Some of us would admit to being surprised at the payback models for fiber-to-home deployments, the degree of business moat protection some believe FTTH offers, and therefore the value of such digital infrastructure assets, compared to other assets such as cell tower sites, data center or edge computing assets.
Looking back over 25 years of business model assumptions, it is quite startling how much the underlying assumptions have changed. Subsidies now play a bigger role, offering in some cases a 20-percent to 30-percent reduction in capital investment in rural markets.
On the supply side, though demand is not altered, private equity investment now means more capital is available to accelerate build timetables.
But the most-shocking change 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.
Expectations now hinge almost exclusively on consumer home broadband.
“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.
source: Frontier Communications
Granted, most larger ISPs believe they can boost ARPU over time, by adding features, adding speed tiers and moving customers to higher-priced plans with higher usage allowances.
Market share or installed base is the other huge assumption. Can most providers expect to get 20 percent take rates or as much as 50 percent? And what other assumptions about operating cost are necessary to create a sustainable business case at 20-percent share?
Most incumbent telcos deploying FTTH have been able to get 40-percent market share after several years of marketing. But is a terminal rate around 40 percent to possibly 45 percent (or even 50 percent) reasonable in most cases? If not, where is that possible?
On the supply side, capital investment benefits from government subsidies and to some extent infra cost declines, though construction costs are stubborn. So while some larger ISPs hint at per-passing network costs as low as $600, others report costs closer to $1,000 per passing, with connection costs of $550 to $600 per customer.
source: Matt Nicholson Lewis
The point is that even with subsidies, lower infra gear costs and new investment sources, the demand expectations for consumer services have been slashed as much as two thirds over the past several decades. Many ISPs no longer expect revenue contributions from voice or entertainment video sources, and must build their demand models based solely on internet access.
The largest ISPs might still expect some revenue contribution from voice or video services, but seem to be modeling higher expectations for business connectivity or contributions to mobile infrastructure cost models. In other words, the cost of small cell infra is aided by the consumer FTTH investment.
Ultimately, we will see whether FTTH really underpins a business that provides a competitive moat, while throwing off predictable cash flow. It seems more likely that private equity could succeed in transforming a legacy copper-based access business into a fiber access business, with a boost in equity multiples that will justify the effort.
That might well be a different question than asking whether FTTH really is a real estate or infrastructure asset on par with airports, toll roads, electrical and gas utilities. Much of the bet relies on limited competition. The argument that the first FTTH provider in a suburban or urban market gets 40 percent market share is likely correct.
That has a reasonable chance of being correct even if two equally competent providers operate their own FTTH networks in a market.
Some believe the first-mover advantage in a rural market could be substantial enough to support higher market shares.
But it remains a valuable exercise to ask whether the FTTH business model is sustainable on an operational business on the revenue scales now being seen.
That is a different question than asking whether a private equity buyer can boost multiples--and then sell the asset--by replacing copper access with optical fiber access.
As a matter of operating economics, it still seems unclear whether FTTH networks generating only $50 to $70 per month in residential revenue are sustainable, assuming legacy provider cost structures. A small, lean upstart should have an easier time, as embedded costs are lower than those found at legacy firms.
