Is Fixed Network Access Business Sustainable?

Sustainability is a fundamental issue for providing high speed Internet access, in any market. And though one never hears it said, the sustainability of the fixed network telecom business is questionable, using the present business model.

“The large incumbent telephone companies do not earn attractive returns in their wireline businesses,” said Craig Moffett Partner and Senior Analyst, MoffettNathanson. “For example, a decade after first undertaking their FiOS fiber-to-the-home buildout to eighteen million homes, Verizon has not yet come close to earning a return in excess of their cost of capital.”

AT&T also has earned poor returns on its fixed network.  AT&T return on invested capital has been declining for a decade and is, like Verizon’s, well below the cost of capital, Moffett said.

In 2014  aggregate fixed network  telecommunications businesses earned a paltry 1.2 percent return, against a cost of capital of roughly five percent.

“For the non-financial types in the room, that’s the equivalent of borrowing money at five-percent interest in order to earn interest of one percent,” said Moffett.

“That’s a good way to go bankrupt,” Moffett said. “No one would undertake to replicate those disastrous financial returns.”

The important implications are two-fold. First, the traditional telco fixed network business model essentially is broken. Cable operators, on the other hand, are earning returns of 13 percent to 33 percent, Moffett said.

The point is that financial returns to be had from overbuilding--being the second or third broadband provider in a given market--are generally poor.

“Broadband is an infrastructure that is very difficult to support two of, and in some case, even one of,” said Moffett.

“Infrastructure deployment requires the expectation of a healthy return on capital,” said Moffett.
“It is not a matter of whether a business is or isn’t profitable, it is instead a matter of whether it is sufficiently profitable to warrant the high levels of capital investment required for the deployment of infrastructure, Moffett said.

In that regard, the problem for telco fiber to home investment is the lack of sustainability.
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