Fibre to the Home: Take-up & Churn – Interview with James Warner

In this episode, Hebah Bibi, Senior Manager at Eight Advisory and Chris Stening, Senior Advisor at Eight Advisory, sit down with James Warner, Chief Executive Officer of Full Fibre Group, to discuss the company’s evolution from wholesale to retail, the impact of competition and first-mover advantage, and how integrated operations can help manage churn while sustaining long-term growth.

[Chris Stening]

Hi, I’m Chris Stening, Senior Advisor with Eight Advisory and I’m really pleased to be here today with Hebah Bibi and with James Warner. James is the CEO of Full Fibre Group which includes Zoom, Full Fibre, and BeFibre. So, morning James.

[James Warner]

Good morning.

[Chris Stening]

Two reasons we’re really pleased to be talking to James. One is that James is a customer of ours but also because he’s one of the very few people that has gone from wholesale to retail. Lots of people are looking to go the other way and actually his experiences through take-up in both of those different types of operation is really useful.

In our report James we talked about how Altnet take-up was now about 20%, Openreach’s big migration effort now at 36%. We just wanted to understand a bit more about what your take-up was looking like but also the differences between wholesale and retail as you see them.

[James Warner]

Sure, I think it’s a good point to reference around the differences that do exist between wholesale and retail, as an Altnet and as someone who’s trying to acquire market share against any of the footprint that they’ve built.

Full Fibre’s journey is one of starting in wholesale and it created a network of about 200,000 RFS in footprint size. And then through mergers and acquisitions inherited a retail ISP, initially BeFibre, and most recently the Zoom ISP as well. Now we’re a network of about 600,000 RFS at scale point and acquiring comfortably very good volumes point 0.7-0.8% every month against that network scale. However, the kind of penetrations that we saw have varied based upon our go to market strategy change.

Initially being wholesale only, the game was quite clear: try and generate as much interest and awareness as possible within your local geography but do that through supporting local ISPs to try and get their brand in front of consumers, so that the consumer and customer would be interested in buying services through not just one but hopefully multiple operators on that newly built network and footprint. We spent a lot of time, a lot of energy doing that. We found good traction with a couple of the local ISPs, however we never quite managed to get it to the scale and the level of acquisition volumes that we wanted. And it’s just a function of: we were spending about the same amount of money trying to promote small ISPs that we would have been if we were doing it through our own retail. The big variance is we weren’t taking the full ARPU stack. We were simply taking the wholesale only revenues from that activity.

Through the merger and acquisition, one of the drivers was that we would get an integrated retail ISP along with the overall synergies and scale point that we all talk about. We did inherit that first retail ISP, BeFibre, and we saw our acquisition rates double very quickly in terms of just being able to drive that single brand promise, awareness, interest into the market which really transformed the level of commercialisation on the footprint for us. And now we continue to do that currently with two brands, but we will be moving it to a single one soon.

[Hebah Bibi]

Thanks James and one thing, just to build on that in a bit more detail. One of the things that we looked at in this version of our take-up tracker was the performance of time-based cohorts.

In our analysis of Altnets what we saw was as the network matures probably more so in the 24+ months cohorts we see some of that penetration reaching as high as 30 to 50%. How does that reflect your experience so far and does that resonate with you?

[James Warner]

Yeah, it does. Our older cohorts are comfortably in the 40% mark, and we do see a very consistent pattern of customer adoption over time as those cohorts get older. One of the things that we’re seeing is a fairly consistent as I say point 0.7-0.8% conversion rate a month across the network, and we don’t see huge discrepancies depending upon the age of the network with that level of acquisition rate. The newer sub three-to-six-month cohorts penetrate at that level and the older cohorts continue to penetrate at that level which means that it is just a factor of time in order to get to those kinds of higher levels of overall penetration.

We don’t plan on our entire network getting to 40 to 50% we think that that’s perhaps too ambitious. But the fact we do have older cohorts at those levels is interesting in itself. Whether that will be maintained or not, time will tell. From our perspective we have a plan that says as long as we continue to acquire at those sorts of levels it is a factor of time that means that we will get to the levels of penetration that we expect to see and that’s what’s happening in practice.

[Hebah Bibi]

And I guess no better sign than past performance, right.

[James Warner]

Good leading indicator.

[Chris Stening]

One of the questions we get asked by our investors is what’s the impact on Openreach overbuild. And we did a bit of analysis on this, and we talked to a number of different operators and averaged out 6% difference between take-up where you’ve been overbuilt by Openreach compared to where you haven’t.

But the really critical factor was who got there first. We are really interested in your perspective on that again on wholesale and retail and does having a vertically integrated business help.

