We’ve all been there! Choppy videos and crackly audio on video calls have been a staple of lockdown. I’ve lost count of the number of times I’ve complained about my internet connection and wished I had something better. Lockdown has made it apparent that the requirement for an internet connection has gone beyond simply requiring “wi-fi”, and that fast and reliable broadband is becoming the “fourth” utility. The question is: is this an investment opportunity, and is it attractive?
The UK lags much of the developed world in the roll-out of fibre optic cable. At the end of 2019, UK coverage stood at 10%, significantly behind countries such as Portugal and Spain where coverage is over 70%. Encouragingly, the Government’s ‘National Infrastructure Strategy’ sets an ambitious target of 85% coverage by 2025 and promises £5bn of investment to help achieve full fibre coverage, however, c£25bn of the required £30bn will need to come from the private sector.
What is a fibre investment?
Fibre investments can be accessed by financing companies that lay and operate full fibre networks. Once networks are operational, revenue comes from two sources:
- Direct rolling contracts between individuals/businesses and the network provider. Contracts usually last around 24 months; however, follow-on renewals, particularly in rural areas with fewer competitors, provide a repeatability of income.
- Wholesale contracts with internet providers who pay for excess capacity; these contracts lock in longer-term revenues with strong counterparties.
Both sources of revenue offer inflation protection, but it is important to understand the complexities of the different business models which create a spectrum of risk and return. Networks targeting urban areas benefit from lower deployment costs per customer but greater competition, whereas installation costs for rural networks are higher but have a more monopolistic position and (potential) government support.
LCP clarity:
As we become more reliant on reliable internet connections, we consider whether fibre broadband makes an attractive investment opportunity.
LCP insight:
Consider whether your portfolio could benefit from a fibre broadband investment.
Let us know if you’d like to know more, or if you’d like us to help with your portfolio.
Isn’t 5G going to make fibre redundant?
There is a misconception that 5G roll-out (expected by 2025 at the earliest) will reduce the requirement for fibre connections. I believe that, at least in more developed countries, this is largely unfounded for the same reason as why wireless ‘dongles’ haven’t made wired internet connections redundant – wireless connections are temperamental and have poor reliability in many areas. However, in less developed areas where it would be more difficult to roll-out fibre broadband there is definitely a case for 5G-only connections.
Even if wireless network coverage does improve, 5G will likely only be used for ‘last-mile connections’ (i.e. the connection from a fibre hub to individual users). 5G is only suitable for these connections as, even with better coverage, full fibre connections have better bandwidth, speed and lower latency.
That said, there are risks:
- Demand and take-up risks are particularly important for development projects.
- Regulatory risk (eg mandating open access or pushing competition) should be considered but seems to be mitigated by many governments’ promotion of data infrastructure.
- ‘Obsolescence risk’ (ie the risk that a faster and more reliable technology makes fibre redundant), is a key risk given the rate at which technology is progressing, but is somewhat mitigated as it would take a considerable time to roll-out a new technology.
In addition, the UK Government has signalled that it expects fibre to be the primary broadband technology in its ‘National Infrastructure Strategy’.
What's the best way to invest?
Generally, I prefer a diversified approach where fibre is one component alongside other infrastructure opportunities such as renewables, utilities or transport infrastructure, over fibre-only funds which tend to be development-led, closed-ended vehicles with long time horizons. Countries that have fallen behind in fibre roll-out, like the UK, Germany and Italy, offer the most opportunities. Therefore, fibre can fit into both UK-focused and globally-diversified funds.
With increasing impetus in this sector and a desire from investors to make a societal impact, I believe that fibre will become the “fourth utility” in the years ahead.
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