Is New Thinking on FTTH Payback Models Required?

There is an increasingly-good argument to be made that take rates determine the payback from any fiber-to-home investment. Traditionally, that meant the percentage of homes passed by the network that had paying customers connected.  

There is an equally-good argument to be made that the payback analysis can no longer be developed solely on the basis of consumer revenues and networks “to the home,” especially when a service provider is supporting both fixed and mobility services. 

That tends to make a shambles of the conventional way of comparing access media and platforms (FTTH, hybrid fiber coax, fixed wireless, digital subscriber line upgrades, satellite). That made sense when the “home” was the driver of payback.

That makes less sense when the fiber distribution network is viewed as necessary for supporting the mobile network and a variety of low-latency use cases. 

Starting with 5G, and presumably intensifying with each coming mobile next-generation network, some of the value is derived from the backhaul network for mobility services. 

Additional revenue might be earned from edge computing, internet of things, “smart” cities,  private networks, and additional small business revenues. Those revenue streams can be wholesale and retail; direct or indirect. 

So the difference is that FTTH payback arguably is determined by the payback from fixed and mobility services (wholesale and retail) sharing use of the same infrastructure. 

Though it might still make sense to evaluate different “last mile” platforms on a fiber-deep distribution network (radio, copper or fiber as the last-mile connection), only fiber is deemed suitable for urban and suburban networks. A greater range of options applies for rural networks. 

This is far more complicated than once was the case, as it involves all revenues from all customer segments (enterprise; small and medium business; consumers); any kind of network (fixed and mobile) and any type of service (internet access, voice, apps and content, wholesale, edge computing, internet of things). 

To be sure, that means payback models might be quite different for integrated operators and mobile-only or fixed-only assets. 

“If the technology penetration rate decreases 60 percent, the cost per subscriber increases 278 percent,” said João Paulo Ribeiro Pereira of the Instituto Politécnico de Bragança, Departamento de Informática e Comunicações in Portugal. “However, if the penetration rate increases 60 percent, the cost per subscriber decreases 39,7 percent.

In other words, the cost of construction and bill of materials arguably no longer determines the payback model, at least in urban and suburban markets. 

It is take rates (penetration) that overwhelmingly shapes returns in such areas. On the other hand, construction arguably continues to dominate the payback model in rural areas. 

Beyond all that, equity value and deployment assumptions also have changed over the last few years, in at least some markets. Aside from the nuts and bolts of a customer payback model, the equity value of access networks has changed as institutional and private equity investors buy up access network assets as an alternative asset for portfolios. 

So FTTH is not only a platform for revenues, it also is a way of creating new equity value. At the same time, there is new thinking about how to leverage  joint ventures for new access infrastructure that trade some ownership for more outside investment in access infrastructure. 

In other words, telcos, cable companies, mobile service providers and independent internet service providers historically have preferred to own their own infrastructure, even in some markets where wholesale is the infrastructure model. 

But there is new thinking about accepting outside investment in exchange for a share of operating profits. 

Also, in some cases, assumptions about levels of government support also have changed, as more money is made available to speed broadband deployment. That effectively lowers investment hurdles and payback assumptions. 

The point is that our traditional ways of evaluating payback from optical fiber investments in access networks are changing. “Fiber to the home” does not quite capture all the value of a fiber-deep distribution network. 

Fiber to the small cell site; fiber to the colocation site; fiber to the enterprise; fiber to the small business and fiber to the home all are parts of the payback analysis. Beyond that, thinking about the financing and ownership mechanisms is changing. 

It might make sense to own less than in the past. It might be sensible to trade some revenue and profit for less exposure to capital investment. 

The takeaway is that our older payback models make less and less sense.

Implicit Questions about Payback from 5G and FTTH

Though there still is no firm consensus about the number of firms that a home broadband market can support, the math suggests that in markets with one or more smaller specialist providers, as many as five firms could sustain themselves. When competition across a full market is necessary, it is possible that, in some markets, that number drops to about three.

Globally, observers note that take rates for the new FTTH services often run in the 20 percent of homes passed up to 40 percent of homes passed range, with the threshold for a payback generally being somewhere around 35 percent on a blended basis.

In other markets there are two ubiquitous providers and several small specialists who serve only parts of a city. It is too early to know how the long-term market will shape up, as most of those new contestants are just entering the market now, or have operated for only a handful of years.

Still, those possibilities far exceed older thinking about access markets, when it was assumed only a single provider could sustain itself. In some markets, we already see that two access providers, competing on a whole-city basis, can sustain themselves.

