Perceptions of Network Asset Value are Evolving

As more private equity and institutional investment funds ponder taking stakes in digital infrastructure assets--including access networks, data centers and fiber backbone assets--we will have to see where the operator comfort level lies. Few have fundamental qualms about divesting tower assets. 

The issue is how much broader involvement in entire core or access assets could occur. Traditionally, private equity investments  have been concentrated elsewhere, especially in real estate, energy assets, business services and software. But telecom infrastructure investments have been growing. 

source: Toptal 

Telecom transactions accounted for 35 percent of total private equity infrastructure deal value in 2020, up from 15 percent a year earlier, Preqin data shows.

Telecom deals involving towers, fiber and data centers are now viewed as possible holdings in the alternative assets portfolio, which generally focuses on  transport, energy and utilities.

source: S&P Global, Prequin 

The trend has been in place and growing for some time, sometimes driven by the traditional “fix and sell” (leveraged buyout, consolidate assets, flip to strategic buyer) model, but with some increasing longer-term holding as well, where private equity might take a minority stake in an operating company without plans to flip the stake in less than six years.  

source: Columbia Business School 

Recently, some big divestitures of whole networks, accounts and infrastructure have occurred, primarily revolving around rural and less-dense fixed networks. Lumen Technologies recently divested about half its fixed network assets, for example. 

And increasing attention seems to be paid to operating assets more efficiently, a traditional driver of private equity investing strategy. 

source: S&P Global, Prequin 

Asset reshuffling tends to be rather common in the connectivity business, with occasional bouts of merger unwinding. Consider the proposed sale of Lumen fixed network assets to Apollo Global Management.   

Basically, the deal unwinds the merger of CenturyLink and Qwest fixed network assets (more an acquisition by CenturyLink of Qwest) in 2011. What remains for Lumen are the original Qwest local exchange operations, plus networks in Florida and Nevada that were not part of Qwest.

Perhaps more important is the Lumen retention of the former Level 3 Communications assets. The proposed deal still leaves Lumen a bit of a hybrid: operator of large tracts of rural fixed networks, plus a handful of tier-two cities, as well as a global enterprise services network. 

source: Lumen

The larger point is that different financing mechanisms for core telecom infrastructure might be entering a phase where there is more “burden sharing” than in the past with private investors. 

That might be far more successful than regulator-forced sharing.

Home Broadband ARPU is One Thing, Prices Another

Nobody will be surprised that U.S. households are buying fewer service bundles featuring internet access and a linear TV subscription. According to Parks Associates, buyers of such bundles have decreased since 2017. 

It might be more significant that home broadband average revenue per account is rising, up to about $65 per account in the second quarter of 2021. 

source: Parks Associates 

In part, that increase in ARPU is the result of consumers upgrading service plans to faster tiers of service, notably at the fastest tier of service. 

source: Openvault 

In the second quarter of 2021 it also was clear that many fewer customers were buying service at speeds below 50 Mbps. Also, retail prices tend to creep up annually, so that makes a difference as well. 

source: Openvault 

It also can be argued that home broadband costs actually have fallen, adjusting for inflation. That might be especially true for the  plans most people buy. Also, home broadband prices have fallen while other consumer product prices have climbed. 

Reemergence of "Structural Separation?"

Structural separation of retail opeations from network ownership was a bigger idea several decades ago than at present, even if a handful of markets have moved that way in a formal sense in Southeast Asia, Australia, New Zealand and the United Kingdom.

The key idea is to create an independent network faciltiies supplier and allow all retail service providers to use that one platform.

Whether mandated by regulators or as a business choice, wholesale access remains contentious in both fixed and mobile segments of the business. Over the decades, one has heard much criticism of the “I build it, you get to use it” argument from facilities providers selling wholesale capacity and services to retail competitors. 

Such complaints happen in a variety of settings, including mobile and fixed network wholesale; whether featuring mandated pricing set by regulators or market mechanisms; and by business strategy and market share (attacking or smaller facilities-based suppliers often see greater advantages than dominant providers). 

It remains unclear how attitudes of underlying carriers could change in the future, if greater functional separation of mobile or fixed assets were to occur, especially if it is not mandated by government authorities. 

In other words, if the ownership of access or core network  facilities continues to evolve, with greater ownership by private equity, institutional investors and other “patient” investors, how much could attitudes shift?

If “core” network assets are only partially owned or even divested by dominant retail suppliers, do attitudes also shift? If core infrastructure no longer is considered strategic by dominant suppliers--as unlikely as that might seem--do most, if not all retail service providers wind up having similar attitudes about the value of wholesale access and their business models?

As an example, what if BT Openreach is fully separated from BT? How does BT’s valuation of core network assets (access, especially) evolve? Does BT not acquire the same positon as any existing wholesale customer of Openreach?

Beyond that, what emerges as the core competency of a dominant retailer once ownership of the scarce access facilities is no longer an issue? The perhaps obvious answers are market share itself, installed name, brand name awareness and value, influence on the regulatory process, other complementary assets and so forth. 

