When Possible, Choose a High-Valuation-Ratio Business to Operate In

When creating a new category of products, allowing for some differences in perceived utility, value and valuation often can vary significantly between an older, legacy product and the new product that is a substitute. 

To be sure, a fast-growing category of product will have a higher valuation than a slow-growing or declining product. But it also makes sense, from the standpoint of attaining the highest-possible valuation, to position an asset as in the “new” category rather than the older category, when a valuation differential exists. 

Product	Industry	P/E	EV/EBITDA
Cloud computing	Software	25	20
Ownership of data devices and software	Hardware	15	10
Linear video	Media	10	5
Streaming video	Media	30	25
Traditional media	Media	5	2
Internet media	Media	20	15

Granted, it is hard to separate the value of “fast revenue growth” from other attributes driving financial value. Newer products often grow faster precisely because they do offer higher value or utility; have different and better cost structures or other value-creating features. 

The point is that key decisions made early in a new product’s positioning within a category can have an important valuation impact later on. This might be true when any single firm has revenue earned from multiple lines of business, for example.

Notably, a pure-play fiber-to-home network carries a distinctly-different valuation from a telco that has both copper and fiber access assets. Data centers tend to have the highest valuations, but, so far, edge computing facilities have a much-lower valuation. 

Asset Type	P/E	EV/EBITDA
Cell Towers	20x	15x
Data Centers	30x	20x
Subsea Fiber Networks	15x	10x
FTTH Networks	10x	5x
Telco and Mobile Service Provider Networks	5x	3x
Edge Computing Infrastructure	3x	2x

The practical import would seem to be that a unit of revenue earned by a firm with a high valuation is worth more than an equal unit of revenue earned by a firm with a  lower valuation ratio. In other words, Equinix earns a higher valuation on a unit of connectivity revenue than does a telco or mobile service provider offering the same product. 

When one has a choice, choose to operate in a segment of the digital infrastructure business that carries a higher valuation. Additional assets in other segments with lower valuations will then tend to be credited with the higher valuation.

Fixed Wireless Dominates U.S. Home Broadband Net Additions in 2Q

With the caveat that nobody knows how long the trend will hold, in the second quarter, home broadband account additions in the U.S. market were dominated by fixed wireless, according to the latest data from Leichtman Research Group. 

Of 841,000 net account additions, 893,000 accounts were added by fixed wireless providers. In other words, fixed network provider accounts actually declined, while fixed wireless grew. 

Skeptics always argue that, eventually, fiber connections will limit fixed wireless demand. Fixed wireless optimists tend to argue that enough capacity can continue to be added to sustain fixed wireless as a viable market offering for quite some time, and perhaps almost indefinitely in a percentage of markets. 

The business strategy would be to continue upgrading fixed wireless speeds, for example, to appeal to 20 percent of the market. In that scenario, the objective is not to match fiber-to-home speeds but only to support features most relevant for about 20 percent of the market that does not want to buy the fastest, or faster, tiers of service. 

In terms of geography, rural areas and out-of-region locations are likely to remain the places where fixed wireless makes most sense. In such geographies the cost to supply will be far lower than the cost of building new optical access networks. The leading exceptions might be markets where FTTH leased access is generally available. 

In the near term, new mid-band spectrum is likely to provide the needed capacity expansion. Long term, millimeter wave spectrum will be the key supplier of capacity growth. To be sure, small cell networks using low-band and mid-band spectrum will help, in some cases. 

Still, longer term, only millimeter and higher frequency spectrum will add enough capacity to allow fixed wireless offers to keep pace (again, preserving key appeal for about 20 percent of the market) with other fixed network alternatives. 

The big advantage of milliwave spectrum is capacity; the main drawback is coverage. That will pose a continuing issue for rural millimeter wave network deployments. The conventional thinking is that denser urban markets are where millimeter will continue to offer the most-interesting business cases: relatively high amounts of capacity in areas where distance is not a primary issue. 

 

source: ABI Research, RCR 

At least so far, fixed wireless has been, far and away, the clearest new use case for 5G.

AI Will Drive Data Center Capabilities: How Much Seems the Only Real Issue

Though artificial intelligence and generative AI training and inference operations are widely expected to drive data center requirements for processing power, storage and energy consumption, it seems perhaps unlikely that edge computing will get a similar boost, principally because AI inference operations and training are not latency-dependent. 

And the value of edge computing is latency reduction as well as bandwidth avoidance. And while it still makes economic sense to store frequently-requested content at the edge (content delivery use cases), AI operations will likely not be so routinized that this adds too much value. 

