Telefónica Colombia, KKR FTTH Deal

Telefónica Colombia and KKR have formed a new company to build a new wholesale fiber to the home (FTTH) network in Colombia, covering locations in nearly 90 cities in the country in the next three years. 

The network will cover 4.3 million Passed Property Units (PDUs).

The new company will be 60 percent owned by KKR and 40 percent by Telefónica Colombia. Telefónica will contribute its current FTTH infrastructure, which already reaches 50 cities and municipalities covering 1.2 million homes.

The new company is valued at US$ 0.5 billion, representing 20 times pro forma operating income, or US$ 410 in enterprise value per location. 

The company presently has adoption of about 32 percent of passings. KKR, it might be argued, seems to believe penetration can be increased, both by Telefónica as well as third party wholesale customers. 

Telefónica Colombia will receive a payment of US $0.2 billion and will be eligible for a performance-based consideration of up to US $0.1 billion as part of the deal. That is a minimum of $166 per location passed, assuming zero contribution from performance payments, or $250 if the performance bonus is earned. 

Of course, in addition to the upfront cash injection, Telefónica Colombia will reduce its capital investment exposure, but also presumably its revenue upside from FTTH. Telefónica Colombia has done similar investment sharing deals elsewhere in South America.

FTTH Business Case Changes

Fiber to the home seems to boost AT&T’s internet access market share by about 10 percent, AT&T has claimed. That is a big deal, as where telcos use digital subscriber line platforms, they tend to have about 30 percent installed base share, compared to cable with 70 percent. 

In an FTTH scenario, AT&T might get 40 percent of the installed base, reducing cable’s share almost immediately to 60 percent. 

Longer term, AT&T expects to reach installed base share closer to 50 percent, in areas where it uses FTTH and has been marketing for three full years. 

But that will require prodigious deployment of FTTH facilities. Traditionally, FTTH deployment by telcos has been limited enough that most cable companies still competed against DSL facilities. 

Some smaller telcos estimate it costs about $500 to $600 to pass a home with FTTH, in areas with the most-favorable economics. Costs to reach less-desirable areas might rise to as much as $1,000 per location. 

By most estimates, it costs up to $725 to connect to a subscribing customer’s location. 

So it might cost $1,325 per customer location to activate an FTTH account. The net cost could well be lower, in the future, for a number of reasons. As AT&T creates a denser optical fiber backhaul capability for its 5G network, that is likely to reduce backhaul costs for other use cases, such as business internet access and FTTH. 

Then there will be some impact from government subsidies for serving low-income customers or providing service in high-cost areas, beyond what traditionally has been available. On the demand side, internet service providers sometimes will see a $30 per month subsidy. On the supply side, there will be one-time subsidies for extending coverage, possibly in the $300 per location range. 

Also, the payback model for optical fiber access now is more complicated, with value being driven in part by non-consumer upside, such as 5G small cell transmission networks, edge computing and business broadband. 

The point is that payback for dense fiber networks is based on numerous value drivers, not just consumer broadband or commercial revenues. The subsidy regime has changed as well.

More Time Division in DOCSIS 4.0

Nothing better illustrates how the cable TV business has changed than DOCSIS 4.0 spectrum plans, as tested by Comcast. Where it once was the case that almost all forward bandwidth was devoted to analog TV signals (50 MHz up to 1 GHz), 

source: Cisco, Broadband Library 

DOCSIS 4.0, as tested by Comcast, devotes most bandwidth to internet access, with just 120 MHz devoted to TV delivery, in the 684 MHz to 948 MHz region. And where traditionally frequency division was the multiplexing method, DOCSIS 4.0 will use time division as well. 

source: LightReading

How Big a Problem is the "Digital Divide?"

One always-present issue when looking at any particular social or economic problem is that we always face multiple problems at the same time. Drug overdoses, malnutrition, carbon and methane emissions, traffic, inflation, joblessness, homelessness, lack of medical care, uneven or inadequate educational opportunities, domestic violence, fair treatment of ehtnic, racial, religious or other minorities, corruption, crime and many other problems have to be tackled simultaneously. 

And it never is possible to rank order all of those problems in terms of allocating resources to solve the problems, in a holistic way, in real time, even assuming we have our means-ends causality chains correctly understood. 

In that vein, the “digital divide” is a bigger problem some places, compared to others, even if it can be seen as a problem no matter where we find it. 

That clearly is the case for people in many lower-income or middle-income countries, where internet access in lower-income countries exceeds four percent of monthly gross domestic product, for example. 

In most middle-income countries greater progress has been made, with costs below the International Telecommunications Union target of two percent of monthly GDP. 

In developed countries, the problems are mostly confined to rural areas or high-cost areas, as monthly recurring costs are below one percent of GDP. There still are issues to be solved, but they are relatively trivial compared to other problems we also face. 

source: ITU

How Far Can Fiber Asset Sales Go?

“Because we can” or “because we should” might explain a good deal of asset disposition behavior in the connectivity business these days. 

Optus owner Singtel, for example, is said to be mulling the sale of a stake in its Australian access facilities, a move that would allow Singtel to raise cash. 

Such opportunistic moves--as always--are driven by a combination of seller need, buyer interest and a broader rise in the value of optical fiber access and transport assets for investors in search of alternative assetshttps. 

Low interest rates mean lots of capital is available, while high valuations for other traditional assets also are driving investor interest in lower-valuation, higher-return financial vehicles and something more akin to a private equity approach to investing by institutional investors such as pension funds. 

