This Industry Viewpoint was authored by J. Drew Mullin, Partner, ATLANTIC-ACM
Despite a 2023 slow-down in the expectation of fiber route mile builds, fiber deployment remains extremely active driven by upgrades, opportunity, and infinite demand for capacity. National carriers continue the shift from legacy copper services to more scalable fiber infrastructure. Regional and emerging fiber-focused players strategically seize niche opportunities including new long-haul routes and densification of existing metro markets. Providers maintain a more disciplined approach to deployment, recognizing it as a strategic land-grabwhere being the first-to-market provides a competitive advantage, and lays the foundation for securing long-term returns. But fiber deployments are expensive, and with the increased cost of capital there is pressure on both providers and investors to build fiber in the right places, driving diverse build strategies guided by existing assets, market outlook, and tolerance for longer return on investment.
Legacy commercial services have maintained flat or declining revenues, but the Dark Fiber and Wavelength marketplace grew by approximately $470M in 2023, with future growth for those products expected to be a little over 5% CAGR over the next five years. Consumer broadband is growing at 3%+ annually through 2028, with fiber to the home (FTTH) growing at almost 10%. Data demand continues its meteoric rise driven by end user content consumption, cloud and hosted application growth, connectivity between data centers, and the explosion of AI and device developed data. In densely populated regions, fiber is considered table-stakes, while in less populated areas, it stands out as a strong competitive advantage. Providers recognize that to be competitive in the long term they will need scalable fiber infrastructure.
Why Does Everyone Like Fiber So Much?
There are numerous connectivity mediums other than fiber, such as copper, satellite, or fixed-wireless, but these mediums are all secondary options to fiber infrastructure. Fiber’s virtually limitless bandwidth potential, capacity to transmit longer distances with less regeneration, and lower operating costs than alternative mediums make it commercially more compelling than any alternative in most circumstances. As optronics technology continues to improve, the same fiber pair can transmit ever-increasing bandwidth, making it a future-proof asset for evolving connectivity needs.
In addition to operational advantages, fiber infrastructure offers significant corporate valuation benefits. Pure fiber-based businesses generally achieve EBITDA multiples ranging from 15 to 25, in contrast to largely copper and cable assets, which typically trade in the 4 to 15 times EBITDA range. This has less impact on larger publicly traded companies, but is very significant for private or private equity-backed regional providers seeking to maximize the returns on their capital investments. While the rapid growth of fiber EBITDA multiples has tapered somewhat, the fiber industry remains an attractive and financially sound sector for investment.
While fiber is inherently superior to alternatives, there are reasons to choose another transport technology, with cost topping the list. The expense associated with constructing or acquiring fiber infrastructure can be considerable, and it is heavily influenced by geographical factors. Build costs vary significantly, ranging from $30,000 to $1,000,000 per route mile depending on geography, and costs are on the rise due to a strained labor force and elevated inflation rates. The Fiber Broadband Association estimates that 205,000 additional workers will be needed through 2026 to support network expansions. Deployment timelines can also be a factor if speed-to-market is a necessity, with fiber construction timeframes typically spanning from 6 to 18+ months and highly susceptible to delays related to permitting and construction moratoriums.
How are Provider Builds Progressing?
In 2023 operators re-evaluated deployments, and in many cases, significantly altered their originally planned deployments. Several major operators pulled back their 2023 targets as they contented with labor shortages, supply chain disruptions, and economic pressures from inflation and increased difficulty in accessing capital.
- AT&T – Reduced their 2023 estimate for new passings from 3.75 million to 2.25 million, as they look to reach 30 million total by 2025. AT&T also has their Gigapower joint venture with Blackrock, where they are looking to hit 1.5 million locations in their initial phase of the buildout that are outside of AT&T’s traditional ILEC footprint.
- Verizon – Fios had 17.1M passings by the fourth quarter of 2022. They remain committed to increasing their overall footprint to 18 million locations by 2025.
- Frontier – Frontier was on track for 1.3 million new fiber passings for 2023, which was a step down from their initial target of 1.6 million passings for the year. Frontier is now over 50% of the way to their 2025 passings target.
- Lumen – Lumen is under new executive leadership and is making significant changes in their go- to-market strategy in hopes of improving their financial position. They lowered their initial 2023 targets from 1.75 million passings to 500 thousand and expect another 500 thousand passings in 2024.
State and federal programs will significantly accelerate deployment spending. Government funding will inject almost $100 billion into the system, most notably through the BEAD program (Broadband Equity Access and Deployment). The roll-out of these programs will be a little slow, or at least slower than many people would like, but they are a catalyst for new builds, and they demonstrate a national commitment to fiber infrastructure.
Focused Strategy is Paramount
Adopting a fiber-focused approach goes beyond merely breaking ground and expanding fiber route miles. It revolves around crafting a well-defined strategy and executing it with precision. Different operators have varying perspectives on fiber shaped by their specific investment criteria, existing assets, target growth areas, and long-term strategy. This broader strategy can include effective monetization of non-fiber assets that still contribute significantly to revenue. Carriers must assess their legacy customer base and make informed decisions on where a transition to fiber has the greatest short- and long-term returns. For new entrants covering markets with little to no fiber the approach is very different. FTTH companies are rapidly expanding their networks to blanket entire neighborhoods or markets with an acute sensitivity to speed-to-market. For these newer entrants, market selection and neighborhood prioritization are paramount, necessitating comprehensive analysis of competition, potential build costs, and growth trends.
Fiber In 2024 and the Coming Years
The pace of fiber deployment will be healthy for 2024 and the coming years driven by the ever-increasing demand for bandwidth and ongoing capital investments from private equity, infrastructure funds, and government funding initiatives. The growing belief that universal access to high-speed internet is a fundamental right for all Americans and the massive amounts of application/device developed data secure long-term demand for the services fiber delivers.
Fiber builds also face some headwinds. Fiber builds necessitate significant investment, and the cost of capital is higher than inflation for the first time in over a decade. The actual expense associated with fiber construction has escalated, with operators identifying labor as a significant contributing factor. Permitting timeframes have consistently presented challenges in the fiber construction process, and while these timelines have not significantly improved or worsened, their impact on time to revenue remains a significant factor, especially with the anticipated surge in BEAD-funded projects in the coming years. And the ongoing challenge across all telecom services: heightened competition in many markets has led to price erosion, intensifying the competitive landscape and added another layer of complexity to fiber deployment strategy.
Despite these challenges, companies are committed to continuing their fiber expansion efforts, employing a variety of rollout strategies and tactics. Unlike the broad, overarching fiber strategies of the past, ongoing fiber builds are expected to be more targeted and specific in nature, reflecting the evolving dynamics of the industry.
Founded in 1991, ATLANTIC-ACM, is a leading strategic consulting firm to the telecom and technology sector. ATLANTIC-ACM assists corporate and investor clients in evaluating strategic growth opportunities for successful investment, market entry, optimization, and long-term planning. For over three decades, Boston-based ATLANTIC-ACM has helped leading companies identify opportunities, capture and retain market share, and navigate changing market dynamics, economies, and technologies. For more information, visit ATLANTIC-ACM’s website at http://www.atlantic-acm.com. LinkedIn: https://www.linkedin.com/company/atlantic-acm/
If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!Categories: Fiber Networks · FTTH · Industry Viewpoint