Is Fixed Wireless an "Inferior" Product or Not?

Cable TV suppliers of internet access continue to argue that fixed wireless is an “inferior” product whose market impact is temporary, while the hybrid fiber coax product offers performance advantages. 

Others might simply argue that fixed wireless is an attractive "value" oriented product that perhaps 20 percent of the present market is willing to buy--and does buy--services operating at 200 Mbps or less. In other words, there is significant demand for “inferior” products in the home broadband market. 

Over time, speeds will have to increase, in every category, including the “value” segment. But there is little reason to believe a significant portion of the market will stop preferring “value” connections, especially as speeds and prices continue to rise for all the other tiers of service. 

Source	Year	Percentage of Customers with Speeds of 200 Mbps or Lower
Openvault	2023	Up to 25%
FCC - Measuring Fixed Broadband - Twelfth Report	2023	15%
NTIA - 2020 Broadband Deployment Report	2020	43%
Leichtman Research Group - Q3 2023 Report	2023	32%
Pew Research Center - Broadband Adoption Report 2023	2023	28%

Fixed wireless access is “an inferior product with limited capacity and geographic coverage which is fluid, is often marketed by the phone companies at a perceived lower-priced to their existing customers, “ said Chris Winfrey, Charter Communications CEO. “ We continue to believe the impact from fixed wireless is temporary.”

Charter argues its hybrid fiber coax product is “faster and more reliable,” and can offer lower pricing when home broadband is purchased in a bundle with mobile or video services. 

Charter also believes the mobile operators will run out of sufficient capacity, eventually, and will have to limit the amount of capacity available to support fixed wireless. 

Of course, there also is competition on the high end. But Charter seems unconcerned about that. 

Overbuilders--generally using fiber-to-home platforms--”will not be able to take significant market share,” Charter also claims. “Overbuild impact tends to be limited to a few percentage points of Internet penetration during the first year of a new overbuild vintage coming online,” Winfrey argues. 

Others will question that assertion, particularly as the major telcos ramp up their fiber-to-home investments. Generally speaking, major telcos are able to get about 20 percent adoption initially, ramping up to about 40 percent share over several years.

Private Equity, Overbuilder and Telco FTTH Payback Models are Very Different

Firms backed by private equity have different business models than other long-term operators of connectivity assets. PE-backed firms aim to create value (typically double the asset value within seven years) and then sell the assets. 

That is a different model than used by connectivity service providers who operate for the long term, where fundamental issues of free cash flow, revenue growth and profit, as well as the ability to pay dividends, are the key constraints. 

And so it is with investors in fiber-to-home assets. 

Back in the heady days of 1996, when the Telecommunications Act of 1996 became law, business models for firms providing connectivity services changed in a big way. For legacy providers, maintaining market share became the key issue. For attackers, gaining share became the obvious key issue. 

Beyond that, the imperatives were different. Legacy providers, operating their businesses for the long haul, could not adopt the “fast growth rather than profits” models as used by many attackers. At a time of “easy money” and “we want you to grow fast” attitudes of key investors, that made sense for attackers.

And, as has been true for many software startups, long-terms operating profits were not the goal. Instead, fast growth in a “hot” area was the objective, since such firms had reasonable expectations they would simply be bought out at some point before they ever reached “terminal value.”

That, at least, is what one has to assume when looking at the costs of FTTH networks and costs to actually connect customers and earn a profit on those services.

The reported cost per-home-passed (CPHP) for underground FTTH deployments ranged from $1,600 to $2,600, according to a recent estimate by Cartesian researchers. The CPHP for aerial deployments was lower than those of underground, ranging from under $700 to $1,500 for respondents in suburban and urban environments, and $1,300 to $2,700 in more rural areas. 

source: Fiber Broadband Association 

Actually connecting a paying customer adds another $600 to $830 in drop costs. 

source: Fiber Broadband Association 

So the per-home cost of serving a paying customer includes an attributed cost of building the network; an assumption about take rates and then the cost of the drop and installation; plus operating and marketing costs. 

Take rates matter. At a 50-percent take rate, for example, the per-customer cost of the network can range from $2,600 to perhaps $5,200, with an additional $600 to $800 in drop costs, for a per-customer network cost ranging from a “best case” of perhaps $3,200 up to perhaps $6,000. 

But that is just the network platform. One would have to add in operating and marketing costs, plus any debt service and loan principal repayments. Operating and marketing costs might range from about $210 per year to $800 per year, per customer, according to some estimates. 

