Talk Talk, definitely not at the level of BT, VM, or Sky. That’s why you see that there’s potentially some margin to actually drag it up slowly, but you don’t want to do what other providers are doing – mid contract price rises for instance and all those things that do not create customer loyalty or customer advocacy. We don’t want to do any of those things. 

[Chris Stening]  

It all comes down again to capital efficiency doesn’t it and if you’re just given more opportunities if you’ve been very efficient on your build. 

[Jeremy Chelot]  

Manage your cost and life becomes a lot easier. 

[Mark Menzies]  

Your focus really is on take-up given you’re capital efficient and you can walk the ARPUs back later. Coming to your take-up, your cohort performance is pretty impressive the chart you provided of the cohorts attracted a lot of interest when we published the report. Essentially the chart is showing a trend towards 30% take-up on your mature cohorts and a real strong correlation between the longer the cohorts have been in market the higher the take-up.  

Is this what you’re expecting to see with those newer more high-volume cohorts that the longer the network is in the market the higher the take-up? 

[Jeremy Chelot]  

Yes, as a short answer. Sometimes when people look at our cohort charts, they think that we play with the scales in the x axis because it looks more linear, so everybody is expecting the line to taper down basically or start flatlining a lot quicker. You could almost draw a line going through all the points. In reality we just don’t know. My network is now a bit more than 4 years old. When you look at take-up you look at it about 5-7 maybe 10 years.  

There are lots of questions about where is the ceiling. Is there a ceiling? There are quite a few networks that are now a lot more than 5 years old sometimes 10 years old, where you see actually the cohort getting to 50% and then carry on.  

What I’ve never heard of is cohort that stops growing. I’m yet to actually find that story that you reach that magical point of a number and then it’s like flat, it stops growing. I haven’t seen also the declining one and there might be some story around that but to some extent it’s linked to the previous question around ARPU.  

If I were to actually increase our revenue per user to a similar level to Virgin Media or to BT or to Sky, you will see my cohort growing a lot slower, flatlining, having to manage a lot more churn.  

Right now, we are competitive and therefore as long as we keep that healthy level between our ARPU and the ARPU of our competitors, there’s no reason for you to stop growing. Obviously, at some point there will be the people okay if you don’t have a TV service, I’m not going to buy from you, there will be the people who will never change because they are loyal to a brand. There is a level of market share I will struggle to break until I have a proposition which is a bit more complete. And that’s why we are planning to launch for example a mobile service at some point this year. Otherwise, there is a segment of the market that you can never tap. There might be people who have been with BT for 30 years and they will never change and it’s completely fine too.  

There is a ceiling based on the product, there is a ceiling based on just the brand. But as long as you keep a healthy price with a speed which is at least equal or faster and a very good customer service, you can go much higher than what we are targeting. We are targeting currently 33% after 5 years. Currently we are getting there in 4 years. When there is Openreach FTTP, it takes a bit longer. We think we get there closer to 5 years so it’s about 20% longer for us because of that inertia at the beginning. It just keeps growing so well and all my peers see the same thing.  

We have networks now that have a huge Openreach FTTP overbuild. My network is more than 50% overbuild by Openreach FTTP. Community Fibre is the same, CityFibre is the same. You see that through looking at data from ThinkBroadband. And yet those cohorts are still growing in a way which is very healthy. Where is the ceiling, I don’t know, I’m sure there is one. 

[Chris Stening]  

We’ll see where we get to, so we want to keep our tracker going on a rolling six monthly basis. It would be really interesting to see how the whole industry has done in six months and how much closer you are. If there’s three networks, and 90% of people end up on fibre, it should be about 30% each shouldn’t it? And then maybe a bit more for the better ones. 

[Jeremy Chelot]  

That’s where I started, that’s why my business plan always had basically that magic with the 30% in it. I said my oldest cohort now is at close to 40%. Therefore, there is a genuine question where does it stop or maybe as competition basically intensify your oldest cohort, they go to 40 your youngest cohort they might hit the ceiling at 25 and overall, it might blend to the 30% mark.  

I genuinely don’t know I just know that it has not stopped so it carries on growing, the growth is more linear than everybody expected, Openreach has overbuilt us at more than 50% and yet we are still doing take-up records every month.  

So far, I haven’t seen the market hit that ceiling or penetration slows down significantly. But who knows at some point they might increase their speed, drop their pricing, and improve customer service to a level where my life becomes a lot more difficult. and then we’ll fight a bit more. 

[Chris Stening]  

It’s going to be a fascinating couple of years and be good to keep looking at this and talking about it every six months or so. Jeremy thank you again ever so much for your time, really good to talk to you we’ll talk soon, thank you. 

[Jeremy Chelot]  

Thank you very much.  

[Mark Menzies]  

Thanks.