How Valuable are Access Assets in the Landline Networks Business?

To what extent is the value of an access network (telco, cable TV, satellite, fixed wireless or other ISP) driven by the revenues the network can generate, compared to the residual value of the physical assets used to deliver those services?

The other way of asking the question: how much of the total equity value of a fixed network communications business is driven by customer account mass, revenues, profit and brand equity, compared to the value of physical assets?

In other words, if a service provider has a chance to operate a big communications business using leased access, is that preferable to a facilities-based strategy? Does a wholesale strategy create equity value equal to, or close to, that of a facilities-based approach?

It is not an easy question to answer. Traditionally, there are relatively few cases where big and dominant telecom businesses have been built on leased assets.

Nor are we likely to get much additional insight as Google Fiber prepares to operate its first gigabit access market in Huntsville, Ala., where a citywide dark fiber network is being built by Huntsville Utilities.

Starting in mid-2017, Google Fiber will provide Internet access to to homes and small and medium businesses in Huntsville, going citywide in four years.

Comcast and AT&T also have said they will sell gigabit service in Huntsville, but it is doubtful those suppliers will use the dark fiber network. Neither firm has had a strategic belief in operating its core business on leased facilities.

But that does raise an intriguing question: how much of the value of either AT&T’s fixed network business, or Comcast’s business, resides in its control of owned access assets?

In other words, if AT&T or Comcast could decommission their existing networks, and operate using the dark fiber network, how would the valuation of the businesses, not to mention capital or operating costs, change? Some analysts think physical assets might equal current debt.

Google Fiber will have some idea of how the use of the dark fiber network affects its own business model, since Google Fiber will have many other owned networks to compare with Huntsville.

To what extent might Google Fiber’s valuation--were it a stand alone business--vary, using either owned facilities or leased dark fiber?

Other ISPs might not relish the thought of competing against Google Fiber, Comcast and AT&T, all at the same time, so we likely will not see any significant market entry by other Internet service providers who might relish the thought of leasing, rather than buildings and owning, their own access infrastructure.

It might seem obvious that a good portion of the equity value of any access network is its sheer rarity. But precisely how much of the total valuation is driven by the physical assets?

That is hard to say, although we might gain better insight as more retailers come to market using wholesale networks.

To be sure, scarcity value has played an important part in underpinning fixed network valuations. But how much value should reasonably be inferred?

Big telcos and big cable are unlikely to build their future businesses on leased physical assets, so the question largelyis moot. Google Fiber will do so in Huntsville, Ala., but Google Fiber will not likely disclose any savings, so it will be impossible to determine what impact a "lease the network" strategy has, compared to Google Fiber's own "facilities-based" approach in other markets.

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