Making the AltNet numbers add up

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Sarah Mills, Managing Director of Wholesale and Smart Infrastructure at Neos Networks, looks at the way the chips might fall in the alternative network provider market and imagines the rise of the Super AltNet.

Alternative Network Providers (aka AltNets) tend to rely on investor funding and the availability of government grants – such as the £5bn Project Gigabite DCMS fund – to help bring super-fast fibre connectivity within reach of communities and businesses that have been overlooked in the national roll-out. Or at least to those areas or niche markets that have not been seen as a priority for the established players.

Initiatives to bring improved connectivity and advanced services to places and communities not being served by the default national supplier are not exactly new, however.

Around 20 years ago, fledgling cable companies would adopt an approach known as ‘selling the dig’. Entire residential streets and communities would be provisioned with cable and then the sales team would work the area, trying to sell advanced services – usually television – to all the properties. The ‘sell’ back then was often simply being to attract customers to a single supplier that could replace both their landline connection and their satellite TV service.

Selling the dig, however, can be an expensive way to go about infrastructure investment. It echoes the field of dreams approach – if you build it, they will come – albeit usually backed with actual research rather than just the ‘voices in my head’.

AltNet companies, on the other hand, don’t set out to ‘sell the dig’. In fact, the approach is almost the exact opposite. The successful AltNets identify locations, and communities of interest, that would benefit from – and are hungry to connect to – super fast services.

They then figure out the cost of getting the service to that location, and also onto a nationwide super-fast communications network from an established provider offering economies of scale. As part of this process, they determine whether they can make the connection and deliver an economically viable service. If the numbers add-up, they will typically seek anchor customers in the area concerned and then effectively ‘dig to the sell’, even if these days the ‘digging’ part of the process might be as much virtual as it is physical.

Regardless of the method to deliver last mile connectivity, the AltNet approach is one designed to virtually guarantee the investment has a good return.

Notwithstanding all that prior planning, the economics for the AltNet providers are not just about the ‘stage one’ cost of getting the connection into the target companies, premises or communities. That fronthaul element of the

connection into the target area might represent the major capital cost of providing the service – but it’s the area that can attract grant funding and can also be written off over a reasonable time period. To sell the services at an attractive price, they have to factor in the operational costs once they leave the confines of their own ‘sunk-cost’ environment.

In addition to the initial outlay, they must also pay attention to the quality of the connectivity they are using for their national access. There’s little point providing communities with high-capacity connectivity if the chosen national network supplier can’t deliver or carry the traffic at equivalent speeds.

This is especially true for those customers looking to pull resources down from the cloud – resources that can cover everything from bandwidth-hungry CRM and ERP programmes designed to help businesses run more efficiently, to virtual reality and other video applications that suffer from buffering if the network can’t match the requirement.

The AltNets that get this right – balancing the cost of their national network connectivity from a trusted supplier, with the quality and provision of advanced high value services – will be the ones who find their audience and deliver those services profitably. As a result, those AltNets delivering attractive, high-value services to niche markets or communities of interest are likely to begin to attract envious glances from other service providers wanting a piece of that pie – either by copying the approach or through acquisition.

It’s therefore not a stretch to imagine an ambitious AltNet investor looking at success in one area and seeking to replicate it in other parts of the country. Especially if that enables it to further maximise the investment that has already been made in cost-efficient national connectivity. That AltNet service expansion could be achieved either by starting afresh somewhere new, or perhaps more simply by swallowing another existing AltNet that had made the grant-backed stage one investment but lacked the best of breed national network connection.

It may be a few years away yet, but I certainly foresee the rise of the Super Altnet, as those providers that are blazing a trail in the market through wise investment choices begin to emerge from the pack. Over time, consolidation in the marketplace is surely inevitable and represents the best way to maximise longer-term profitability. Of course, if the smaller, independent AltNets are successful in unlocking profitability in niche markets, then the larger established service providers will also become hungry for that business. Maintaining independence may require scale to survive and thrive competitively.

Whatever way the chips fall, there’s little doubt that the ultimate success of the AltNet players will depend on the economics of not only how they reach their customers, but also how they serve them – and that falls back on the overall quality, capacity and speed of the connection end-to-end.

Sarah Mills is Managing Director for Wholesale and Smart Infrastructure at Neos Networks.   She is responsible for helping fixed, mobile and alternative service providers meet their ambitions by providing a high-capacity, high quality national fibre network. As well as its service provider solutions, the company’s nationwide fibre network provides critical communications infrastructure for the energy grid, public sector bodies and businesses. Sarah has more than 15 years of service provider experience having led business development and market strategy for divisions of both O2 and Telefonica.