Telefonica unlikely to spend big to build or buy fixed broadband in the UK< but there are still options open to O2 if it is keen to penetrate the market

The report earlier this week that UK mobile operator O2 is considering a return to the fixed broadband market led many industry watchers to immediately start to question the rationale behind the firm rolling out a new fibre network or reselling capacity from Openreach. There are serious obstacles to both options – essentially cost in the first and margins in the second – but there could be other ways for O2 to offer home broadband that wouldn’t make shareholders faint at the prospect.

Speaking of shareholders, the source of the rumour, Bloomberg, noted that O2’s parent company Telefonica is at the early stages of deliberations on fixed broadband, no plan has yet been presented to its exec committee, and the talks could still come to nothing. It’s tempting to assume that will be the case, given that O2’s previous attempt to provide fixed broadband in the UK led to it selling the business, known as Be, and its half a million customers to Sky in 2013.

But the market has changed since then.

Outside of the UK mobile operators have been acquiring fixed assets for a few years in a bid to tap into the move towards converged services, the latest example being Vodafone’s ongoing bid to acquire Liberty Global’s cable networks in Germany and Eastern Europe. It is not an area that has really taken off in the UK to date, but BT is working hard to integrate EE’s offerings with its own and major entertainment players like Sky and Virgin have gone down the MVNO route. It could be prudent for O2 to think ahead.

With regard to Virgin, it emerged earlier this month that the cableco is considering opening up its infrastructure to wholesale customers, which could provide a route to market for O2. A more formal tie-up than that perhaps seems unlikely, but given its parent company’s recent spate of deal-making, you can never say never.

As Bloomberg’s sources pointed out, M&A options in the UK are limited. And you also need to look at Telefonica’s appetite, or lack thereof, to open its wallet.

It is three years since the European Commission blocked Telefonica’s bid to merge O2 with 3UK. There were subsequently rumours of a deal between O2 and Liberty Global, but they came to nothing and Telefonica instead plumped for the IPO route. A London listing never happened, with reports citing concerns over Brexit.

While it looks like Telefonica is happy to hold onto O2, despite its debt-reduction endeavours, ploughing significant sums into the business seems an unlikely outcome.

It has already had to do that, of course. O2 was the biggest spender at the UK’s 5G auction last year, racking up a bill of £524 million to secure frequencies in the 2.3 GHz and 3.4 GHz bands. 700 MHz and 3.6 GHz-3.8 GHz sales are due to follow in the second half of this year.

The Bloomberg report does not mention 5G as a fixed broadband option, but O2 could choose to launch a mobile-based home broadband service to make its move into the fixed market. 5G-based broadband isn’t for everyone, but it’s certainly an option.

O2 could also look to tie up with one of a raft of fibre network upstarts in the UK. Vodafone, for example, is working with CityFibre to roll out high-speed broadband in certain UK markets.

So while we’re not expecting to see a large-scale, high-spend onslaught on the UK fixed broadband market from O2, the telco still has options open to it, if it wants to pursue a converged strategy.

Friday Review: 26 April 2019