The United Kingdom communications market is different than that of other European nations. In 2002, BT (BT.A) sold its wireless operations to avoid bankruptcy after the tech and telecom bubble burst. That single decision made the UK very different from other countries, where the incumbent operator and often one or more others owned both fixed-line and wireless networks. As a result, no UK carrier has pushed convergence of fixed-line and wireless telephony in the country. Convergence has been a major trend across Europe in recent years, led by Spain.
However, in 2016, BT acquired EE, the largest wireless operator in the UK, which once again created an integrated company. BT has been very slow to push a converged service until very recently, as it has been tied up with integration efforts, dealing with Ofcom's, the UK telecom regulator, 10-year industry review, problems across other parts of the business, and management turnover. Still, we think that owning both assets clearly strengthens BT's moat – it’s sustainable competitive advantage over peers. Having both networks provides a unique asset set and distinguishing feature that the other operators can’t match.
Competitors Can’t Catch BT
We believe BT’s ownership of both fixed-line and wireless networks provides it with a unique set of network assets. Communication networks are expensive to build and maintain. Thus, the more subscribers on a network, the lower the cost of the network per individual customer. This makes scale very important.
Within the UK, BT has the largest customer bases in traditional fixed-line telephony, broadband, and wireless telephony, while Sky has the largest base for pay television. While BT and Sky have the largest scale in the UK, Vodafone (VOD), Telefonica, and Liberty Global achieve their scale by operating in lots of other countries besides the UK Telefonica’s core moat comes from its scale in Spain, while Vodafone’s is the composite of all its operations: It is the largest operator in only a few emerging markets, such as South Africa and Egypt.
However, its combined size makes it one of the largest telecom operators in the world, whereas Liberty Global is the largest cable TV operator in Europe, including the UK through Virgin Media. However, as previously stated, Sky, which is primarily a satellite-TV distributor, has more pay-TV customers than Virgin Media.
On the fixed-line side, competition is increasingly between telecom companies and cable-TV operators. This is particularly being played out in fixed broadband. Generally speaking, cable-TV operators have a speed advantage over the telecom operators, as their networks were built for video based on a hybrid fibre-coaxial cable network, while telecom firms were built for voice based on a copper network.
Beyond scale, the expense of building out a telephone network provides an efficient scale as it becomes very difficult to build a new network late in the game and attract enough subscribers to generate a decent return on invested capital.
It is important to understand that Sky, TalkTalk, and others wholesale the "last mile" from BT. In other words, BT receives some revenue from 80% of broadband customers in the UK.
Virgin Attempts Market Grab
In 2015, Virgin Media announced Project Lightning. It had reviewed its network and realised that because of the disparate networks it had consolidated, which had been built independently last century, there were significant holes in the middle of its footprint, even in London and Manchester. With the price of building out fibre declining, the firm believed it was then profitable to fill in these holes and expand the network in some cases.
In total, it planned to pass an additional 4 million premises and take its network coverage from about 50% of the population to about 70%. However, the firm has found the buildout to be more difficult than expected, and after three years of effort, the project is only about one third of the way completed.
However, even when the expansion is complete, there will still be about 30% of the population that relies exclusively on BT’s network for final connection to homes. Liberty Global is the largest cable operator in Europe and owns Virgin Media, the UK cable-TV operator. However, even before the acquisition, Virgin Media had realised its competitive advantage was the speed of its broadband network.
While BT recognised it had a speed disadvantage it didn’t believe the demand for much higher speeds would be significant, so it could take its time in increasing speeds, as it is expensive to upgrade a copper network.
While BT has significantly enhanced the amount of fibre in its network in recent years, it has chosen to primarily use technology improvements that have enhanced the ability of copper to carry faster speeds.
The UK's current state positions BT well, as everyone other than Virgin Media requires access to its fixed-line network to reach broadband customers. So, while it has a solid 37% broadband market share directly, the firm's network underlies 80% of the UK's broadband customer base. BT's ubiquitous network provides the firm with a unique asset that strengthens its moat.