Cost Category	Low Estimate ($/year/subscriber)	High Estimate (/year/subscriber)	Sources
Network Infrastructure	$100	$500	FTTH Council: $200-$300,  Deloitte: $300-$500
Operations & Maintenance (O&M)	$25	$75	FTTH Council: $40-$60. Analysys Mason: $25-$35
Customer Acquisition (CAC)	$50	$150	BroadbandNow: $50-$100, Analysys Mason: $60-$150
Customer Care & Billing	$25	$50	Analysys Mason: $25-$35,  Leichtman Research Group: $30-$40
Marketing & Sales	$10	$30	Analysys Mason: $10-$20,  Leichtman Research Group: $15-$25
Total Operating Cost	$210	$805	Sum of individual ranges

And one might have to add interest charges and eventual debt principal repayment in addition to those charges. 

And there is a possible additional range of investments as well. Some firms must first acquire copper-based legacy telco assets first, before starting the FTTH upgrade, either to own and operate over the long term, or to sell the assets in five to seven years. 

Transaction	Date	Buyer	Seller	Asset Type	Homes Passed (M)	Price (USD Billion)	Cost per Passing (USD)	Source
Brightspeed - Lumen assets (20 states)	Oct 2022	Brightspeed	Lumen	Fiber	0.3	3.0	10,000	Reuters
Consolidated Communications - NewWave Communications	Aug 2022	Consolidated	NewWave	Fiber	0.18	0.65	3,611	Fierce Telecom
Windstream - MetroNet Holdings (FL)	Aug 2022	Windstream	MetroNet	Fiber	0.06	0.28	4,667	Fierce Telecom
Frontier Communications - Verizon (WA, OR)	Dec 2021	Frontier	Verizon	Mixed (Fiber & Copper)	0.14	1.05	7,500	Fierce Telecom
Allo Communications - Lincoln Telephone & Telegraph	Nov 2021	Allo	Lincoln	Mixed (Fiber & Copper)	0.11	0.21	1,909	TelecomTV
Ziply Fiber - US Cellular assets (WA, OR)	Oct 2021	Ziply	US Cellular	Fiber	0.12	0.51	4,250	Fierce Telecom
CNSL - Searchlight Investment	Jan 2020	Searchlight	CNSL	Mixed (Fiber & Copper)	0.71	0.425	600	CNBC

In many cases, the capital investment to acquire assets is equal to, or more than, the cost to add the FTTH upgrade. But that’s where the business case lies. If one assumes a copper asset can be purchased for $600 to $800 per passing, but then an upgraded FTTH asset can be sold for $5,000 to $10,000 per passing, that is the business case for making all the investments in FTTH. 

It might still be a difficult business case for a shorter-term owner, but “buying copper assets; upgrading to FTTH and then selling” can work. 

The payback for longer-term operators always has been equally challenging, if not more challenging, and has gotten arguably tougher as total account revenues including voice and video entertainment have dwindled, forcing the payback model to be based on home broadband alone. 

The main point is that FTTH payback models for private equity investors and service providers are quite distinct. What makes sense for a PE firm might not always make sense for a legacy fixed network service provider or an “overbuilder.” 

That is perhaps one reason why GFiber (owned by Alphabet) has not purchased copper telco fixed network assets before upgrading them. As with other “overbuilders,” GFiber has simply built its own greenfield FTTH networks from scratch.

Are Many AI Adoption Forecasts About Five Years Too Early?

Though I’d agree with the general shape of these adoption curves for the internet, smartphones and artificial intelligence, I would argue they are shown about five years early. 

In other words, though AI is likely to provide many more benefits than presently expected over the longer term, it is likely to produce fewer than expected benefits in the near term. 

That is not inconsistent with the expected trend of integrating AI into virtually all forms of software, hardware and applications and experiences in the near term. Basically, we are going to throw it against the wall and see what sticks, and what does not. 

In many cases, the benefits will be unclear. 

source: Visual Capitalist

That might be true of smartphone adoption in the U.S. market, for example. 

 

source: Asymco 

It can also be noted for internet adoption as well.

source: InternetLiveStats 

 

Nor are adoption curves of this type unusual for successful consumer products. 

source: HBR

The point is that, as important as AI is, its adoption will not be as swift as many now predict, beyond investments in the infrastructure to enable model creation and inference generation.