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Fibre-specialist ISPs are facing an increasingly difficult business environment

Stephen Wilson Principal Analyst, Research

"Fibre-specialist ISPs need more differentiation in their offers or continued survival may prove challenging."

In fixed broadband markets that are dominated by wholesale providers, a breed of specialist fibre ISPs has developed often promoting lean business models and low retail prices. Examples include MyRepublic in Singapore, Australia and New Zealand, and Bredband2 and Bahnhof in Sweden. However, such players face strong competition from existing ISPs, including incumbent operators and mobile network operators (MNOs) that are entering the fixed-line market. This comment examines the viability of specialist fibre ISPs and how they are faring in different markets. It is based on Analysys Mason's recently published report FTTx conversion: worldwide trends and forecasts 2017–2022.

Specialist fibre ISPs have fared better in Sweden than elsewhere

Fibre specialist ISPs have struggled to make a significant impact outside Sweden. We estimate that MyRepublic has a 5% share of Singapore's FTTP connections, and that this has not changed much since the end of 2013. We estimate that MyRepublic in New Zealand has gained around 15 000 subscribers or approximately 3% FTTH subscriber market share since it launched in October 2014. Specialist fibre ISPs in Sweden have gained more traction and are gaining fibre subscriber market share. Bredband 2 and Bahnhof, the two largest specialist fibre ISPs, have slightly increased their share of fibre subscribers recently and together accounted for around 20% of subscriptions at the end of 2016.

The launch of fixed broadband offers by late-entrant MNOs poses a significant challenge for specialist fibre ISPs

The presence of a late-entrant MNO in the fixed broadband market poses an important challenge for fibre specialist ISPs. In New Zealand, third MNO 2degrees has been the largest gainer in the fixed broadband market in recent quarters and grew its fixed subscriber base from 39 600 at the end of 2Q 2016 to 64 300 at the end of 2Q 2017. Its fixed broadband subscriber market share now stands at around 4%. Such gains augur well for Vodafone's entry into the Australian fixed broadband market. Singapore's third MNO M1 has an FTTH subscriber market share of around 15%, although this has not increased in recent years.

The presence of late entrant MNOs in the fixed broadband market is significant for fibre specialist ISPs because such MNOs have the incentive to offer low prices and eat into the addressable market for fibre specialist ISPs. Late entrant MNOs can offer low prices as their fixed broadband offers may deliver supplementary benefits such as reduced churn for existing postpaid mobile customers and prepaid-to-postpaid mobile migration. Late entrant MNOs may lack existing fixed broadband revenue to protect and may be keener to compete on price. Late entrant MNOs can be price leaders by offering discounts to their existing mobile subscribers. 2degrees in New Zealand offers NZD10 (USD6.9) per month discounts on its fixed broadband plans to its postpaid mobile subscribers, equivalent to a discount of up to 13%. Specialist fibre ISPs may not be able to replicate such offers if effective MNO agreements are not in place. The Swedish fibre specialists have been more successful than fibre specialist ISPs in the other markets mentioned in this article because the fourth MNO, 3, is not active in the fibre broadband market. The third MNO, Tele 2, sold its residential cable and fibre operations to the second-largest MNO, Telenor, at the start of 2014. Moreover, fixed–mobile bundles are not prevalent in Sweden. Quadruple-play fixed–mobile offers had just 14 000 subscribers at the end of 2016, unchanged from the end of 2015. Late entrant MNOs may also enjoy better brand recognition than fibre specialist ISPs. This is less of a challenge in Sweden where players like Bahnhof and Bredband2 have long been active over open-access networks, which has allowed them to gain consumer mindshare.

Fibre specialist ISPs have been unable to capitalise on service-level differentiation

A principle of open-access networks is that there should be differentiation on a service level between competing ISPs, but this is a concern for specialist fibre players, which have generally struggled to find distinct services. MyRepublic in Singapore has tried to target the gamer niche with low-latency offers but M1 has also pursued this approach. Content is another way that ISPs have sought to differentiate themselves, for example, Singtel's ownership of English Premier League football rights. However, specialist fibre players will lack the resources to compete in this area and MyRepublic in Singapore does not offer an IPTV service. Competition on a service level has also often focused on fixed–mobile bundles and existing MNOs are better positioned to capitalise on this trend than fibre specialists, which may have limited room for differentiation through MVNO agreements. Existing MVNOs may also launch no-frills FTTH offers although there are limited examples of this approach. Tesco Mobile in the UK failed to generate traction with its no-frills-type fixed broadband proposition despite the success of its MVNO. Energy companies like Trustpower in New Zealand can also offer bundles including energy and telco products, and specialist fibre ISPs may not be in a position to match such packages.

Incumbents have also launched no frills fibre broadband propositions

Incumbents can also target the lower-price end of the market with no-frills offers with their own sub-brands. New Zealand's incumbent Spark has used its Skinny sub-brand to offer fixed broadband to the lower-cost end of the fibre market since 2016, and Telstra in Australia caters to this market with the Belong sub-brand. Such sub-brands narrow the room for price differentiation for fibre specialist ISPs, although this may be greater if such players have more control over infrastructure – for example, if they use unbundled point-to-point fibre offers or GPON unbundling (as is the case with MyRepublic in Singapore).

Fibre specialist ISPs must build awareness and include more products in their bundles

In order to overcome some of these challenges, fibre specialist ISPs will need to work hard on marketing and building brand awareness. They must also consider how to effectively add more services to their bundles, for instance, different forms of video services and mobility offers through MVNO agreements. Partnerships with digital players is another avenue such players could fruitfully explore. Without moves in these areas it will become increasingly difficult for fibre specialist players in many markets to survive in the long term.