C-Band is a Huge Deal for Verizon: Extends Home Broadband Addressable Market from 25% to Virtually 100%

One iron rule for internet access services is that if one has enough bandwidth, access speeds can be very high. For mobile operators, bandwidth expansion can come in a few ways: adding more spectrum, building smaller cells or deploying better modulation techniques or radios.

In that regard, for 5G, mid-band spectrum has been key for firms such as Verizon, which have had less mid-band spectrum than others. The difference is striking. 

After deploying C-band spectrum, Verizon mobile peak speeds “go from 9 Mbps to an amazing 2.4 gigabits per second,” said Hans Vestberg, Verizon CEO.

That has implications for home broadband as well, as, in principle, peak speeds might reach gigabit per second levels. And that, in turn, is important because it dramatically extends the addressable market for fixed wireless from perhaps 25 percent of buyers to perhaps 99 percent of buyers (those who buy home broadband at speeds up to about 2 Gbps, and do not require symmetrical access)

True, Verizon has millimeter wave assets to deploy in urban areas, but C-band means fixed wireless has higher bandwidth in suburban and rural areas as well. 

For Verizon, which has a smaller fixed network footprint than many of its leading competitors, that really does matter, as it means Verizon can compete for home broadband customers who want higher speeds in most U.S. geographic areas. 

Of a total of 140 million U.S.  homes, AT&T’s landline network passes 62 million. Comcast has (can actually sell service to) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

The number of Verizon homes passed might be 27 million. Lumen Technologies never reports its homes-passed figures, but likely has 20-million or so consumer locations.

The point is that Verizon cannot easily expand its fiber to home footprint outside its historic service areas, for reasons of investment magnitude. So fixed wireless makes eminent sense for a firm that can presently reach only about 19 percent of U.S. homes using its fixed network. 

The same sort of logic holds for T-Mobile, which historically has had zero access network fixed network footprint. There is neither time nor money for T-Mobile to wire the entire country, or even a substantial part of it, using FTTH. 

So C-band is a really big deal. It extends Verizon’s home broadband addressable market from about 25 percent of homes to up to 100-percent of homes.

T-Mobile Probably Can Compete for 25% of the Home Broadband Market

A new Ookla report on mobile speed performance cites T-Mobile’s 5G network at 221 Mbps downstream. Compare that to Ookla’s average for fixed network internet service provider speeds at 213 Mbps. 

To the extent that T-Mobile’s fixed wireless service can attain such speeds, it arguably would be faster than the typical home broadband service purchased by, and experienced by consumers. 

That does not mean home broadband providers are not, in many instances, able to sell faster services in the gigabit ranges, for example. It simply is not a service “most” consumers of home broadband are buying, right now. 

Looking at U.S. customer behavior, it appears that about 25 percent of the market is willing to buy service that tops out at about 200 Mbps. If T-Mobile can boost fixed wireless speeds to about 400 Mbps, it could appeal to about 60 percent of U.S. customers. 

source: OpenVault 

Private Equity FTTH Interest is About Asset Growth, As Always

One lesson observers might have learned from past investment bubbles in the computing and connectivity businesses is the importance of maintaining sanity when evaluating the prospects for sustainable financial returns. 

Granted, many investments are either designed to be short term. The investors assume they can build an asset that is expected to be acquired by some larger entity before the issue of sustainability must be addressed. 

In the software business, the example is a small start-up whose financial backers believe is destined to be acquired before it must actually scale up as a sustainable business. 

Some observers might find it odd that private equity capital is being invested in fiber-to-home networks. Under present conditions, these investments have very-long payback cycles (10 years or more), which would seem unsuited to the private equity need to sell off assets within about a five-year horizon. 

Still, as always, private equity investments are about growing asset values, not operating businesses long term. And that explains the investment thesis. 

But the assumption seems to be that willing buyers can be found. Consider take rates and monthly revenue for Google Fiber, which targeted areas where it would be the first FTTH supplier in each city. Results suggest that Google Fiber is getting market share from customers who want faster speeds and are willing to pay for it, as its average monthly revenue is higher than incumbent ISPs (telcos and cable TV) generate. 

