MoffettNathanson: ROI will be disappointing for new fiber deployments; FWA best for rural markets
From two recent research reports to clients, MoffettNathanson chief analyst Craig Moffett wrote:
There is no question that there will be a great deal of new fiber deployed in the U.S. But we expect it will be considerably less than current worst-case scenarios for two reasons.
- There simply isn’t sufficient labor availability for all operators to meet the projections they’ve set forth (this issue will be significantly exacerbated by the upcoming rural Broadband Equity, Access, and Deployment (BEAD) program, which will introduce a dramatic new source of labor demand).
- The expected return from fiber overbuilds will be disappointing, in our view, both because deployment costs (including the cost of capital) have risen sharply, and because expected densities of available markets are falling sharply.
We are skeptical about the returns that will be generated by fiber builds, as costs are rising and densities are falling. The spiraling costs of fiber deployment also make it likely that there will be upward, not downward, pressure on broadband ARPU in competitive markets, as overbuilders scramble to cost-justify not only their existing projects, but, perhaps more importantly, the projects on which they have not yet broken ground (and which, without a more generous ARPU assumption, can no longer be return-justified). Craig had argued earlier this year that the fiber buildout bubble may pop.
Wireless operators have an enormous cost advantage in offering fixed wireless access (FWA) service on preexisting network facilities; the marginal cost of offering FWA is zero if it is simply using excess capacity. The capacity available for such a strategy is relatively limited, making the strategic leverage of FWA relatively limited as well. Cable operators have a smaller, but still significant, cost advantage in offering wireless services that can offload at least some of their traffic onto existing infrastructure. And unlike wireless operators offering FWA, their capacity to do so is unlimited.
Almost no telecom investor with whom we have spoken views FWA as an important part of the story for the companies that actually offer it. Investors seem to have already come to the view (for the wireless operators, at least) that FWA is at best a costly sideline in rural markets. Longer term, the bigger threat to cable broadband is likely fiber rather than fixed wireless, Moffett said. But even with that, the analyst seems to be less concerned that cable operators will overspend on fiber or that overbuilders will present more competition.
The convergence arguments for fiber to the home (FTTH) are arguably even weaker. As we’ve pointed out often, AT&T’s wireline footprint covers but 45% or so of the U.S. (by population), and of that, just a third is wired for fiber. In total, then, AT&T can deliver a bundled solution to just 15% or so of the population. In our view, a strategy (bundling) that “works” in 15% of the country isn’t a strategy.
We certainly aren’t convinced that the U.S. market will be fundamentally shaped by convergence. But if it is, the cable operators, not the telcos, are positioned to benefit.
MoffettNathanson: Fiber Bubble May Pop; AT&T is by far the largest (fiber) overbuilder in U.S.