Operations requiring large language model access likely will still need to happen at larger data centers, for reasons of access to processing and storage resources. Think about processing to train AI models for self-driving cars, fraud detection, and other applications that require the analysis of massive datasets.

To be sure, support of self-driving cars also involves perhaps-stringent latency requirements. The problem is simply that the requirement for high-performance computing and access to data stores is more crucial for performance. So processing is likely to be located “onboard.” Again, the key observation is the split between on-device and remote data center functions. Edge might not play much of a role. 

The debate will likely be over the value of regional data centers, which some might consider “edge,” but others will say is a traditional large data center function. 

Operations that can be conducted on a device likewise will not benefit much, if at all, from edge compute capabilities. Think real-time language translation, facial recognition, and other applications that require quick responses.

And Digital Bridge CEO Marc Ganzi believes AI will mean a new or additional market about the size of the whole public cloud computing market, eventually. 

If public cloud now represents about 13 gigawatts of capacity, AI might eventually require 38 gigawatts, says Ganzi. 

The whole global data center installed base might represent something on the order of 700 gigawatts, according to IDC. Other estimates by the Uptime Institute suggest capacity is on the order of 180 GW. 

According to a report by Synergy Research Group, the global public cloud computing industry now represents 66.8 gigawatts (GW) of capacity. 

So AI should have a significant impact on both cloud computing capacity and data center requirements over time.

Will Access Network Disaggregation Increasingly Take the Form of Joint Ventures?

There is one element beyond “consolidation” or “asset shuffling” that is not yet a significant development on this chart of major U.S. telco acquisitions since 1985: deconstruction, deconsolidation or disaggregation of functions. 

The chart, for obvious reasons of showing only formal asset ownership of brands, does not show internal or structural changes across the industry to separate application creation from asset ownership; with revenue flows following. 

source: Wall Street Journal, Seeking Alpha 

The chart does not show shifts in business strategy beyond “gaining scale” and does not show the acquisition of any mobile service provider assets, either. 

source: Quexor Group 

Beyond shifts of asset ownership, connectivity providers have moved on a variety of fronts to disaggregate functions, sometimes retaining asset ownership; sometimes divesting assets and retaining functions in some other way. The adoption of TCP/IP as the “next generation” architecture, for example, necessarily entails separating connectivity functions into layers. 

Fundamentally, that means applications can be created and consumed by customers or users without app owners having formal business relationships with access network providers. 

In other cases, mobile service providers have opted to sell off their cell tower networks, in favor of leasing arrangements. More recently, telcos have shifted their computing networks from internal and owned platforms to use of cloud computing suppliers. 

And while virtualization of network functions, or separated control and data planes, do not intrinsically require ownership disaggregation, it always enables function disaggregation. 

Category	Moves	Examples
Sale of cell towers	Major telecom companies have sold off their cell towers to independent tower companies. This allows the telecom companies to focus on their core network functions, while the tower companies can focus on managing and maintaining the towers.	In 2019, AT&T sold its 8,200 cell towers to Crown Castle for $8.1 billion. In 2020, Verizon sold its 10,000 cell towers to American Tower for $5.1 billion. In 2021, T-Mobile sold its 4,000 cell towers to SBA Communications for $3.4 billion.
Virtualization of network functions	Telecom companies are moving away from traditional, hardware-based network functions and towards virtualized network functions (VNFs). VNFs are software-based network functions that can be run on generic hardware. This allows telecom companies to be more agile and to scale their networks more easily.	In 2017, AT&T announced that it would be moving its network functions to a virtualized architecture. In 2018, Verizon announced that it would be moving its 5G network to a virtualized architecture. In 2019, T-Mobile announced that it would be moving its network functions to a virtualized architecture.
Use of wholesale	Telecom companies are increasingly using wholesale networks to provide services to their customers. Wholesale networks are owned and operated by independent companies, and they sell capacity to telecom companies on a wholesale basis. This allows telecom companies to offer their customers a wider range of services without having to invest in their own network infrastructure.	In 2017, AT&T announced that it would be using the FirstNet wholesale network to provide 5G services to first responders. In 2018, Verizon announced that it would be using the CBRS spectrum to provide wholesale services to its customers. In 2019, T-Mobile announced that it would be using the DISH 5G network to provide wholesale services to its customers.
Adoption of TCP/IP	Telecom companies are increasingly adopting TCP/IP as the underlying protocol for their networks. TCP/IP is a standard protocol that is used for data communication over the internet. This allows telecom companies to interoperate with other networks and to offer their customers a wider range of services.	In 2017, AT&T announced that it would be migrating its network to a TCP/IP-based architecture. In 2018, Verizon announced that it would be migrating its 5G network to a TCP/IP-based architecture. In 2019, T-Mobile announced that it would be migrating its network to a TCP/IP-based architecture.
Architectures using data plane and control plane	Telecom companies are increasingly adopting architectures that use separate data planes and control planes. This allows the data plane to be optimized for performance, while the control plane can be optimized for flexibility.	In 2017, AT&T announced that it would be using a data plane and control plane architecture for its 5G network. In 2018, Verizon announced that it would be using a data plane and control plane architecture for its 5G network. In 2019, T-Mobile announced that it would be using a data plane and control plane architecture for its 5G network.

