Opal storms the UK front line

This year has been a time of consolidation for tier-2 providers in UK managed services, and some significant players are emerging. Like other tier-2 providers, Opal is lining up new services that should be considered by enterprise users.
If Opal masters the launch of new higher-margin services and convinces the critical mid-sized market of its credibility to deliver these services, it will be well-placed to provide a leading alternative to BT, Cable & Wireless, and Virgin Media Business.
With a local loop unbundling footprint approaching 90% population coverage in the UK, Opal is set up to provide an access-driven alternative to incumbent telco BT, alternative telco operator Cable & Wireless, and cable operator Virgin Media Business.
Opal has several key strengths that could open up significant sales in the SME market. First, its network – which it has spent over £500 million upgrading – is one of the densest in the UK, with 50 PoPs located on a core of four resilient rings, bringing its backbone closer to businesses than many of its competitors’.
Second, two-thirds of Opal’s unbundled exchanges are Ethernet-enabled – a proportion that is expected to grow to nearly three-quarters by the end of 2010. As a result, Opal is getting ready to deliver potentially lower-cost managed data services to many of the UK’s businesses.
Services include IP VPN connectivity (geographically dispersed companies such as retailers may be attracted to this offering from Opal), Ethernet-based Internet access, and point-to-point and point-to-multipoint Ethernet connectivity.
Ethernet is giving Opal the opportunity to offer services that provide an upgrade for smaller businesses using ADSL, while being a cost-effective alternative to leased lines. It continues to resell BT Wholesale’s Ethernet services, but it is well-positioned to ramp up Ethernet services using its own local exchange equipment, which will offer it additional flexibility in service provisioning as well as pricing.
Like other UK tier-2 service providers, such as Daisy Group, Easynet, and Azzurri, Opal is no stranger to M&A activity. The service provider is the business arm of TalkTalk Group, the ISP that demerged from Carphone Warehouse in March 2010.
Opal has quickly built up a significant customer base of 200,000 small businesses via direct and indirect channels. Much of this has been achieved by the May 2009 purchase of Tiscali UK, which had already bought the ISPs Pipex, Freedom2Surf, and Nildram.
Opal has added organically to its broadband base, with 100,000 net broadband customer additions in 2009. However, it faces a number of challenges as a prospective managed services provider.
Aside from integrating its multiple customer bases and networks – a process that is under way – Opal faces challenges with regards to its product mix. Most of its customer base, whether acquired through Tiscali or not, take legacy products that are declining in margin – between two-thirds and three-quarters of Opal’s revenues come from inbound or outbound legacy voice.
Most of the remaining sales are for broadband, where Opal chiefly competes on price, particularly in the small business space.
Opal’s managed data network offerings – Ethernet connectivity and IP VPNs – are still limited in terms of the breadth of portfolio when compared with BT, Cable & Wireless, and Virgin Media Business, and these offerings still comprise a small fraction of total revenues.
Opal has yet to deliver many services that are offered by its larger competitors, such as unified communications and collaboration, and cloud computing. It must drive growth in these services.
It is also weak with regards to its mobile offering, which is based on an MVNO arrangement. These weaknesses will mean it will struggle to meet the shortlists of many larger businesses in the immediate future.
However, Opal is starting to address these shortcomings. It claims a growing pipeline of data sales, and it has defined a roadmap for expanding and launching higher-margin services, starting with a hosted IP PBX offering. In 12 months, Opal may be offering web conferencing or collaboration software, and basic cloud services.