Many other large questions, such as the role of wholesale mechanisms, open networks, the role of mobile versus fixed networks and the mix of revenue from consumer and business customers, all are open questions at the moment. Nor can we rule out some eventual move, in some markets, back to monopoly regulation of fixed network access services.

A related question is the ultimate shape of mobile service provider markets as well. At the moment, many observers believe markets with four leading mobile operators are unsustainable. Those observers believe markets will stabilize only when the number of suppliers is reduced to three (or perhaps fewer, in some cases).

Much of the debate over "fair share" mechanisms in the European Union countries seems to revolve about support for mobile networks rather than fixed networks.

But observers might also have questions about the sustainability of private equity investments into fiber-to-home networks as well, and for similar reasons: payback on potential investments.

According to consultants at Bain and Company, private equity investors have poured about $32 billion into building fiber-to-home networks between 2019 and 2022. It is not clear whether that sum also includes the cost of acquiring copper access assets that are then rebuilt using FTTH, though.

Payback can be obtained at lower levels when construction costs are low, such as in rural areas and when aerial construction is possible, rather than underground. Payback periods also are affected by other issues such as the availability of wholesale transit or access fiber, ability to pull new cables through widespread duct infrastructure, government subsidies and so forth. 

The point is that profitability often hinges on local conditions, including the level of expected competition from other internet service providers. 

source: Bain and Co. 

Other studies and transactions might confirm the risk involved. In many cases, before an FTTH network actually is built, a firm will buy an existing telco service provider business. That can add $1,000 per home to the payback model for an eventual FTTH build. 

Metric	Description	Example
Construction costs	The cost of building and deploying an FTTH network, including the cost of materials, labor, and permits.	$1000 to $1200 per location passed; perhaps $2,000 - $4,000 per household if existing copper assets are purchased.
Asset purchase costs	The costs associated with purchasing the necessary equipment and infrastructure for an FTTH network, such as fiber optic cables, routers, and switches.	$500 - $1,000 per household
Take rates	The percentage of households in a given area that subscribe to an FTTH service.	40% - 60%
Demographics	The characteristics of the population in a given area, such as age, income, and education level, can impact the demand for FTTH services.	Higher-income and more educated households are more likely to subscribe to FTTH services.
Housing density	The number of housing units per unit of land can impact the cost of deploying an FTTH network and the number of potential subscribers.	Higher housing density can make it more cost-effective to deploy an FTTH network.

Some recent transactions, especially those made by private equity, have involved purchase of existing telco assets, with the intention of building FTTH to change the revenue model. But that also can effectively double hurdle rates for earning a financial return, all other things remaining equal. 

In other words, instead of building a greenfield FTTH network for about $1100 per passing, the acquisition cost, plus FTTH cost, can effectively double the payback hurdle. 

Transaction	Date	Buyer	Seller	Asset Description	Number of Homes	Cost per Home
Apollo Global Management to acquire Lumen's copper access assets	2022-07-25	Apollo Global Management	Lumen Technologies	Copper access assets in 20 states	10 million	$600
KKR to acquire Consolidated Communications	2022-02-01	KKR	Consolidated Communications	Copper access assets in 21 states	1.3 million	$900
EQT to acquire Frontier Communications	2020-10-09	EQT	Frontier Communications	Copper access assets in 25 states	2.4 million	$1,000

Changes in U.S. FTTH Demand and Supply Sides

There are several reasons--both supply side and demand side--why U.S. “fiber to home” business models appear to have changed. 

Perhaps oddly, fundamental demand for home broadband, though higher than ever, also provides less of the revenue to build the networks.

As important as the fiber-to-home business is, it is responsible for less than 10 percent of AT&T revenues. In the fourth quarter of 2022, for example, mobility drove nearly 69 percent of total revenue. 

In the fourth quarter of 2022. AT&T earned $31.3 billion. Mobility generated $21.5 billion of that amount. The fixed networks business generated $8.8 billion. Consumer fixed network services generated $3.3 billion or so. 

Of course, not all contestants are similarly situated. For many competitive internet service providers, revenue does largely depend almost exclusively on home broadband. Again oddly, revenue potential for such ISPs also seems to have declined. 

Where designers once assumed FTTH per-customer home revenue in triple digits ($130, for example), they now assume revenue in the $50 to $70 a month range. That might seem to eviscerate the business case, if network costs are in the $800 range with additional costs to connect actual customers in the $600 to $725 range, with take rates ranging from 20 percent up to about 40 percent. 