Likewise, any shift to use of wholesale mechanisms is a form of disaggregation from formerly-vertically-integrated asset ownership. 

To be sure, there are practical reasons for undertaking these moves. At one level, no grand shift of strategy is required, and each single move can be seen as an incremental change to improve operating economics. 

Move	Reason
Sale of cell towers	Allows telecom companies to focus on their core network functions, such as switching and routing, and to outsource the management and maintenance of their cell towers to third-party companies. This can help telecom companies reduce costs and improve their flexibility.
Shifting to wholesale	Allows telecom companies to offer their customers a wider range of services without having to invest in their own network infrastructure. This can help telecom companies reach new customers and compete with larger rivals.
Separating network and business functions	Allows telecom companies to become more agile and to respond more quickly to changes in the market. This can help telecom companies stay ahead of the competition and offer their customers the best possible services.
Taking other steps to separate asset ownership	Allows telecom companies to interoperate with other networks and to offer their customers a wider range of services. This can help telecom companies stay ahead of the competition and meet the growing demand for connectivity.

But all the steps, taken together, in a context where revenue growth remains sluggish, capital investment requirements arguably are rising and competition is growing, might signal continued pressures to disaggregate. 

Indeed, the new involvement of private equity investors in digital infrastructure asset ownership might be part of the shift. To be sure, most such investments involve acquiring both operating and physical assets. To that extent the asset shifts are simply part of the background of asset disposals or acquisitions on an incremental level, and not a “grand strategy.”

But many business plans envision both retail and wholesale operations. And the same is true for the growing number of municipal networks, independent facilities-based internet service provider operations as well. Over time, more fiber-to-home networks are being added that allow wholesale access to other ISPs. 

So far, only cable operator mobile service operations have been based extensively on wholesale mechanisms. And cable operators are moving to shift substantial reliance to their own assets, including both spectrum assets and small cell networks, for example. 

The larger point is that business model drivers might, over time, increase the value or necessity of further disaggregation in the direction of a more-layered organization of the business, especially for non-dominant service providers. 

One clear example, however, is the growing use of joint ventures to build fiber-to-home infrastructure. For some observers, a growing role for app providers such as Google might seem quite noteworthy. 

Year	Location	Partners	Details
2020	United States	Google and Frontier Communications	Google will invest $1 billion in Frontier to help the company build a fiber-optic network to 1 million homes in 25 states.
2020	United Kingdom	Virgin Media O2 and Vodafone	The two companies announced a joint venture to build a fiber-optic network to 1 million homes in the U.K.
2021	United States	Google and AT&T	Google will invest $2 billion in AT&T to help the company build a fiber-optic network to 3 million homes in 10 states.
2022	United Kingdom	CityFibre and Macquarie Infrastructure and Real Assets	The two companies announced a joint venture to build a fiber-optic network to 5 million homes in the U.K.
2023	United Kingdom	Google and Openreach	Google will invest £1 billion in Openreach to help the company build a fiber-optic network to 2 million homes in the U.K.

So far, Google alone has made FTTH investments in firms including Zayo Group, SiFi Networks, Ting, Webpass, Frontier Communications, AT&T and Openreach, in addition to operating its fully-owned Google Fiber business. 

ear	Location	Joint Venture Partners
2020	United States	Zayo Group and Frontier Communications
2021	United Kingdom	CityFibre and Vodafone
2021	Australia	Telstra and TPG Telecom
2021	Canada	Bell Canada and Rogers Communications
2022	Brazil	TIM Brasil and Telefonica
2022	India	Reliance Jio and Google
2022	Japan	NTT Docomo and KDDI
2022	South Korea	SK Telecom and KT
2022	Taiwan	Chunghwa Telecom and Far EasTone

Perhaps one would speculate that facilities disaggregation for FTTH networks will often manifest itself in the form of joint ventures. That is an incremental step that only “shares” asset ownership rather than dispensing with it. 

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