The Era of Bargain Fiber Is Over

July 1st, 2012 by · 15 Comments

If Zayo’s pending purchase of AboveNet says anything, it’s that those islands of underinvested fiber (metro, regional, or intercity) that were orphaned by the hundreds across the USA when the dotcom bubble burst are getting pretty darn scarce.

The mantra for years has been that the only way to make money in fiber was to let it go bankrupt first, and then buy it for pennies on the dollar – getting the asset to operate without spending the capex to build it.  A great idea, but one that only works out right when building fiber doesn’t work economically the first time.

For many years now, people have been extending fiber networks with real capex in economically sustainable ways.  And by extending, I mean building new fiber routes from scratch.  Not everyone has proven their path to the pot of gold at the end of the rainbow of course, but overall the industry has figured out how this business model works and the demand to drive it forward really has finally arrived. The metro business came first, but regional fiber has been coming on strong as well due to twin needs of lower latency and greater route diversity and there is momentum starting to build even for the longhaul end of the spectrum.

The wave of consolidation across the USA over the past several years has left us with a relatively sparse field of healthier, aggressive national and regional competitors, with fewer and fewer holdouts still looking for their price.  There just aren’t that many places to go anymore to buy fiber infrastructure anymore, just at a time when cloud computing and mobile data are poised to require so much more of it.

For instance, I have heard from multiple sources over the past few months that there are folks out there right now actively looking to buy national intercity US dark fiber, but can’t find anything close to the price points we were seeing just a few years ago. Level 3 and CenturyLink have most of it, and they’re very careful these days about who they sell it too, however they spin it publicly. Zayo still sells dark fiber where it has it, but their intercity footprint even after the AboveNet deal closes will not be national in the sense of dark fiber available to sell. AT&T, Verizon, and Sprint rarely even mention fiber anymore except when it comes to upgrading their gear to fit more bits into what they already have. About the only sizeable portion out there that is probably on the market is what Carl Icahn is sitting on, and whatever he does with it will surely benefit exactly one person (three guesses who).

What that means is that investors really need to start looking at the fiber sector differently. There is no glut hanging overhead, there is lots of room for metro and regional expansion, and there are cash flows available to fund new construction. And most importantly, there are no more cheap backdoor ways to invest in it.  The fiber wasteland is long gone.  Nowadays it’s a gated community.

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Categories: Fiber Networks

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15 Comments So Far

  • Ed Kinsella says:

    As usual, great industry insight Rob – but as a Zayo Account Director my biased opinion is there’s definitely Intercity Dark Fiber available and in many instances opportunity to build new routes well within current financial models.

    • I wasn’t saying there’s no intercity dark fiber out there, but rather that you can’t buy it on the cheap anymore. What one must pay is now derived from what it costs to build, which wasn’t true at all not so long ago.

      As for new routes within current financial models, I completely agree – but only for those (like Zayo) that have got it figured out.

  • Morty says:

    You mention Icahn as having fiber— XO is running on lvlt fiber , if memory serves [based on the lawsuit between lvlt & XO some yrs ago] the XO IRU expires in 2018—-there was an option available to XO,but I could never learn the length of the option or the money to be paid by XO to LVLT if the option is exercised .
    I imagine that this was the reason for XO’s objection to the lvlt/glbc merger . The possible merger delay gave Icahn leverage to negotiate something . The objection did not last very long & I assume Icahn got something !

  • Morty says:

    The point of my previous post is that Icahn has an IRU of indeterminate time as opposed to clear ownership of fiber .

    • The details of XO’s IRU/ownership remain quite opaque to me, so I can’t speculate much further than I already have on the subject. I do suspect that whatever Icahn does with XO will happen over the next year or so, and perhaps things will become clearer when that happens.

  • Anonymous says:

    XO has clear ownership of its long haul fiber from Level 3 after its IRU term ends. It also has significant
    additional LH fiber separate from Level 3 & owns 10K+ miles of dense metro fiber assets.

  • Morty says:

    XO got metro assets by purchasing Allegiance Telecom & may have purchased others . I doubt that XO ever built anything on its own.
    You will have to explain how XO owns an LVLT asset when its IRU & option expire ?


    • Morty, you have it backwards. XO (or Nextlink back then) constructed much of the metro it now operates, some in partnership with MFN as I recall. Allegiance had very little, mostly just an east coast intercity fiber route as I recall. Allegiance was more of a pure CLEC, they planned to build fiber when they had the revenue to justify it, but never got that far. Nextlink planned to get their intercity fiber off the L3 build while building their own Tier 1 metro footprint.

      • Greg Green says:

        As a former regional President for NEXTLINK you are correct we did build a lot of metro fiber in our early years of 96, 97, 98 and beyond. Longhaul is another story.

  • Al B says:

    Rob = Is your implication that our cities are once more ready and willing to allow their streets, walkways, etc to be torn up again for the laying of additional, new fiber optic lines??

  • Anonymous says:

    Thanks Robert. Few questions. 1) What types of customers are you getting feedback from? Do you think that pricing on intercity routes will move back toward replacement cost economics? That has grave implications for the telecom space broadly. 2) Is the increased price coming from supply constraints or because there are only a few suppliers that control all excess capacity? If its supply constraint, doesnt that imply that the technology curve for bit traffic is growing faster than the fiber optic cables can be upgraded (demand is outpacing technology upgrades). How do you think about that?


    • Anonymous says:

      It would be interesting to look at historical capacity analysis from install to current levels and plot that against historical demand levels. The original business plans of these companies never factored in that technology was the good news & the bad. He who built/lit last had the lowest cost that quickly became the cheapest provider taking the lead in the race to the bottom. I agree with Anon that demand is currently outpacing technology however is it capex investment issues or really a tardy technology lapse & when will that ratio reverse? A technologist would have to weigh in here on the upgrade availability.

  • Grant Lewis says:

    I actually think if Zayo could have acquired XO when it attempted to do so in 2008 it would have gotten a good value for the assets that were in play and the overall situation relative to fiber would be a much different story given the frenetic pace of acquisitions the last two years.

    On the subject of XO being acquired if memory serves me correctly Zayo’s proposal was $940M for XO non inclusive of NOLs, Nextink & Allegiance. The Nextlink & Allegiance assets were valued at ~$100M which isn’t much considering the original price but reflective of appropriate market prices given assets are less than desirable. I wonder what the value would be today now that the NOL’s have been stripped and to Morty’s point the value is clearly diminishing since the IRU expiration is fast approaching ….

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