Google Fiber prices range from $70 for gigabit service up to about $125 per month for 5 Gbps service. And speeds of up to 8 Gbps are being offered in several of the markets, for about $150 a month. 

City	Years of marketing	Take rate	Average monthly revenue per home per account (ARPU)
Austin, TX	6	25%	$120
Kansas City, MO	8	30%	$110
Provo, UT	7	35%	$100
Salt Lake City, UT	6	40%	$90
West Des Moines, IA	5	45%	$80

That suggests a calculation has been made that the assets can be created and then sold to other owners over a relatively short period, before full payback on the investment has occurred. 

Consider the generic example of a PE firm buying an existing telco with little to no FTTH footprint, and then rebuilding using FTTH. 

Assume the asset can be purchased for about $1,000 per home location, and then the owner can build a new FTTH network for about $1,000.

I am skeptical of the payback model for private equity funding of fiber to home (FTTH) networks, especially in cases where the PE firm has to buy an existing telco and then invest another $1000 per household to build the FTTH network.

Assume the firm can get 40 percent take rates, as it might already have about that level of customer penetration to begin with. Assume its home broadband revenue is about $90 a month. 

So the key high-level assumptions include:

• Upfront investment: $2000 per household ($1000 to buy the existing telco + $1000 to build the FTTH network)

• Annual revenue per household: $90 x 12 = $1080

• Operating expenses: Assume 50% of revenue, or $540 per household

• Annual operating cash flow: $1080 - $540 = $540 per household

• Assuming the PE-backed firm can achieve 40% market share, this means it will generate $540 x 40% = $216 in annual operating cash flow per household on average.

To reach operating cash flow breakeven, the PE-backed firm needs to generate enough operating cash flow to cover its upfront investment. This means it needs to generate $216 x 9.26 = $2000 in operating cash flow per household over 9.26 years.

Assuming a 10-percent required rate of return, the PE-backed firm needs to generate $2000 x 10% = $200 in annual profit per household, as well. 

To earn a full recovery of invested capital, the PE-backed firm needs to generate $200 x 10 = $2000 in profit per household over 10 years, assuming the take rates are at 40 percent and customer revenue is $90 a month. 

Of all the assumptions, the take rates at $90 per month, per account, are likely the most challenging. 

Most incumbent ISPs selling FTTH have managed to get only about 40 percent take rates after several years, and at average selling prices closer to $50 a month. 

So builders of new FTTH networks might do best when targeting more-affluent neighborhoods, rather than whole cities. 

In this simplified model we do not include any inflation-related price increases, some amount of business customer revenue (for enterprise or cell tower backhaul, for example) or wholesale revenues from allowing competing ISPs to use the network. 

The observation is simply that private equity firms historically want to sell assets after about five years (the range being three to seven years). 

So such investments--always designed to be sold--will likely have been sold to other investors before full payback is reached. 

On the other hand, at least at the moment, terminal values would seem to warrant the investment. In principle, investments of up to $2000 per home could reach $3000 per home in a sale, assuming present trends hold. 

Year	Transaction value (per home)	Buyer	Seller
2023	$3,250	GIP	Zayo Group
2022	$3,000	Apollo Global Management	Lumos Networks
2021	$2,750	KKR	Hargray Communications
2020	$2,500	EQT	Suddenlink Communications
2019	$2,250	Warburg Pincus	Charter Communications
2018	$2,000	TPG Capital	MetroNet
2017	$1,750	Berkshire Hathaway	OnFiber
2016	$1,500	Goldman Sachs	WaveDivision Holdings
2015	$1,250	Carlyle Group	FiberNet Holdings
2014	$1,000	Providence Equity Partners	Clearwire Communications
2013	$750	Blackstone Group	FiOS Networks

Customers Buy What They Want, When They Want It

Some “debates” never seem to go away. Some decades ago, an engineering vice president quipped that “fiber is the future,”  followed after a short pause by “and always will be.” 

The humorous point was that customers make concrete choices under concrete circumstances that often defy our notions of “what is better” or “what they should buy.” 