Right now, the mobile virtual network operator business model provides some baselines. 

MVNOs are not legal in every market, but in some markets represent  significant portions of the installed base and market share. That is especially true in Europe. 

source: McKinsey 

Margin potential varies. Simple branded “resellers” who add little additional value also face the least risk, at the cost of expected profit margins. Basically, this business model relies on sales and marketing skill, as the basic “product” is sourced completely from a facilities-based service provider, with no fundamental differentiation. The reseller is not able to set its own retail prices. 

An MVNO operating as a “service provider” assumes more risk, for more potential reward.  A service provider operates its own direct billing and customer care operations and can set its own prices. Revenue is typically earned on outbound traffic. 

The “asset light” MVNO earns revenue on both outbound and inbound traffic, and is obliged to pay the underlying carrier on a pattern similar to the “service provider” MVNO. The main advantage is that this type of MVNO is free to add any sort of additional value and differentiation. 

A “full MVNO” itself supplies all of the infrastructure except the radio access network, which is leased from a facilities-based mobile operator. This model offers perhaps the highest ability to differentiate the user experience, with the highest amount of risk, however. 

As a rule, an MVNO has to have operating costs 30 percent or more lower than the host provider’s cost structure. Perhaps for that reason, the full MVNO model is rarely chosen. The center of gravity is arguably either the service provider or asset light approach. 

Much can hinge on the anticipated gross revenue and  profit margins to the wholesale services supplier. Bulk accounts have their attractions. If some customers want to defect to a lower-cost mobile virtual network operator--and that is the primary attraction for nearly all MVNOs--then supplying access to a retail competitor still makes business sense.

The underlying carrier makes revenue off a “lost” customer account. Some argue that asset-light MVNOs can earn higher profit margins than facilities-based retailers. 

source: Oxio 

If a dominant mobile service provider could achieve margins between 15 percent and 20 percent as do other light MVNOs, but avoid capex and opex, further boosting margins, would that not be a reasonable choice? 

And if so, the historic value of owning scarce access assets decreases substantially, perhaps nearly entirely. So the business model becomes more disaggregated.

Structural separation, in past decades mostly viewed as a regulatory solution, might eventually become a preferred marketplace solution.

What Zoom Fatigue Tells Us About the Present Value of Video Conferencing

For decades we have been told that video conferencing would be a useful replacement for face-to-face meetings or an enhancement of remote communications. That is true, up to a point. 

But, generally speaking, we are a long way from holographic telepresence that replicates the full sensory experience of communicating with a real person in real time, in person. 

The mass “remote work” social experiment caused by Covid has provided an actual test of the value of video conferencing--and its issues and limitations--over most of the past two years. 

And most of us might agree that it is a mixed blessing. 

Zoom fatigue--the feeling of exhaustion many feel after too many video conferences--seems directly related to the amount of time spent videoconferencing every day, a study suggests. The feeling of burn out 

source: Meetric.app 

There are physiological reasons, including the fact that cognitive load during a video conference is higher than would be the case for a face-to-face, in person meeting, scientists at Stanford University say. Other researchers agree that video conferencing requires  higher cognitive load.  

Video conferencing also inhibits the non-verbal clues humans use when communicating in person. So people are working harder to figure out what is going on. 

Another study suggests that 49 percent of videoconference users report feeling “exhausted” after video conferencing. 

source: Virtira.com 

Many surveys show that remote workers participate in more meetings than when they are in the office. And there is some evidence that younger workers experience more fatigue than older workers, according to a survey of 1700 employees and managers surveyed by Virtira. 

source: Virtira.com 

Video conferencing has a way to go before it can hope to avoid Zoom fatigue.

Historic Shift of U.S. Internet Access Market Share is Coming

Though U.S. cable operators have steadily added to their installed base of internet access customers for two straight decades, at the expense of telcos, that might be on the cusp of significant change. 

Verizon, for example, seems to be taking share from Altice, despite that firm’s conversion from hybrid fiber coax to a fiber to home platform continues, and even as most of the footprint is offering gigabit levels of service. 

In some markets, independent FTTH providers also are gaining share. Tucows, which operates Ting Internet, has been getting market share.of about 31 percent where it chooses to build its symmetrical fiber-to-home networks. 

Coming next is an expansion of the addressable telco FTTH market, based on $65 billion in subsidies to be enabled by a new infrastructure bill passed by the U.S. Congress. 

The passage of an  infrastructure bill by the U.S. Congress means as much as $65 billion in support for broadband access across the United States. While the specific allocations are not yet available, that essentially means the business case for deploying fiber to the home--and other access platforms--is better by about that amount. 

The big implication is that the business case for deploying high-performance broadband networks will improve by a substantial margin, bringing millions of locations to the point where such networks are justified in terms of business case, where they had not been deemed feasible in the past. 

