Revenue Often Does Not Drive FTTH Value

It often is hard to determine when it is worthwhile to upgrade copper access facilities to fiber-to-home platforms, in large part because competitive dynamics, customer density and total investment (own copper and upgrade to fiber; buy copper and upgrade to fiber) costs vary so much. 

In many cases, the financial upside comes not so much from operating revenue results but from equity value increase.

Fiber networks generally command higher valuations compared to copper networks. For example, while copper access lines from Lumen were acquired by Apollo Global in 2022 for about $1,154 per passing, the estimated value post-fiber upgrade ranged from $2,154 to $2,654 per passing.

The value of fiber assets can increase dramatically with higher customer take rates. A network with a 40% take rate may be worth roughly twice as much as one with a 20% take rate.

As a rule, the “average” cost of upgrading a telco copper access line to fiber is roughly $1,000 to $1,500 per passing (location), assuming 50-80 homes per mile, a suburban density. 

Costs arguably are lower for urban densities and higher for rural passings. Financial return often hinges on population density and competitive dynamics, however. Assuming the presence of at least two competent internet access providers, the fiber upgrade of owned assets might assume revenue from half to less than half of passed locations, since the other competent competitor will roughly take half the market share. 

For such reasons, many independent ISPs choose to build only in parts of any metro area, while many incumbent asset owners will tend to follow suit. In other words, it might generally make sense to upgrade in urban and suburban areas (often focusing on single-family residences) while delaying or finding different platforms for rural and ex-urban areas (fixed wireless, mobile substitution, satellite). 

But the key point is that the financial opportunity is to rebuild networks for fiber access and boost take rates for those assets. 

The cost per passing is one figure, but even after spending the money to upgrade to fiber, if take rates climb, the value of the assets still exceed the cost of acquisition and upgrade.  

For Apollo Global, for example, the acquisition of “mostly” copper access lines from Lumen in 2022 was about $1154 per passing. Once upgrade for fiber access (boosting per location investment to between $2154 and $2654), and assuming take rates can be boosted to 40 percent, the financial value of the assets still grows.

Year	Seller	Buyer	Assets	Valuation	Notes
2022	Lumen	Apollo Global	Mostly copper access lines	$1,154 per passing	Acquisition cost before fiber upgrade
2022	Lumen	Apollo Global	After fiber upgrade	$2,154 - $2,654 per passing	Estimated value post-upgrade
2023-2024	Various	Various	Fiber networks	$2,000 - $3,000 per passing	Typical range for suburban areas1
2023-2024	Various	Various	Copper networks	$500 - $1,000 per passing	Estimated range based on industry trends

Beyond those considerations, incumbent owners of copper access assets have other values to consider. Any telco that does not upgrade from copper to fiber likely cannot survive long term in the market when competitors do so. 

So irrespective of the actual business case, any access provider that wants to remain in business must consider fiber upgrades. “You get to keep your business” is the strategic rationale, not “higher revenues, lower costs and higher profits.” 

AI Monetization? Look at 5G

Buyers of infrastructure and services to use artificial intelligence might be forgiven their angst about payback or monetization of those investments. Sellers have few such qualms. 

Roughly the same argument happens around monetization of 5G services: executives complain that they have spent a lot on 5G and have perhaps not seen the financial returns they were expecting, in terms of new or higher revenues. 

That is not a new problem, and our experience with fiber-to-home and 5G provides instructive insight.

For some of us, the debate is an old one. In the mid-1990s, for example, it would not have been hard to find an argument about the payback from fiber-to-home networks, either. In the specific context of new competition between telcos and cable operators for voice, internet access and entertainment revenues, the argument was that FTTH would allow telcos to compete with cable in internet access and video, while cable operators took market share in voice. 

Then, as now, the issue was the new investments would enable assaults on various markets. Assuming a rough split of new internet access share, telcos expected to take share from cable in video services, while cable two-way networks took some telco voice share. 

Financial analysts and operating executives might have hoped for higher returns, but essentially the rationale came down to an existential argument: “do you want to remain in business or not?” Without FTTH upgrades, few, if any, telcos could expect to survive against competitors able to supply hundreds of megabits to gigabits per second home broadband speeds. 

That argument applies to 5G investments and clearly will apply to AI investments as well. Though many expect new revenues, use cases, products and services to be possible, the bottom line is that the new investments essentially allow firms to “remain in business.”

“You get to keep your business” might not be highly appealing, in one sense. One would rather be able to claim that investments will produce high financial returns. 

But that is not really the choice. The choice is “keep your business or go out of business.” The new investments in 4G and AI are essentially strategic and existential; not fully driven by traditional “return on investment” criteria. 