The success of 5G fixed wireless and cable hybrid fiber coax alternatives to digital subscriber line probably comes as no surprise to anybody. But the actual choices consumers make, when fiber to home, hybrid fiber coax and other alternatives are available might confound technologists who believe “fiber is always the answer.”

In fact, consumers make choices that suggest that is not automatically true. Most telcos (perhaps all) have found that after marketing for several years against hybrid fiber coax, they tend to get about 40 percent adoption (four homes out of 10 will buy). 

So something other than “performance” is at work.  Rather obviously, a substantial number of customers believe the product version that makes most sense is a “good enough” product for a “reasonable price” For perhaps half the market, that means whatever commercial service offering speeds “in the middle” and also “prices in the middle” of all offers, low to high. 

Data from OpenVault consistently suggests this is the case. 

source: OpenVault 

Physical media matters, since not every platform has the ability to keep scaling bandwidth into scores-of--gigabit-per-second ranges, either symmetrical or not. 

But consumer demand also matters, as even when the difference between the fastest tier and the slowest tier is two orders of magnitude, most customers will likely keep buying speeds in the middle, about one order of magnitude below the “fastest” tier of service, and one order of magnitude above the lowest tier of service. 

Internet service providers often need to offer speed that is “good enough,” at prices that also are viewed as reasonable, to remain viable for half the market. But it might always be the case that up to 25 percent of the market will buy even a “slower speed” service if the pricing is right.

Even as speed requirements continue to grow, demand for “slower but affordable” and
“Good enough at a reasonable price” should both remain viable segments of the home broadband market.

Why Fixed Network Internet Access Features Consumer Speed Tiers, While Mobile Networks Do Not

While it might be difficult to describe the average revenue per account impact of 5G accounts, compared to 4G, it seems far easier to show revenue lift provided by fiber-to-home accounts, compared to copper-based accounts.

Company	FTTH ARPU	Copper ARPU	ARPU Difference
AT&T	$65	$45	$20
Verizon	$70	$50	$20
Lumen	$55	$40	$15
TDS	$60	$45	$15
Brightspeed	$65	$45	$20

In large part, that is likely because FTTH allows sale of higher-priced access plans, which naturally generates higher revenue. Also, unlike the case for mobile account figures, home broadband is “service to a place,” so there is no effect of “multiple users” on recurring price.

In mobile scenarios, multiple users and devices might be supported on a single account, in the form of multi-user accounts, with “lines” or “numbers” ranging from two to some higher number. 

For example, Ericsson suggests 5G boosts average revenue per user by less than five percent, even if many observers suggest ARPA drives significantly higher impact. 

Company	5G ARPA	4G ARPA
AT&T	$100	$80
Verizon	$120	$90
T-Mobile	$90	$70
NTT	$110	$80
Telefonica	$100	$80
Vodafone	$90	$70

It remains unclear whether mobile operators might eventually shift to differentiated access speed plans for their mobile customers, as do home broadband providers. 

There are clear business imperatives underlying each charging principle. The cost of supplying capacity on a fixed network is far lower than on a mobile network, traditionally, largely because fixed networks generally have more ability to add capacity (optical fiber bandwidth is almost infinite; mobile capacity is based on radio frequency resources that are inherently limited). 

Traditionally, fixed networks have huge advantages where it comes to capacity and therefore cost per gigabit of consumption. While we might argue about the precise absolute retail cost of supplying capacity, mobile bandwidth has generally been about two orders of magnitude more expensive than fixed network bandwidth. 

Year	Fixed network (USD/GB)	Mobile network (USD/GB)
2000	100	10,000
2005	10	1,000
2010	1	100
2015	0.1	10
2020	0.01	1
2025	0.001	0.1

Under such circumstances, it makes sense that mobile operators “need” to manage consumption expectations, where fixed network operators can more easily consider “tiers of service” where higher-speed access is sold at higher prices. 

Rarely will mobile operators, with their higher cost to supply capacity, have high incentives to encourage higher customer data consumption by offering higher-speed (and higher-priced) consumption tiers.