U.S. FTTH Payback Models are Changing

The U.S. fiber to home payback model is changing, with construction costs seemingly falling, subsidy mechanisms increasing, equity value growing, strategic value climbing and investor interest at high levels.

It is an unexpected outcome for a traditionally-challenged investment thesis. Some believe Apollo Global Management, which purchased assets at about five times to six times cash flow (EBITDA) could--after the FTTH upgrades--own assets valued at 10 times cash flow.

By some estimates, fiber to home construction still costs about $1200 per location. But U.S. service providers including Lumen Technologies say the cost is $1000 or so per passing, though current builds cost less than that.

Others estimate costs of about $600 per passing, with an additional $725 to connect and activate service at a consumer location. The key point is that FTTH costs have fallen significantly over the last two decades.

Others say the cost is closer to $800 per passing. So payback models are highly dependent on the characteristics of each specific deployment, including housing density and propensity to buy.

Take rates will matter, as take rates of 30 percent are not likely to produce a satisfactory return, Lumen has said, expecting take rates more on the order of 40 percent, which telcos traditionally have been able to get after a few years of marketing.

Importantly, service providers now are looking at multiple revenue streams which can be generated--or supported-- from an FTTH deployment. The same FTTH network supports small cell deployments, for example. In essence, part of the value of FTTH then flows from the mobile services revenue stream and payback models for mobile services infrastructure.

Edge computing, enterprise and smaller business data connections, internet of things support and private networks for business also are envisioned as revenue streams enabled by FTTH.
Lumen’s ability to invest is an issue for many observers, though, who believe Lumen might have to choose between retaining its dividend and investing aggressively in FTTH. In any event, the payback models will be complex.

It will not be 40 percent take rates for consumer households passed by the new networks. It also will be the role played by the optical access networks in supporting edge computing and enterprise use cases, including dedicated internet access, private networks and backhaul for mobile cell towers.

Working that into payback models will be complex.