Some parts of the U.S. digital infrastructure market will get a boost from new federal funds to support fiber access networks. Thost subsidies might mean a reduction of capital investment to build new access networks of perhaps 30 percent.
Such subsidies are part of a wider movement by internet service providers to reduce the capital expense of building advanced fixed access networks, and efforts by governments to incentivize deployment.
Co-investment, by definition, spreads risk and cost for any single investor, if it boosts customer adoption by single digits, in some cases. Fiber-to-home never has been an easy business case, and is dramatically more challenging in any market with at least two rivals.
For that reason, many investors (operators and financial entities alike) believe the optimal business case is for an owner of the first fiber-to-home network in any area, using a wholesale model that encourages most or all of the other contenders to lease capacity rather than build their own infrastructure.
For large operators in urban markets as well as small operators in rural markets, much depends on cost containment, as revenue increases are tough in competitive markets. But capex is the first hurdle.
According to some small community or co-op internet service providers, the total cost to build fiber-to-home systems in rural Vermont is about $26,000 per mile, including drops and customer installs for six customers per plant mile.
Assuming 12 potential customers per plant mile, that implies a take rate of 50 percent by the end of third year of sales. Other studies suggest a per-mile cost closer to $56,000, with 22 potential customer locations per mile.
That implies a per-location cost of about $2545, and a per-customer cost of $5091, with monthly revenues possibly in the $50 range. Assume take rates of 50 percent.
If the free cash flow ratio is about 13 percent (after payroll, taxes and all other cash expenditures)--assuming any rural internet service provider has the same cash flow margin as a telco, capital can be obtained at five percent interest rates, cash flow increases three percent per year, there is never a payback on investment.
Traditionally, that shortfall in rural areas has been covered by subsidies of one sort or another, plus rigid cost controls.
If the cash flow ratio (not including operating expenses) is about 29 percent, payback is at least 21 years. Subsidies that effectively reduce invested capital expense by 30 percent help.
In the above case, assume the ISP has a subsidy of 30 percent, resulting in per-location cost of $1782 and per-customer cost of $3564. Then the payback period drops to 16 years.
Keep in mind, payback means that the owner only has reached breakeven on the cost of the network.
A tier-one ISP able to leverage scale in its buying costs would fare better. Assume per-location investment of about $800 and per-customer cost (including drop cost and installation of $300 per location. Others might note that costs can range up to $600 per location) of about $1900.
Assume monthly recurring revenue of about $960, with the same 29 percent cash flow margin, borrowing costs of five percent and three percent annual revenue increases. Assume a 50-percent take rate.
If cash flow then is $278, the payback period (breakeven) is about six years. In practice, the payback period is probably a bit longer, as this analysis assumes the telco gets 50 percent take rates, while present take rates are in the 40-percent range.
If one uses the 40-percent take rate, then per-location costs of $800 work out to about $2000 for customer capex, plus $300 for installation, for a total of about $2300 per customer. Then payback is about 7.5 years, based on cash flow.
A large telco also has other upside, though, serving business accounts that boost average revenue per account. A large telco with its own mobile operations also benefits from the ability to use the fiber network to support its mobile operations as well.
Of course, that is cash flow, not profit. Cash flow is working capital, not profit. But in many cases free cash flow margin is about equivalent to profit margin.
Still, the point is that any new subsidies that lower upfront capital expense by 30 percent are going to positively affect the payback model. And the payback model supports profit generation.
If an ISP can get funds from the government to defray as much as 30 percent of capex, many projects that might not have been undertaken would be feasible.
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