Virgin Media expansion

All over the news today are the Virgin Media expansions plans. Virgin plan to spend £3billion expanding their network reach from 13 million to 17 million homes. That’s £750 per household passed. If, following this investment, Virgin grows its customer base by the same proportion as the growth in network coverage they might expect to grow their base from 5 million to 6.5 million customers. That would make it £2000 per acquired customer. Let’s not worry about other customer acquisition costs.

Virgin will depreciate that cost over maybe 25 years so that’s £80 per customer per annum, or £6.66 a month. That’s £6.66 of the monthly subscription cost of a new customer being the cost of laying down the network. This would be reduced if they depreciated it over a longer period which maybe they do – I imagine BT’s strategy is to depreciate over many decades as once in the infrastructure lasts a long time. A chunk of the £3bn might well be operational cost which would reduce the depreciation but add to operations costs.

Brings it home as to why these services cost what they do. It’s analagous to why a BT line rental costs roughly £16 a month although one imagines that BT has written off most of the capex of installing its copper. Even though broadband can almost seem to be free nowadays the cost at the lower end is driven by the line rental. When it comes to superfast broadband bandwidth costs come more into play.

The revenue growth would notionally increase from £4.2bn to £5.5bn although I’m being a little simplistic and not taking the effect of their mobile business into consideration.

I haven’t seen profit numbers for 2014 but I think they are pretty profitable. Lets assume 10% profit. Could be more. 10% profit of the delta sales arising from the new investment (our guess is around £1.3bn as stated) would be £130m a year. That would be a 23 year payback time for the £3bn of cash spent. It’s a long term game isn’t it?

These numbers are very rough back of a fag packet calcs but I think it certainly gives you an idea. I’m sure there are lots of Variables played in by Virgin accountants to come up with a business case. Also I’ve almost certainly missed something out but I bet I’m not far off the mark.

A 23 year Return on Investment wouldn’t pass muster with most companies. Even BT which is in the same long term infrastructure game as Virgin. I’m told that BT’s Cornwall infrastructure project which had the benefit of substantial EC cash only showed a reasonable time to money because of that EC money. And that was something like a 12 – 13 year payback.

Note there were according to the Office for National Statistics 26.7 million households in the UK in 2014.

So Virgin’s investment takes them to around 64% coverage. Their existing network reaches around 49% of the population so for £3m they get 15% more. If we were to extrapolate these numbers then the whole country would cost £20billion to service. I realise it isn’t as simple as that but the number isn’t orders of magnitudes adrift from the Caio report of a few years back which estimated the total cost of rolling ubiquitous Fibre to be around £29bn.

If we keep the maths simple and assume that rural areas would cost the same per household to service, which they won’t the cost of extending the Virgin network to every household would be just over £7bn. I don’t have the additional cost of servicing non-metropolitan areas off the top of my head but it wouldn’t surprise me if it wasn’t represented by the £9bn delta between my own calcs in this post and Caio.

So the cost of providing a high speed broadband infrastructure to the last third for a new provider feels as if it would be something like £16bn. We don’t have a number were BT to be the provider but BT will already have a chunk of infrastructure in place towards fulfilling the job.

My guess is that there’s no way based on these projected costs that Virgin would ever seek to invest in the “final third”. Their RoI/payback would stretch almost to the next century. This is just a bit of an exercise but it does serve to illustrate the long term game that is the telco business.