Only a firm with low overhead can make money sustainably at 20 percent adoption rates. For larger firms, adoption in the 40-percent range is likely required. At a high level, AT&T has been saying FTTH payback models work at $50 a month ARPU and penetration of 50 percent, though revenue from targeted newbuilds now exceed those figures, AT&T says. 

It is one thing for a smaller ISP to contemplate building an FTTH network and sustaining itself solely on such revenues. It is quite another matter for a dominant firm in a local area (Comcast, Charter, AT&T, Verizon, Lumen, Frontier, Brightspeed). 

Strategic concerns also matter, however. Even if the fixed networks business generates 10 percent of total revenue, that revenue still matters. Without the FTTH upgrade, AT&T risks losing that revenue and profit margin and cash flow contribution. 

In other words, even if never stated so starkly, unless the FTTH upgrade is made, AT&T and others risk losing their fixed networks business to competitors. 

At the same time, though harder to quantify, the payback model for deep-fiber networks can come in other ways. If small cell mobile networks require deep fiber networks, then business value comes also from the value of the backhaul network. So “fiber to the tower” and “fiber to the radio site” become elements of the payback model. 

Fiber access networks also support the business customer revenue stream. For AT&T, fourth quarter 2022 fixed networks business revenue was $5.6 billion, or about 18 percent of total revenue. So “fiber to the business” arguably drives almost twice the revenue as home broadband does, for AT&T. 

In other words, the same network supporting home broadband also contributes to support of the mobility business and business customer revenue streams. 

All that makes for a more-complicated payback analysis for any sizable contestant with dominant mobile revenues. Though the home broadband payback has to be there, the value of what we used to call “FTTH” has to be justified in other ways. 

Smaller ISPs might be able to justify an FTTH network on the basis of home broadband services alone, with 20 percent take rates. It is not so clear a large dominant service provider can hope to do so unless it can reach 40 percent or higher take rates, assuming revenue per account in the $50 to $70 range. 

And even when it does so, total deep fiber network value can hinge on other value contributions. 

Still, there are additional considerations. Supply side support from the federal government can reduce the cost of rural networks builds by 20 percent to 30 percent, which aids the payback model. 

Joint ventures of various types provide similar benefits, at the cost of possibly further reducing net revenue upside. 

And though it is an indirect input, many private equity firms are willing to invest in deep fiber projects with a rather simple formula: buy assets at a five times to six times revenue multiple and upgrade with FTTH to produce an asset selling at 10 times to 11 times revenue multiples. 

Demand side drivers also have changed a bit as well, beyond the “need” for internet access. 

The Affordable Connectivity Program provides a $30 a month subsidy for low-income buyers. That subsidy can be used to buy basic or faster services, and increases demand for internet access. 

In some cases, that means new FTTH facilities benefit both from 20 percent to 30 percent lower build costs, plus $30 a month in consumption subsidies for lower-income households. All those are new elements in payback models that improve the business case on both demand and supply sides.

Big Change for AT&T FTTH Payback Model?

The economics of fiber to the home infrastructure have never been easy, in the United States or anywhere else. But the business case is quite different now than two decades ago. Consider the metrics AT&T CEO John Stankey mentioned at the UBS Global TMT Conference. 

Talking about the pace of FTTH deployment in the consumer market, Stankey said “we've turned the corner in the consumer space on EBITDA growth,” elaborating that “we're watching those returns improve every quarter.”

And Stankey expects even better payback models as AT&T scales its FTTH deployment and revamps its operating cost structure. 

“When we can get into that space with customers that are paying us $50-plus a month and we're splitting share in that market, that's a good place for us to be over the long haul,” said Stankey. 

There are two key elements there: broadband market share very close to 50 percent and average revenue per location in the $50 a month range. The former would be a historic shift in market share and installed base. The latter is important because it shows the lower payback threshold. 

A couple of decades ago, the payback would have assumed something more on the level of $130 to $150 worth of monthly revenue from a consumer customer location, driven by the triple-play bundle of voice, internet access and linear video. 

The actual penetration rate was complicated, as there were a mix of single product, dual-play and triple-play accounts, each with different ARPUs. For AT&T, the road ahead remains a bit complex, but will be anchored in broadband. 

The FTTH payback decision would seem to be based on at least $50 a month for internet access as the base case, with a mix of customers buying voice, streaming or linear video products that will be non-consolidated items provided by Discovery Warner-Media, with AT&T receiving about 71 percent of the free cash flow. That might represent about $8 billion in annual free cash flow for AT&T, as its share of the proceeds from Discovery Warner-Media. 

