Virgin Media O2’s decision to cut thousands of jobs and halt further fibre upgrades marks quite the retreat for a company once positioned as BT’s biggest challenger, writes Saskia Koopman.
Five years after Virgin Media and O2 merged to create a £31bn telecoms giant, VMO2 is battling falling revenues, ongoing customer losses and over £22bn of debt. Its response? An £800m annual cost-cutting programme, including £300m in workforce savings and a halt to further full-fibre upgrades beyond existing commitments.
But the restructuring also exposes wider issues in Britain’s broadband industry, where years of network investment have left operators competing for customers in an increasingly saturated market.
A merger under pressure
When Liberty Global and Telefónica combined their UK businesses in 2021, the aim was to create a stronger competitor to BT by combining Virgin Media’s broadband infrastructure and O2’s mobile network.
The deal, however, also saddled the firm with heavy debt. Additional borrowing to establish the 50/50 ownership structure meant VMO2 was born with around £18bn of it. Higher interest rates have also since added to the pressure, and five years and more than £10bn of investment later, the company is cutting, rather than expanding, its network.
The group’s third-quarter revenue fell 5.7 per cent to £2.4bn, while underlying earnings declined 2.6 per cent. It also shed over 22,000 broadband connections.
Paolo Pescatore, analyst at PP Foresight, described the restructuring as a potential “last roll of the dice to rebuild confidence”.
“Simplification is overdue, but the scale of the changes raises uncomfortable questions about what the merger has delivered”, he said.
“Employees now face the consequences of a business still searching for a convincing route to sustainable growth”.
Most redundancies are expected to affect non-customer-facing roles, while VMO2 is increasing its use of AI in customer service and sales.
The Communication Workers Union warned that losing experienced staff could undermine service quality. “It is important that immediate cost savings do not have a negative long-term impact by losing workers with the key skills and legacy knowledge that is so crucial to ensuring good customer service”, said assistant secretary Stephen Albon.
The group’s fibre ambitions
VMO2’s decision to halt further full-fibre upgrades also reflects mounting pressure across the industry, where years of investment have created overlapping networks. BT’s Openreach is competing against Virgin Media, as well as smaller providers including Cityfibre, Community Fibre and Gigaclear.
While competition has expanded consumer choice, operators are also facing borrowing costs and pressure to attract customers to justify spend.
VMO2 has now concluded that the market just cannot support three overlapping fibre networks. Instead of continuing its full-fibre upgrade programme, the company is planning to use cheaper technology to deliver speeds of up to 2Gbps across most of its remaining cable networks by 2027.
It is also reportedly nearing a deal to use BT’s Openreach infrastructure to reach customers outside its existing footprint. This would mark a change of direction for a company whose shareholders have backed nexfibre as a major challenger to Openreach.
The shift comes as the Competition and Markets Authority (CMA) considers whether to block nexfibre’s proposed £2bn acquisition of Netomnia.
VMO2’s shareholders have accused regulators of inconsistency after BT was allowed to rescue struggling rival Talktalk, while their own deal faces competition concerns.
Meanwhile, CityFibre is negotiating a refinancing after accumulating £3.9bn in net debt, underlining the financial pressures facing alternative broadband providers.
Will the cuts be enough?
VMO2 is not alone in reducing its headcount, with BT having announced plans in 2023 to cut as many as 55,000 jobs by 2030, and VodafoneThree also pursuing redundancies.
But VMO2’s debt burden makes its restructuring plans more urgent than perhaps its rivals’.
Bloomberg Intelligence analyst Erhan Gurses estimates the redundancies could generate around £200m in annual gross savings by 2028.
“Yet it wouldn’t effectively resolve the balance-sheet strain”, he added, warning that the net leverage would still be around 5.5 times earnings in 2028, above the firm’s target range of four to five times.
“Preserving cash is understandable”, Pescatore added. “However, pulling back on fibre risks weakening differentiation over time”.
“A smaller cost base means little if customers and revenue keep shrinking”.
VMO2’s difficult challenge will be cutting spending without also accelerating the customer losses that have so far contributed to its financial difficulties.
The company is expected to set out its fuller strategy alongside its annual results in early 2027.
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