[James Warner]

Yeah, so when we look at Openreach as a kind of competitor dynamic in the footprint we see circa 75 to 80% of the performance where we don’t have Openreach as a competitor in there. We’re still performing at levels which are very supportive, and my footprint is 55% overbuilt by Openreach currently and the rest of it we plan to continue to be overbuilt over time. I believe that it’ll all be overbuilt at some point, but that kind of 75 to 80% of acquisition performance is what we’re seeing and no variation in ARPU. So, purely around the acquisition levels, slight variation – no variation in ARPU because we don’t do dynamic pricing to try and differentiate between the footprint’s competitive dynamic.

What do we expect to happen given that our older cohorts are over performing at kind of 40 to 50% of our terminal penetration. I think we’re accounting for the fact that that 75 to 80% performance across the rest of the footprint will play out everywhere and that kind of acquisition rate will mean that we still get to the levels of terminal penetration that is more than sustainable for our business. We are very lucky in the fact that we’ve been incredibly efficient in our overall build engine.

Our capital to RFS ratio deployment is very good and in fact we are the lowest levered Big 5 Altnets out there. So, we have the lowest level of debt to RFS ratio of anyone. In terms of actually achieving our levels of profitability and what we need to do, true profitability not just EBITDA, then we’ve got a very clear nice roadway to doing that next year. And we see that the Openreach competitive dynamic has an impact but it’s perhaps not quite as big as you might perceive it to be.

[Chris Stening]

And what about on that first mover advantage. Do you see that through your retail business?

[James Warner]

I think that 75 to 80% dynamic is really what I would refer to as that first mover difference. What we don’t have is a very clear picture on the true impact of being first to market against Openreach versus Openreach coming 3-6-12 months later. It gets quite analytical when you really try and dig into the data and then there’s all sorts of variances around what was my go-to market strategy at that point in time, how much effort did I put into which digital versus offline channel.

There’s quite a lot of variation in there and you can get a little bit lost in the analysis of it. But one of the things that I would say is that because we’re performing almost as good, very close to as good with or without Openreach, we just don’t see it being a huge challenge to continue to perform at those levels moving forward.

[Hebah Bibi]

The final topic that we wanted to get your thoughts on was churn. As we know with customer volumes growing and more users coming out of contract, churn naturally becomes obviously a key area of focus.

In our report we suggest that gross churn for Altnets is still significantly lower than incumbents so about 8 versus 14%. It would be good to get your thoughts on what you’re seeing in your own churn performance.

[James Warner]

Yeah, my view on this is that you should consider churn in two forms. You should consider it at the retail ISP layer and then at the network platform layer. If we first tackle the retail ISP layer, the function of churn being lower for most Altnets at the moment in that kind of retail integrated model is really a piece around how mature the customer bases are.

Most of the customer bases in most Altnets are still relatively young, relatively immature and they haven’t had the 5-7-10 year cycles that the larger, more mature ISPs that you’re benchmarking against with the likes of Sky or Talk Talk or BT and others and therefore customer churn is yet to really materialise in those Altnets.

Now there are things that you can do to positively impact churn on a retail integrated business or a retail ISP: clearly better customer service, better experience, living up to your brand promise, ensuring that you don’t have ridiculous back book pricing  where you go from front end pricing that might be quite attractive in order to gain market share  and then a level of maturity to come to a sensible back book price point or your out-of-contract prices. All have a huge interplay with the levels of churn that you will receive. But it’s my fundamental belief that in that retail ISP space, we will see a level of normalisation between those bigger players and the Altnet retail market and therefore we can’t expect the days of having 7%- 8% churn to continue forever. We have to plan for that.

The other part to it is that network platform churn, and within there if you have a business which allows customer choice in order to maintain that fibre connection, that excellent service experience of the physical fibre that they’ve been getting and you can allow them to therefore take that same service or product through another ISP on your network you will see lower levels of churn and in practice we see that today.

One of the big advantages to operating both a retail and wholesale operation, a relatively mature wholesale operation albeit not through the Big 5 ISPs, we see customers that will happily go on to our retail outfit and spend a couple of years there happily and then for whatever reason make the decision to want to move to somebody else. And where they stay on footprint, they’re not moving house to go somewhere else outside of our network, we see roughly 40% of those customers that might leave the retail ISP stay on the network but go to one of our other wholesale providers on the network itself. Maintaining that platform churn at a much lower rate, clearly is a really big benefit to the overall business.

And that’s one of the key advantages that we see to holding both wholesale and retail operations. The retail operation allows us to gain market share quickly, allows us to do it at a lower cost to acquire, and it allows us to get the full stack ARPU up front. But we recognise that not all customers are going to want to just stay with that single ISP for the end of time and therefore allowing them choice to other ISPs through wholesale operations just allows us to maintain that connected customer.

[Chris Stening]

Really interesting James and I’m really pleased that you’ve been able to show how the retail and the wholesale businesses can work together. Thank you very much and thank you for your time. Really interesting conversation, thank you.

[James Warner]

Thanks.

[Hebah Bibi]

Thanks James.