The big change is the strategy. Essentially, the FTTH payback is anchored by internet access of perhaps $50 per location, with adoption close to 50 percent, and aided by voice and video entertainment contributions at lower levels. 

That is a huge assumption change from two decades ago, when revenues in the $130 to $150 per month range were assumed to be necessary. To be sure, AT&T also has get close to half the consumer broadband services market, in terms of installed base. 

But AT&T executives seem quite encouraged by trends they have seen in the latest rounds of FTTH builds.

FTTH Payback Models are Way More Complex These Days

If you are the sort of person who has followed the investment case for fiber to the home over a long period, you are well aware that payback periods are moderately long. You might also profess a reasonable belief that the payback analysis has gotten more complicated of late. 

Among the reasons: more of the payback might come from business customers, arguably less from consumer customers. More of the payback might come from attributed value for owners of mobile access services and less from services for customers of the fixed network. 

There are new investors in digital infrastructure whose estimations are financial rather than as operators of such assets. Such financial investors might not be as riveted on longer-term operating value but rather a chance to boost the valuation of assets before selling to longer-term investors. 

All of that requires a more-complicated analysis than was the case 30 years ago, when the analysis might generally be more simple: expected revenue gains from consumer services.  

It no longer is so clear that a quick, high level analysis still hinges largely on consumer revenue per account, for example, even if that might represent the principal direct revenue sensitivity.  

For example, where it once was possible to estimate consumer account revenue at perhaps $120 a month, as was the case for internet service providers selling home broadband plus entertainment video plus voice services, many ISPs now report that typical recurring home broadband revenue is more on the order of $50 to $70 per month. 

So revenue sensitivity also is potentially different for firms with other contributors, whether that is the value for mobile revenue generation, business services or wholesale upside. Pure-play home broadband ISPs almost always must contend with lower revenue per account than multi-play service providers with meaningful voice, video or other revenue drivers, including incremental revenue from mobile services that the FTTH investment supports. 

Some multi-play providers, including cable companies, also must contend with a major platform change similar in magnitude to a copper access telco upgrading to FTTH, though always with higher per-account revenue assumptions than a pure-play home broadband supplier. 

Firm	Breakeven Years	Investment per Home Broadband Account, Triple Play or Dual Play	Revenue per Account
Shentel	5-7	$1,500-$2,000	$100-$150
Google Fiber	3-5	$1,000-$1,500	$70-$100
AT&T	7-10	$1,500-$2,000	$100-$150
Comcast	10-15	$2,000-$2,500	$120-$170
Private Equity	7-10	$2,000-$2,500	$120-$170

If we assume that home broadband is the sole revenue driver, and that customers will routinely buy service plans at the upper range of available service plans (gigabit per second or multi-gigabit service plants), the payback models are a little more stringent.

Firm	Breakeven Years	Investment per Home Broadband Account	Revenue per Account
Shentel	10-12	$1,500-$2,000	$70-$100
Google Fiber	7-9	$1,000-$1,500	$50-$70
AT&T	12-15	$1,500-$2,000	$70-$100
Comcast	15-18	$2,000-$2,500	$90-$120
Private Equity Investor	10-12	$2,000-$2,500	$90-$120

The payback models are worse if the typical ISP has only home broadband as the primary revenue source and recurring revenues are at the lower end of what investors expect, about $50 per customer account, to start with, growing over time to higher levels over time, allowing for some annual increases in revenue per account. 

Firm	Breakeven Years	Investment per Home Broadband Account	Revenue per Account
Shentel	15-17	$1,500-$2,000	$50-$70
Google Fiber	10-12	$1,000-$1,500	$30-$50
AT&T	17-19	$1,500-$2,000	$50-$70
Comcast	20-22	$2,000-$2,500	$70-$90
Private Equity	15-17	$2,000-$2,500	$70-$90

The payback case might be longer if one has to include borrowing costs to acquire assets and then invest in FTTH. And one might argue that no private equity firm will hold assets for the full period required to earn an expected return. 

Among the obvious other imponderables are the differences in asset valuation that might be the driver, not the payback period or the typical recurring revenue, but mainly the arbitrage on assets whose value is boosted. 

Competition, demand assumptions and therefore revenue-per-account expectations are different. The implied value for supporting core mobile operations now is a factor. Business revenue arguably is more dynamic. 

And investment objectives are a new issue for some classes of investors. 

The upshot is that FTTH payback models are much more complex than was the case 30 years ago.