UK Q3 2022 Retail ISP and Network Operators Market Analysis
Bigger players ride out market slowdown but trouble lies ahead
Summary of Key Findings
The third quarter of 2022 marked the fixed line broadband sector’s weakest performing quarter in years as consumers and businesses reign in spending costs and grapple with the ongoing cost of living crisis. Over the past three quarters fixed consumer and business broadband subscribers have been steadily decreasing with growth trends in subscriber uptake numbers falling by 38 per cent from Q1 to Q2 and 86 per cent from Q2 to Q3 2022.
FTTP network rollout has steadily continued throughout the quarter, but wholesale connections have levelled out as the market has severely slowed down. A wholesale market shake-up looms as the independent network sector consolidation picks up pace with the winners inevitably eyeing up wholesale agreements for a return on their investments.
Total Q3 2022 FTTH/P/B, FTTC, cable, FWA/satellite and DSL wholesale connections stood at an estimated 29.04 million, up from 29.03 million Q-o-Q and 28.38 million Y-o-Y; with retail consumer and business connections reaching an estimated 29.03 million during Q3 2022, up from 29.01 million Q-o-Q and 28.44 million at the close of Q3 2021.
Household Internet penetration reached 89.29% with the majority of fixed broadband connections using predominately FTTC, DOCSIS 3.1 or FTTH/P/B technologies.
Retail net broadband additions were in the low tens of thousands (~12k) as the cost of living crisis deepens and some consumers move away from fixed-line broadband services.
BT’s fixed broadband Consumer division saw an estimated 27k net additions in the quarter; for the second consecutive quarter Openreach saw a loss of 40k connections due to market slowdown and industrial action.
Openreach’s FTTP penetration rate continued to slowly rise at 27.4% and is closed the gap on Virgin Media O2 (VMO2) with the latter’s take-up rate falling to around 35%.
At the close of Q3 we estimate that nearly 55% of lines live on the Openreach FTTx network belong to non-BT service providers.
VMO2’s fixed segment showed a slight improvement from Q2 with its broadband net adds reaching 19k up from a 16k bringing its broadband customer base to 5.631 million.
Virgin Media’s Project Lightning build picked up pace in Q3 having passed 115k premises up from 114k in Q2, with the cumulative build covering just under 3 million premises.
CityFibre (CF) reached the 2 million premises passed milestone (1.8 million ‘Ready for Service’), reaching a quarter of its 8 million premises target by 2025.
Sky UK remains the dominant player in its European operations and its UK operations are bolstered by pay-TV subs and closed the quarter with around 6.187 million broadband subscribers.
AltNet providers continue their network rollouts at pace, but struggle to gain traction as the consolidation in the sector is ramped up.
AltNets FTTx (pre-dominantly FTTP/B) ISPs subscriber numbers continue to remain static and we estimate around 2k broadband net losses during the quarter seeing the total number of subscribers staying around 2.8 million at the close of Q3 2022.
Openreach underperforming in broadband connections but makes up for it in revenue
Openreach again boasted another record breaking quarter for its FTTP network rollout, weekly run-rates and FTTP connections, however it has seen net broadband connection losses continuing in Q3. At the close of the quarter its FTTP network footprint covered 8.762 million homes and businesses, passing just under 3 million premises year-on-year. Its rural build is also progressing well with 2.6 million premises passed.
BT Openreach’s 'Fibre First' FTTP build programme rollout continued to accelerate, reaching record levels in the third quarter, building at an average run-rate of 62k premises passed per week and 805k throughout the quarter. The supplier is aiming to average a million premises per quarter and is not far off achieving this and has increased its target to pass a further 3.5 million premises this financial year. Openreach reported 2.405 million connections compared with 2.073 million in Q2 with a 59% increase Y-o-Y from 1.508 million with a penetration rate of around 27% (Figures 1 and 2).
Openreach saw a loss of 89k broadband connections during the quarter, which is the second consecutive quarter (-44k in Q2) for the supplier to experience a loss in its subscriber base. The supplier did report that around 40k of the losses could be attributed to the general market slowdown along with industrial strike action by workers leading to a failure to implement new instals and FTTP provisioning. Openreach foresees the decrease in figures likely to carry on until the end of this year as the fixed line broadband market stalls and the new housing development sector slows down.
Openreach’s total revenue growth saw a positive 4.3% increase at the close of the quarter however this is slightly down from the 5.2% increase in the previous. Openreach’s revenue growth continues to be driven by inflationary linked price increases and increased sales of fibre-enabled products and Ethernet, however this continues to be offset by the decline in physical lines and decrease in chargeable repairs due to lower repair volumes.
Broadband retail sector sees slowest quarter since Covid-19 pandemic
The fixed line broadband subscriber market has continued to see a marked slowdown for the second consecutive quarter. BT’s Consumer segment recovered in Q3 from the previous quarter’s losses and saw around 26k net broadband additions. Its Enterprise unit still continues to struggle as it reported a loss of 1k subscribers for the third consecutive quarter. VMO2 reported 19k net additions to its broadband services and also reached the 1 millionth subscriber milestone mark on 31 October to its first converged Virgin broadband and O2 mobile ‘Volt’ package launched in the previous year.
Sky’s European operations also showed an overall improvement as it reported 320k net additions up from 255k net losses in the previous quarter. Its revenue decreased by nearly 15% quarter-on-quarter, however its UK operations and annual price increases kept its revenue consistent with the previous year. Despite the healthy net additions across its operations, broadband net additions declined by 1.1% but its unique pay-TV content services helped bolster its revenue stream. At the close of Q3 2022 we estimated Sky UK to have a broadband customer base of 6.122 million.
Budget-friendly ISP TalkTalk, saw only minor gains in Q3 with an estimated 5k additions throughout the quarter. Although not in the top four major players, Vodafone does leverage its FTTP reseller agreements with CityFibre and Openreach to offer full fibre connectivity to more than 8 million premises. Vodafone has continued its strong performance with a net addition of 39k fixed line broadband subscribers (up from 22k in Q2), bringing its customer base to 1.111 million at the close of the quarter.
Most operators will again be introducing the ever-unpopular inflationary price increases due to come into effect in April for new customers. However as consumers’ ‘real’ income further deteriorates most households will be further reducing their outgoings accordingly, with some moving away from fixed broadband services to relying on mobile broadband.
Wholesale connections remain static as challenging conditions continue
At the close of Q3 2022, we estimate wholesale connections to have reached 29.04 million. Growth in the sector has begun to plateau and as reported above Openreach for the second consecutive quarter reported a loss of connections. Increase in net broadband connections grew by a meagre 0.03% quarter-on-quarter, which despite the increase in FTTP network coverage by major and AltNet suppliers is indicative that the market is reaching saturation point along with AltNet suppliers not gaining as much traction as expected within their footprints.
As expected, DSL lines are on the wane and dipped to 2.95 million during the quarter down from 3.15 million during the previous quarter. FTTC connections decreased to 16.19 million compared to 16.40 million in Q2 2022. FTTP ultrafast (100 Mbps+) lines are steadily progressing however and have risen to around 3.79 million up from 3.40 million in the previous quarter (Figure 3 below).
Full details of the quarterly analysis along with the metrics spreadsheet can be found in the attachments.