The obvious issue is where to prioritize the spending of money and for how many different types of platforms. As always, there will likely be an effort to award subsidy funds in a “platform neutral” manner, or largely so. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 

Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.

Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 

But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 

Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 

The issue is the level of subsidy in various areas. 

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

Such an extensive subsidy system would change the FTTH business model for all telcos operating in rural and even many urban or suburban areas. might affect cable operators and also could affect demand for all satellite and fixed-wireless operators. 

It just depends on the eligibility rules. 

Generally speaking, both AT&T and Verizon, where they offer fiber-to-home service, have been getting installed base a bit higher than 40 percent, in markets where they have been marketing for at least a few years. AT&T is hopeful it can, over time, boost share to about 50 percent of the market. 

Unless cable operators fail to respond, and that is highly unlikely, their installed base could  drop from about 70 percent to perhaps 50 percent if telcos adopt FTTH on a wide scale. That obviously leaves little room for third providers at scale, on a sustainable basis. 

To be sure, Ting Internet is “cherry picking” its markets, picking locations where it believes it has the best chance to gain share. 

Those typically are higher-income suburban areas where the main competitor, in terms of speed, is the cable operator, and where a telco remains wedded to copper access. Market share should be lower in areas where both the incumbent cable operator and telco offer gigabit speeds. 

In those markets, assuming pricing is relatively comparable, Ting’s advantage in part will rely on upstream bandwidth capabilities, at least where compared to the cable operator. 

It is harder to predict what might be the case in a decade, when telcos and cable operators alike might be offering access routinely in the gigabit to multi-gigabit ranges, possibly with upstream bandwidth high enough that return bandwidth is not an issue for nearly all customers, even if not fully symmetrical. 

To be sure, terms and conditions and general customer expectations about experience will matter. Internet service providers as a class do not score highly in the American Customer Satisfaction Index, for example. Whether specialist providers can do better, on a sustainable basis, is the issue.  

Brand name preferences and product bundling might also help the largest incumbents. According to ACSI, for example, in 2021 AT&T and Verizon both are ranked higher in customer satisfaction scores than any of the cable companies. 

That is surprising, especially for AT&T, which has not yet converted most of its plant to FTTH. The infrastructure bill is likely to accelerate AT&T deployments of FTTH, if it significantly changes the business case.

Big Change in U.S. FTTH Business Case

The passage of an  infrastructure bill by the U.S. Congress means as much as $65 billion in support for broadband access across the United States. While the specific allocations are not yet available, that essentially means the business case for deploying fiber to the home--and other access platforms--is better by about that amount. 

The big implication is that the business case for deploying high-performance broadband networks will improve by a substantial margin, bringing millions of locations to the point where such networks are justified in terms of business case, where they had not been deemed feasible in the past. 

The obvious issue is where to prioritize the spending of money and for how many different types of platforms. As always, there will likely be an effort to award subsidy funds in a “platform neutral” manner, or largely so. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 

Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.

Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 

But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 

Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 

The issue is the level of subsidy in various areas. 

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

source: Cartesian

Such an extensive subsidy system would change the FTTH business model for all telcos operating in rural and even many urban or suburban areas. might affect cable operators and also could affect demand for all satellite and fixed-wireless operators. 

It just depends on the eligibility rules.

How Much Room for Indpendent ISPs in U.S. Markets?

A key issue for potential internet service providers operating as  overbuilders is market share. When competing against two incumbent ISPs, and picking markets, what is a reasonable expectation for market share, and eventually installed base? 

Tucows, which operates Ting Internet, has been getting adoption of about 31 percent where it chooses to build its symmetrical fiber-to-home networks. 

Generally speaking, both AT&T and Verizon, where they offer fiber-to-home service, have been getting installed base a bit higher than 40 percent, in markets where they have been marketing for at least a few years. AT&T is hopeful it can, over time, boost share to about 50 percent of the market. 

Unless cable operators fail to respond, and that is highly unlikely, their installed base could  drop from about 70 percent to perhaps 50 percent if telcos adopt FTTH on a wide scale. That obviously leaves little room for third providers at scale, on a sustainable basis. 

To be sure, Ting Internet is “cherry picking” its markets, picking locations where it believes it has the best chance to gain share. 

Those typically are higher-income suburban areas where the main competitor, in terms of speed, is the cable operator, and where a telco remains wedded to copper access. Market share should be lower in areas where both the incumbent cable operator and telco offer gigabit speeds. 

In those markets, assuming pricing is relatively comparable, Ting’s advantage in part will rely on upstream bandwidth capabilities, at least where compared to the cable operator. 

It is harder to predict what might be the case in a decade, when telcos and cable operators alike might be offering access routinely in the gigabit to multi-gigabit ranges, possibly with upstream bandwidth high enough that return bandwidth is not an issue for nearly all customers, even if not fully symmetrical. 

To be sure, terms and conditions and general customer expectations about experience will matter. Internet service providers as a class do not score highly in the American Customer Satisfaction Index, for example. Whether specialist providers can do better, on a sustainable basis, is the issue.