Private equity firms say they invest in fiber to premises providers instead of “telcos.” That is the key to understanding the restructuring opportunity they see.
Access providers don’t want to be known as “telcos” anymore. They don’t want to be known as “cable TV” companies, either. Instead, they are internet service providers, or home broadband providers. That trend has been nearly two decades in the making and tells us much about how the business has changed.
But the very fact that private equity firms invest in digital infrastructure also tells us some other possible things about the business.
Historically, the private equity business model requires acquiring assets that can be transformed in some way to add value. Sale of those assets is the exit. That might imply there is a “problem” of some type with the asset that PE can fix, before flipping the asset.
Institutional investors are the other group that traditionally buys real estate type assets ranging from hotels to airports and toll roads to gas pipelines and electrical utilities. They are more interested in predictable cash flow generated from slow-growth assets with some degree of natural advantage in the form of business moats that protect them from competition.
The issue that we might contemplate is what the new interest in digital infra assets indicates about business models. Some PE investments are vertical: airport operation, gas pipeline operations, toll road operations and produced cash flow are the value. The physical assets underpin operations.
In other cases, the model is more horizontal. The value of a wholesale broadband access network is the ability to lease access to the network, rather than operating the retail business to generate cash flow.
The analogy in the classic real estate business is the “asset light” model used by some hotel, hospitality or entertainment businesses where the retail business operates without land ownership, sometimes without building ownership, sometimes without indigenous management or branding.
So the issue is how far similar concepts can be applied within the connectivity industry. Everyone is familiar with the “asset light” mobile virtual network operator model in the mobile industry.
Fixed network operators are moving, in parts of their businesses, in that direction, at least in the form of joint ventures that share ownership of access network assets.
Up to a point, hyperscale app providers have moved vertically, to integrate transport functions (wide area networks). Google Fiber is an example of full vertical integration, in some ways. So are hyperscale data centers.
Just how far the fixed network unbundling can go is a question, as is the degree of vertical integration by hyperscalers.
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