As an Asset Class, Infra is Infra: Valuation Envy is Pointless

Many observers would likely agree that a fiber to the home network costing about $1200 per location passed, with initial take rates of 20 percent, terminal take rates of 40 percent, featuring revenue of $60 per account, might reach breakeven in seven years or so, assuming borrowed money carries a four percent interest rate and full principal repayment after five years.

That would be a relatively quick breakeven point for other types of infrastructure investments. A new airport might reach breakeven in 10 to 20 years, some say. A new seaport, a new toll road or could well take that long as well. 

A new electrical generation plant, a natural gas utility or water system also might take that long to reach breakeven. 

The issue is what sort of investor can afford to make such investments? Many businesses simply cannot afford to wait that long for breakeven. Retailers or homebuilders might tolerate only six months to two years to reach breakeven. 

A new software company might need to reach breakeven in one to five years. Fixed or mobile communications networks might reach breakeven in five to 10 years, with seven years being a reasonable expectation, with a useful life of either type of network spanning as much as 20 years. 

Additional maintenance capital might be expected about every three to five years, however, which complicates the breakeven analysis. 

So it is possible, indeed likely, that the breakeven period for a communications network actually is similar to that of many other infrastructure investments, looking only at the mass market home broadband revenue driver. 

Most major ISPs would also say that additional cash flow is contributed by potential services for business customers, and some with mobile assets building small cell facilities would also point there for incremental value, even if not reflected in direct revenue contributions that can be measured. 

At some level, then, FTTH networks might have to be evaluated as most other infrastructure assets are: patient time perspectives, steady cash flow and competitive protections being parts of the valuation matrix. Value, not growth, in other words. Predictable cash flow rather than explosive revenue expansion; long term returns rather than short term. 

In other words, as much as some will hate the characterization, access networks are more like a utility than an application business. Network owners always are envious of the higher valuation multiples software and online assets command. 

But utilities and infrastructure simply are not those sorts of assets. Valuation envy can only be rationally satisfied if infrastructure owners become asset owners in those other businesses. And that is the argument behind “moving up the stack” or acquiring new roles within the value chain. 

The core access business, though, is what it is. Which is why new types of investors have emerged: digital infra is infra, with all that implies.