Buyer interest has grown the value of optical fiber assets or the ability to create them,  while sellers are enticed by such higher valuations to monetize access network assets as they earlier monetized cell tower assets. Singtel itself sold a majority stake in its Australia cell towers in 2021. 

No doubt owner's economics still are important. But the issue is whether full ownership is required to reap that value. In a growing number of cases, partial ownership seems to be viewed favorably.

Streaming Does Not Change Everything

As much as video streaming has changed business models, there are some things it has not yet changed. At a high level, video entertainment and audio entertainment has been moving toward on-demand consumption for decades; virtual rather than physical media; unicast rather than multicast delivery. 

source: Statista 

But some things have not changed as much as observers say. Despite the virtually-universal description of AT&T’s ownership moves related to content, AT&T continues to own 71 percent of Discovery Warner Media. The results of that business are not fully consolidated, but AT&T reaps the reward of cash flow and profits related to that organization's success. 

In other countries different connectivity providers will have their distinct asset ownership profitles as well. But is is incorrect to say AT&T “has gotten out” of the content business. It has monetized some of its ownership and changed the way it continues to own such assets. But it still owns 71 percent of Discovery Warner Media. 

A few of us still believe that will be important, going forward, even if it is correct to say AT&T now can concentrate on its connectivity business with less distraction. 

But some things in the video content business have not changed. Subscriptions still dominate over full on-demand access. Content bundles still prevail over full a la carte access. Content catalogs still matter. 

What might be distinctively new is that the video content business has become globalized. No longer does it make as much sense for any content provider to operate in a single country, as streaming economics are vastly better on a global scale, as is true for most consumer-facing internet apps and services. The most-successful content services will operate globally. 

But bundles of content remain key, even if the delivery mechanism has changed.

Balancing "Connecting the Unconnected" with "Faster Speeds for Many"

 The new infrastructure bill is touted as making $65 billion available for demand and supply investments in U.S. broadband access. And there is an argument to be made that both supply and demand investments will change consumer behavior. The issue is how much. 

 

Many people use their smartphones--on purpose--for personal internet access, and do not buy fixed network service. That is a demand issue, not a supply failure. But look only at supply issues. 

About 44,198 Hawaii households (10 percent) are said to have “no internet access.” It never is completely clear what definition is used. Some likely define it as having no networks which provide local service. But others might use the “25 Mbps” speed as the definition of broadband. So a household might have internet access, but not broadband. 

In fact, Hawaii internet access statistics are the same as for the United States as a whole. That suggests national statistics are relevant for judging where the greatest benefit from the new demand and supply policies is to be obtained. 

There are both supply and demand issues. About seven percent of households do not own a computer. If you do not use a computer, perhaps internet access is not so relevant. Recent surveys suggest seven percent of Americans do not use the internet, by choice. 

By some estimates, 23 percent of households have internet access, but not at the 25 Mbps rate defined as “broadband.” There is, in other words, a difference between “internet access” and “broadband.”

There also are key implications for investment. A home that has internet access, but not at 25 Mbps, must be upgraded. But the cost to do that often is far less than building brand-new facilities to a location without existing access. 

For the United States as a whole, only about two percent of households or less literally have no fixed network access. That two percent is where costs will be greatest, and also the most-isolated, cases. It might only be feasible to use satellite or some other wireless technology in those cases. 

For most locations, upgrades are called for, not necessarily greenfield construction. Most of the households “not buying or not able to buy” internet access are “upgrade” situations. To be sure, telcos will have to consider ripping out copper plant and switching to optical fiber, which might require new construction. 

So the issue there is the degree of benefit an average subsidy of $339 per location represents. 

Income almost certainly affects demand as well. About 19 percent of households with an annual income less than $75,000 have no internet subscription.

As always, educational attainment also matters. Some 10 percent of individuals without a high school diploma or equivalent do not buy internet access. 

 

Assume that total funding to affect demand and supply is about $300 million for the state. If half  the funds were spent on supply and half on demand, that implies $150 million to build new facilities. 

If 44,200 households need to be connected, that also implies capital investment and construction support of about $339 for each “non-subscribing” or “high cost”  location. Some might argue that is a helpful, but relatively small change in the business case for upgrades. It might be deemed generally insufficient to incentivize new construction in very high-cost areas.  

If one assumes a monthly cost of $50 for internet access, the $30 subsidy cuts costsof such plans 60 percent. 

source: Broadband Hui 

Again, however, many existing programs provide 25 Mbps broadband access at relatively low prices for low-income customers. It is not clear how much change the $30 a month additional subsidy will change buying behavior. But it certainly is reasonable to argue that the main impact is to create incentives for purchasing of higher-priced and faster-speed plans by customers now choosing to buy 25-Mbps service. 

On the supply side, since one big pool of money in the bill is allocated for “unserved” areas, we should expect to see incremental investment in such areas. Since another pool of money is allocated for “high-cost” areas, we similarly should see additional investment in such areas. But the actual additional lines added should be more modest than some expect, simply because such access lines are so hugely expensive. 

For practical political reasons, we are likely to see significant effort to show “big numbers” where it comes to improvement. And those results can be obtained mostly in cases where speed upgrades are possible for a wide number of lines. 

So it might be reasonable to expect a relatively small improvement in total “connected homes,” but a significant increase in homes able to buy service at speeds from 50 Mbps up to a gigabit per second. 

Not only is the impact likely to be wider for such incremental upgrades, but the total impact, compared to investment, will be highest as well. Assume two thirds of the supply-focused money will be spent on unconnected or hard-to-connect locations. Still, the third of funds spent to upgrade existing facilities will likely show the biggest numbers of locations that benefit.