All that noted, some segments of each value chain will have an easier time showing results. As always with a new technology, the initial investments are required to enable use of the technology, and that often means infrastructure suppliers are first to benefit. 

If one agrees that the artificial intelligence market can be viewed as consisting of three layers of infrastructure; models and applications, as do analysts at UBS, value creation and supplier revenue also are in layers. As generally is the case for software layers, AI involves layers that also drive or dictate business, revenue and monetization models. 

The most-direct monetization will happen at the infrastructure layer, involving direct purchase of hardware, software and capabilities as a service. Nvidia and other creators of graphics processing units and acceleration hardware, as well as servers, are in this category. 

Monetization possibilities are mostly direct, in the form of licenses and subscriptions, at the model layer, with some possible indirect monetization for open source models. Subscriptions to use OpenAI; Copilot or Gemini are in this category. 

At the applications layer, monetization will mostly be indirect, in the form of improved existing products and services. UBS estimates “enabling” layer products and services including semiconductor production; chip design, cloud and data centers, and companies involved in power supply will generate at least $185 billion in 2027, with total segment revenues closer to $331 billion. 

Companies developing large language models and those that own data assets that can be turned into intelligence

Application layer: The companies which embed the tools from the intelligence layer into specific use cases. This layer likely offers the largest monetization potential over time, yet this opportunity is difficult to quantify at this early stage. Presently, the report expects a directly addressable market of USD 395 billion in revenue opportunities for the application layer by 2027.

In the 5G markets, one might note a similar trend. The clearest initial winners were the suppliers of 5G network infrastructure, such as Ericsson and Nokia; construction firms and so forth. 

Typically, it takes longer for application success to be discovered. 

In that regard, the salient example of direct new 5G revenue is fixed wireless for home broadband. Since about 2022, virtually all net account additions in the U.S. home broadband market have been supplied by fixed wireless platforms. 

source: CTIA 

Other gains attributable to 5G are mostly indirect or hard to quantify, since in most markets supporting 5G services, all the providers offer 5G. In some markets the quantities of various spectrum resources might provide an advantage to one or more providers, such as in the U.S. market, where T-Mobile’s greater trove of mid-band spectrum arguably has allowed it to take market share from the other leading providers. 

Still, over time, most of the value of 5G or AI, for most applications, use cases and users, is likely to be realized in more-subtle and indirect ways. 

If AI Emerges as a General-Purpose Technology, Watch for Both Disruption and Creation

Any general-purpose technology might be envisioned as a set of layers of other technologies that build on it. Many could agree that GPTs are characterized by pervasiveness, flexibility, spillover effects and transformative impact. 

So the internet might underpin layers of core infrastructure and industries and businesses built around protocols such as TCP/IP and physical networks and industries (mobile and fixed networks, terrestrial and satellite wireless networks). 

Then there might be layers of roles and businesses supplying web technologies such as HTML, CSS, JavaScript, and related web development tools that enable building websites and web applications.

Networking technology including routers, switches, firewalls would be another layer. 

So would databases, cloud storage, and content delivery networks.

Then there would be many application and service layers for communication (e-mail, instant messaging, video conferencing, and social media platforms) e-commerce and online marketplaces, content and entertainment, social media, video and audio streaming or online gaming. 

Internet of Things businesses built around smart devices, sensors, and connected appliances, as well as many types of business software could be listed.

Some might include artificial intelligence as among the layers built on the internet. But some of us would say AI is a new general purpose technology that will create its own pyramid of technologies, businesses, industries and applications. 

Era	General Purpose Technology	Impact
Pre-Industrial	The Wheel	Revolutionized transportation, agriculture, and warfare. Led to the development of roads, carts, and other wheeled vehicles.
18th Century	The Steam Engine	Powered the Industrial Revolution, driving mechanization and mass production in factories, transportation (trains, ships), and agriculture.
19th Century	Electricity	Transformed daily life with lighting, appliances, communication (telegraph, telephone), and industrial processes.
20th Century	Internal Combustion Engine	Propelled transportation revolutions with automobiles, airplanes, and ships. Changed industries, warfare, and leisure activities.
20th Century	Electronics & Semiconductors	Enabled miniaturization of devices, leading to computers, radio, television, and countless electronic gadgets.
20th Century	The Internet	Connected the world, democratized information access, facilitated communication, and fueled e-commerce, digital services, and the knowledge economy.

And some of those roles or industries might presently be viewed as built on “internet” foundations. 

