Mercury Broadband, an internet service provider serving rural customers near Topeka, Ks., has gotten an investment of up to $230 million from private equity investment firm Northleaf Capital Partners.
The investment is part of a larger trend of private equity firms investing in digital infrastructure assets. The latest wrinkle is an increase in investment in rural ISPs able to leverage new government funding in rural areas where the bigger ISPs are unlikely to want to compete.
Mercury Broadband is among firms that have secured Rural Digital Opportunity Fund (RDOF) grants by the Federal Communications Commission to bring fiber optic broadband to underserved communities, especially in rural areas.
The construction is expected to add more than 12,000 plant miles and pass tens of thousands of locations.
As a rule, the availability of RDOF grants lowers the fiber access plant capital investment hurdle by 30 percent or so. That, among other things, has dramatically reshaped thinking about when FTTH deployments make financial sense.
The economics of connectivity provider fiber to the home have always been daunting, but they are, in some ways, more daunting in 2022 than they were a decade ago. The biggest new hurdle is that expected revenue per account metrics have been cut in half or two thirds. That would be daunting for any supplier in any industry.
These days, the expected revenue contribution from a home broadband account hovers around $50 per month to $70 per month. Some providers might add linear video, voice or text messaging components to a lesser degree.
But that is a huge change from revenue expectations in the 1990 to 2015 period, when $150 per customer was the possible revenue target.
You might well question the payback model for new fiber-to-home networks which assume recurring revenue between $50 and $70 per account, per month, with little voice revenue and close to zero video revenue; take rates in the 40-percent range; and network capital investment between $800 and $1000 per passing and connection costs of perhaps $300 per customer.
But that is the growing reality. Among the reasons: higher government subsidies; indirect revenue contributions and a different investor base.
All that has shifted fiber-to-home business models in ways that might once have been thought impossible.
In the face of difficult average revenue per account metrics, co-investment and ancillary revenue contributions have become key. Additional subsidies for home broadband also will reduce FTTH deployment costs. All that matters as revenue expectations are far different from assumptions of two decades ago.
“Our fiber ARPU was $61.65, up 5.3 percent year over year, with gross addition intake ARPU in the $65 to $70 range,” said John Stankey, AT&T CEO, of second quarter 2022 results. “We expect overall fiber ARPU to continue to improve as more customers roll off promotional pricing and on to simplified pricing constructs.”
Lumen reports its fiber-to-home average revenue per user at about $58 per month. For those of you who have followed fiber-to-home payback models for any length of time, and especially for those of you who have followed FTTH for many decades, that level of ARPU might come as a shock.
Though some honest--and typically off the record--evaluations by some telco executives 25 years ago would have described the FTTH business model as “you get to keep your business” rather than “we boost revenue.” Few financial analysts would have been impressed with that argument.
But revenue expectations were quite different back then. The thinking was that per-home revenue could range as high as $130 to $200 per month.
Contrast that with today’s view, which is that monthly review per account is closer to $60 a month. And yet investors believe that provides a reasonable business case, in the right markets, with subsidies and a chance to create competitive moats.
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