Earlier this summer BT, under pressure from telecoms regulator Ofcom, announced that it was slashing its wholesale prices and increasing access to its network. For BT’s smaller, nimbler rivals this represents a genuine opportunity.

TechMARK-listed Easynet has been particularly quick to respond.
For some time now the firm has been busily engaging itself in local loop unbundling (LLU), a process that has enabled it to develop a wholesale business capable of competing with BT’s.

LLU is important because, as a result of its dominant position as the State-owned telecoms provider, BT hitherto held a monopoly on connections from telecoms exchanges to individual homes and businesses in the UK. In practice, this has meant that BT owns the network and that its rivals (be they telecoms firms, internet service providers or broadband business) have had to buy bandwidth from it, which they then resell on to consumers. LLU allows the likes of Easynet to break away and operate their own connections, challenging BT’s wholesale market dominance.

Easynet guns for 5.8m homes

‘We always knew that Ofcom viewed LLU as the key to the UK market,’ Easynet’s finance director Will Gardiner states, ‘and at the moment we’re one of only a handful of companies really doing it.’

On the back of Ofcom’s decision, Easynet is accelerating its unbundling programme. It expects to free up a further 100 exchanges over the next 12 months, a move that will take its total to 350 and, in doing so, grant it direct access to 5.8 million UK homes and 850,000 businesses.

A recently signed deal with Centrica subsidiary Onetel, to provide wholesale broadband connectivity for three years, could thus be a taste of things to come.
The downside for Easynet is that the process is expensive and, with September’s interims showing losses rising from £9.9 million to £13.1 million (on sales up 12 per cent to £77.1 million), many investors will probably continue to give the group a wide berth.

This is understandable, but for those eager to accept the risk of backing a long-time loss-making firm the benefits could be great. Gardiner maintains that ‘we are now cashflow positive and hope to reach profits in 2006, which is what we’ve predicted all along.’

Pipex’s 24MB broadband dream

AIM-listed broadband and internet service provider Pipex Communications has also set its sights on the local loop.

A series of quick-fire acquisitions have already enabled Pipex chairman Peter Dubens to build a business worth close to £200 million. In July, however, Dubens went on to confirm that he too has designs on certain local loops – albeit to a different end.

‘Given the number of broadband customers we now have,’ Dubens explains, ‘we have identified 60 exchanges that have sufficient customer density to make strategic LLU very attractive.’ Pipex thus plans to unbundle these exchanges over the next 18 months and to sell its broadband services to customers located around these centres directly, thereby reducing its dependence on reselling BT’s bandwidth.

Pipex hopes this process will eventually enable it to offer connection speeds of up to 24 megabytes per second, significantly ahead of the one and two megabyte broadband links that currently abound.

Like Easynet, Pipex remains loss- making at the pre-tax line. Yet it too is also forecast to make a significant breakthrough in 2006.

For the full year, broker Baird anticipates a reduction in losses from £5 million to £3.6 million on sales up 33 per cent at £136 million. A £5 million profit and £155 million of revenue are then forecast 12 months on.

With the shares currently valued at 8.5p, Pipex trades on a prospective p/e of 11.6 times expected 2006 earnings. The risks remain but the shares could be worth locking away for the long-term.