Is FTTH Some Form of "Greater Fool" Theory?

One has to ask whether some version of the “greater fool” investing approach applies to private equity and institutional investor positions in copper access networks that can be repositioned as optical access assets. 

That theory suggests an investor can make money buying overpriced assets so long as there are investors willing to pay an even-higher price. It works until there are no more “fools” left. 

The issue might be that payback models for today’s investors do not clearly seem to make sense on an operating basis. And fiber-to-the-home always has had marginal payback, even if strategically important. 

The most-shocking changes are the revenue assumptions for consumer locations. 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. In some cases, revenue up to $200 per home location was considered feasible. 

To be sure, capital costs arguably have fallen to some extent. But most ISPs also operate in competitive markets, which increases the danger of stranded assets. 

And though ISPs might once have built their payback models on three potential revenue sources--voice, video entertainment and internet access--they now tend to base returns on one single service: consumer home broadband. 

To be sure, some ISPs also point to value for supporting small cell networks and upside from business customers. But one never sees detailed financial contributions from these areas in quarterly earnings reports. 

That suggests the contributions are indirect and hard to measure. 

“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.

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

But assume for the moment that such additional value can be reaped. Why have potential investors other than connectivity service providers seemingly changed, bringing in financial investors from “outside” the ranks of service providers?

The clear argument is that digital instructure now is viewed as within the class of infrastructure investments that long have been favored by institutional investors. Digital infrastructure also is viewed as interesting by private equity firms that long have invested in underperforming or appreciating assets. 

Real estate and infrastructure investors are said to have different motivations for investing in each asset class. Real estate investment trusts, for example, traditionally are valued for their ability to produce income. 

Infrastructure offers predictable cash flow and business moats. But both assets also are supposed to offer diversification from asset risk related to concentration in stocks and bonds. 

On the other hand, both asset classes tend to be viewed similarly these days. Firms that invest in real estate also invest in infrastructure, including digital infrastructure such as cell towers, data centers and optical fiber networks. 

Private equity firms, which tend to invest in assets believed to be underperforming, tend to see similar opportunities in both real estate and infrastructure. Both asset classes are viewed as offering high financial returns. Both offer diversification for investment portfolios. 

Both are hedged against inflation and offer capital appreciation. Both are seen as supply-limited assets. And in recent days, some forms of digital infrastructure also benefit from government subsidy programs that reduce capital investment hurdles. 

And both types of assets are long-lived, capital intensive assets where leverage normally is required. 

We ultimately will see whether digital infrastructure winds up with some form of “greater fool” dynamic, in at least some parts of the sector. 

At the moment, payback from FTTH producing $50 to $70 monthly revenue from perhaps 40 percent to 45 percent of locations does not immediately suggest the FTTH capex produces a clear and interesting financial return. 

That might well be the case in areas where the first firm to deploy FTTH can reap take rates far higher than 45 percent. The payback might also be notable if wholesale access means the facility operator can count on both retail and wholesale market share. 

Such conditions arguably exist most often in rural markets, and less often in urban and suburban areas. Networks in rural areas are more expensive than networks built in urban and suburban areas, so payback seems to remain an issue in virtually all markets, even with government subsidies. 

The point is that some of us have yet to see payback analyses that are completely convincing where it comes to copper access networks intended for FTTH upgrades. Eventually we will find out. Let’s just hope some version of the greater fool theory is not operating. 

“Buy high, sell higher” works until there are no more buyers willing to “buy higher.”