Intelligent infrastructure such as smart cities, autonomous vehicles, adaptable robotics, “personalized” healthcare, neurotechnology (brain-computer interfaces),  bionic limbs and prosthetics and much “metaverse” style immersive experiences, plus much of virtual and augmented reality, hyper-personalized content creation, AI-powered companions, precision agriculture and other use cases that might today be attributed to the  “internet” GPT might eventually be properly seen as built on AI as a GPT. 

Perhaps analogies can be seen in the Apple iPhone and Google search. Apple did not invent the smartphone or the mobile phone. But it completely reshaped the business, destroying Nokia and BlackBerry in the process as former market leaders. 

Google was not the first search engine, but it destroyed Altavista and other existing search engines in the market. The point is that many existing industries might be fundamentally reshaped if AI emerges as a GPT. 

And as has been the case before, AI might reshape and disrupt existing industries, functions and roles, in addition to spawning entirely-new industries, as all prior GPTs have done.

"You Get to Keep Your Business" is the Point of Every Mobile Generation

As is true in any value chain, major innovations such as a new mobile platform (2G, 3G, 4G, 5G) will tend to produce a few key changes in user behavior and app experience. For example, though some would include a wider range of new use cases, most of us could agree that new apps or use cases “nearly everyone” uses can be identified for each mobile generation. 

Mobile Network	Key New Use Cases
2G	Text messaging
3G	Mobile web access, mobile email
4G	Mobile video streaming, mobile conferencing, ride sharing
5G	Fixed wireless for home broadband

Though we sometimes forget to note the developments, 2G also enabled widespread use of call waiting, caller ID, and voicemail. 

The 3G network added picture messaging and multimedia text messaging as well as mobile gaming. 

The 4G network added Wi-Fi calling, mobile offload to Wi-Fi, use of mobile hotspots, full web functionality on the mobile device (including full motion video) and, for some customers, mobile substitution for home broadband. 

The new 5G network is still developing new use cases, but fixed wireless to support home broadband is clearly the earliest case of a new mass market innovation, and among the few new features to produce direct new revenue for mobile operators. 

Device features also progressed, with at least some generally-available features on most makes and models. 

Mobile Generation	Key New Device Features
2G	Camera, color display, expandable storage
3G	Wi-Fi, GPS, MP3 player, better keyboards, turn-by-turn directions
4G	High-definition display, NFC, fingerprint sensor, speech-to-text,
5G	Still developing

And although we have to make somewhat broad estimates, revenue sources have continued to evolve in importance with each digital mobile generation. Though voice drove virtually 100 percent of all revenues in the analog era (1G), revenue sources have shifted in the digital era.

Proponents of every mobile next-generation network always talk about all the new use cases each new platform can provide. Indirectly, it matters. But even were no direct changes in use cases occurred, each new mobile generation would still be essential, and for the same reasons home broadband capabilities must advance over time.

People consume more bandwidth every year, require faster connections every year, and any ISP than fails to keep pace will go out of business.

So, at some important level, "new use cases" do not matter. Those will develop. But mobile ISPs must adopt the new platforms for another, more basic reason: they want to stay in business.

And each next-generation mobile network is primarily the way additional capacity gets added, cell splitting notwithstanding.

That noted, we still can point to new use cases that seem to develop over time. It simply helps to recall that such new use cases are not the main reason each next-generation mobile network "must" be adopted.

At a high level, voice has receded and internet access has become dominant. Text messaging became important in the 3G era. And even if the basic “subscription” continues to drive the bulk of revenue, internet access increasingly drives the value of a subscription. And the importance of business customers arguably has grown in virtually every generation. 

Mobile Network Generation	Voice	Text Messaging	Internet Access	Business Customers	Consumer Customers
2G	90%	10%	0%	10%	90%
3G	60%	20%	20%	20%	80%
4G	40%	10%	50%	30%	70%
5G	20%	5%	75%	40%	60%

Aside from fixed wireless, we still are waiting to see which innovations 5G actually will produce at scale. But even in a “worst case” scenario, where no identifiable new use cases actually become dominant, 5G still “succeeds” if it allows mobile operators to continue increasing the capacity of their internet access networks. 

“You get to keep your business” might not immediately sound like a huge benefit, but it is a far better outcome than “going out of business.” And that can happen when any internet service provider is unable to keep pace with the growing capacity requirements of the internet access business.

Recall all the dial-up ISPs that were not able to stay in business once the broadband era began. Think of the few pioneering “DSL” specialists that either went bankrupt or were absorbed by the legacy telcos. Think of the danger fixed wireless poses for some incumbent ISPs in terms of lost market share or account growth.