FTTH Payback Models Have Changed

Larger U.S. internet service providers using fiber-to-home platforms sometimes continue to face an excruciatingly difficult business case for such investments. Consider Lumen Technologies, which has been relatively slow to upgrade copper access to FTTH. Lumen says average revenue per user (account) for new fiber connections is $59 a month. 

source: Lumen Technologies 

If average FTTH capex is about $1,000 per passing, and take rates are about 40 percent, then capex per account is about $2500. At $59 a month revenue, annual proceeds are about $710 per account.

That can make for a long payback cycle, which is why assets are being purchased by more-patient investors such as private equity, pension funds and other institutional investors. Such investors buy access assets as an alternative investment that produces predictable cash flow and offers some diversification from other asset classes. 

Recent presentations BY Frontier Communications also have shown fiber-to-home home broadband average revenue per user of about $63. 

source: Frontier Communications 

That is lower gross revenue than many had expected three decades ago. Where a triple-play bundle might have produced $130 per month to $200 per month revenues, home broadband might produce $50 to $80 a month. 

With the shrinkage of both fixed network voice revenues and entertainment video, ISPs increasingly must build their revenue models on home broadband. 

And payback models have changed. Increasingly, it seems, capex costs are not the most-important element of such models. Instead, take rates matter much more. Customer density and competitive conditions still matter, but government subsidies and expected equity value increases also are a factor. 

The former aids the investment cost; the latter increases the total expected return by increasing exit multiples or exit prices. 

That new FTTH projects increasingly are feasible with a $50 to $60 monthly revenue target and adoption around 40 percent to 50 percent shows how much the capex and opex assumptions have changed over the past three decades. 

Of course, some ISPs are able to justify the dense fiber networks by including the benefits of fiber to support cell sites and business customers. Government subsidies also help. 

Nor are profit margins in home broadband especially high. AT&T profit margins for new broadband builds are said to produce profit margins “in the mid- to upper teens,” AT&T has said. 

Such revenue prospects are one reason why co-investment has grown in popularity. If expected revenue is at such levels, a reduction in capital investment burdens is necessary.