Why Buy Rural Fixed Network Assets?

There is one good reason why any buyer would look to acquire rural telco copper-based network assets, and that is the assumption the assets can be made to produce higher revenue, higher profits and higher equity value, after reasonable capital investment and acquisition costs.

Perhaps the key assumption is that an upgrade to optical fiber would allow the firm to reach 50-percent market share (installed base, actually) of the home broadband market, with some incremental revenue contribution from voice, cell tower backhaul, business services and possibly other value-added services.

But all business cases will turn on consumer services. Assume consumer revenue of about $50 a month per connection, or about $600 per year per line, for copper facilities. That is a blend of voice service, subsidies and internet access service, with voice market share of perhaps 40 percent and internet access share of perhaps 30 percent. 

The big bet is that an upgrade to fiber-to-home facilities could boost average revenue per account to perhaps $100 per customer, per month, while also creating the means for boosting other revenue sources as well.

Some households conceivably could hit $200 to $250 per month, BCG has argued. That likely would happen in exurban geographies that are less rural than 15 homes per mile of linear plant, and likely also assumes high take rates for triple-play services.

That last assumption is the most questionable, as it has proven uneconomical for most smaller internet service providers to make money on video services, always a scale business but doubly so as demand declines.

source: BCG 

Most potential acquirers will likely focus instead on internet access and a few other incremental revenue sources, without factoring video entertainment into the model.

Potential buyers (private equity or other) might bet they can boost internet access share to 50 percent and boost average revenue per account by as much as 100 percent, the key change being an increase in internet access revenues from perhaps $30 to $80 per account. 

Many estimate that connecting a rural home could cost four to five times as much as connecting a suburban home, so the issue is whether there is a business model, including payback time for investments. 

As a rule of thumb, areas with home density less than 15 per linear plant mile probably represent fiber upgrade costs between $8,000 to $10,000 per home. At 50-percent penetration that implies per-customer costs between $16,000 and $20,000. Without subsidies, that is a daunting, if not impossible business case. 

The sweet spot might therefore be areas where capex requirements are a more-modest two to three times suburban cost, and where it is feasible to boost ARPU 100 percent or more.