The state of the UK broadband market in 2007
Nick MacKenzie
August 2007
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The UK is increasingly a broadband-based Internet market, with narrowband effectively disappearing. The narrowband market is shrinking, as most consumers switch to broadband and operators have little potential for price competition. All broadband service providers continue to provide narrowband services and retain a significant customer base, but they are making intense efforts to encourage their subscribers to upgrade to broadband.

Broadband connections overtook narrowband during 2005, and Ofcom estimates that 50% of adults had broadband access at home in April 2007. xDSL is the most popular method of connection and is increasing its market share, with 58.6% at the end of March 2007 (up from 44.9% in 2005), although cable and other access methods have maintained a strong presence in the market (17.5%). Dial-up connections is estimated to account for only 23.9% of Internet customers, compared with 39.0% at the end of 2005.

The UK is the third largest European broadband market (after Germany and France ), with 13.0 million broadband lines in operation in 2006. The market is continuing to expand rapidly, with an increase of 3.0 million during 2006. It is estimate that in 2006 residential and SME connections generated £1.84bn in retail revenue for broadband providers - a fifteen-fold increase in six years. Despite this growth, operators are under pressure as a result of economies of scale, access to premium content and retail price competition.

The broadband market has developed quickly as a result of the improvements in the local loop unbundling process following BT's commitments to Ofcom in September 2005. Until 2Q 2005, the unbundling process was relatively slow (70,000 unbundled lines by June 2005), but this accelerated to 210,000 by the end of 2005 and 2.0 million by April 2007.

Ofcom indicates that the broadband sector may have entered a virtuous circle, with the combination of diverse offers, falling prices and increasing speeds leading to greater consumer awareness and demand, forcing operators to provide additional services and lower prices. It also warns that, in the short term, subscribers may face problems over contract terms relating to contention ratios (large numbers of users simultaneously sharing bandwidth) and usage caps (limits on data downloaded per month). Although users are rarely affected by either problem at present, most users are either unaware of the terms or have an incorrect understanding of how these terms apply to them. The increasing demands of streaming television over IP and growing Internet usage mean that this could become a significant problem.

Price competition between the different operators is intense, and ISPs have quickly adopted bundling broadband with other services to tie consumers in and maximise price reductions. In May 2007, BT's "option 1" package offered broadband at 8Mbps for £17.99 per month, with a promotional offer of £8.95 per month for the first 6 months; Virgin Media's "2 for £20" offer provided 2Mbps broadband and unlimited evening and weekend telephone service for £20 per month; both AOL and Tiscali offered 2Mbps services for £14.99 per month; and Carphone Warehouse's Talk3 offer included unlimited telephony service and up to 8Mbps service for £19.99 monthly.

BT remains the market leader in terms of retail broadband services, with 3.5 million retail subscribers (25.3% market share) in 1Q 2007. The second largest operator is Virgin Media, which had 3.1 million customers and a market share of 23.0%.

The entry of new operators to the market is shown by mobile operator O2's purchase of Be in June 2006, enabling O2 to promote quadruple play offers, and also by the arrival of satellite broadcaster British Sky Broadcasting (BSkyB). O2 paid £50 million for broadband operator Be in June 2006, which had already rolled out its own ADSL2+ equipment in 150 local exchanges. This take-over was seen as a sign of the increasing convergence between the fixed and mobile markets, and matched O2's strategy in Germany where it already offered broadband services to its mobile customers. O2 reported that it had increased its broadband subscribers from 17,000 in 2006 to 24,000 in 1Q 2007. Although this does not represent a significant market share (less than 1%), it is expected that O2 will quickly develop its presence in this market.

BSkyB purchased broadband operator Easynet in October 2005. BSkyB has used its strong position in the broadcasting market to rapidly increase its total broadband subscribers from 21,000 at the time of purchase to 553,000 in 1Q 2007. BSkyB claimed coverage of 50% of UK households and is expanding aggressively through the local loop unbundling process.

A second major driver in the development of the market is the takeover and merger of cable TV operators ntl and Telewest by the Virgin Media group in October 2005. The two cable operators built up debt in developing their networks and buying out the various small operators, and both had struggled to avoid bankruptcy in 2002. A small group of US investors purchased these debts and converted them into shareholdings as part of the bankruptcy process, and these investors hold minority stakes in the Virgin Media group. Virgin Media completed its re-branding at the end of 2006 and increased its broadband subscriber base to 3.1 million.

To increase the competitive pressures on BT in the infrastructure market, Cable & Wireless sold its Bulldog retail arm to competing operator Pipex in June 2006, announcing that it would concentrate its efforts on serving the wholesale market. C&W's plans indicated that it would extend its backbone network, install its own equipment in BT exchanges through the unbundling method and offer services to individual service providers.

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