FTTH Payback Depends on the Business Model

It always is difficult to figure out the payback period for any fiber-to-home investment, as the number of key competitors; regulatory encouragement or discouragement issues; retail versus wholesale business models and possibility of joint venture arrangements; amount of aerial versus underground construction vary widely. 

But everyone agrees the FTTH asset is long lived, and has payback periods that are optimistically less than 10 years, but can run up to 20 years. And that obviously increases incentives for FTTH investors to reduce risk and lessen capital investment burdens. 

Joint ventures that reduce any single firm’s capital investment and also speed up deployment rates are an obvious solution. So are wholesale business models that increase network utilization rates. 

Study Title	Source	Market	Payback Period Estimate
"Fiber to the Home: The Economic Viability for Competitive Local Exchange Carriers"	National Telecommunications and Information Administration (NTIA), U.S.	U.S.	7 to 14 years
"The Economics of Full Fibre Deployment: Costs and Benefits"	University of Oxford, U.K.	U.K.	10 to 20 years
"Fiber to the Home: The Path to Success"	Federal Communications Commission (FCC), U.S.	U.S.	5 to 15 years

Firms backed by private equity have different business models than other long-term operators of connectivity assets. PE-backed firms aim to create value (typically double the asset value within seven years) and then sell the assets. 

That is a different payback model than used by connectivity service providers who operate for the long term, where fundamental issues of free cash flow, revenue growth and profit, as well as the ability to pay dividends, are the key constraints. 

And so it is with investors in fiber-to-home assets. For a private equity firm, all that matters is the ability to flip the asset for a higher multiple than acquired assets, even after the FTTH upgrades.

For an operator of internet access services, payback must include considerations of revenue per customer and revenue per passing as well as profit margins long term.

Asset value drives the logic of investment for a PE firm. Gross revenue, operating cash flow and ultimately profits are what matter for a service provider. But acquiring assets from PE and other firms can make sense for a service provider if it accelerates time to market and time to cash flow, while also possibly having the benefit of eliminating a potential key competitor in a market.