As AT&T, Verizon and Sprint move forward with their wireless densification plans and 5G preparation, wireline wholesale providers see an opportunity to further monetize their fiber networks. But these opportunities are coupled with a new reality of hard-nosed negotiations on what wireless operators are willing to pay for dark and lit fiber facilities.
The largest wireless operators are setting the pace for a host of backhaul opportunities. AT&T, according to a MoffettNathanson research note, has a multithousand-site fiber to the tower (FTTT) RFP in the market.
Meantime, AT&T revealed earlier this year it began deploying small cells using Centralized Radio Access Network (C-RAN) architecture in San Francisco. AT&T is replicating that deployment in other cities, enabling the operator to densify its network and lay the groundwork for 5G and beyond. While it has not revealed any fiber partners yet, AT&T will need the assistance of other fiber providers to accommodate additional C-RAN rollouts.
Alternatively, Verizon is taking a different approach by signing two significant fiber and component deals with its main suppliers Corning and Prysmian. Verizon will purchase up to 20 million km (12.4 million miles) of optical fiber each year from 2018 through 2020 from Corning and over 17 million kilometers (10.6 million miles) of ribbon and loose tube cables from Prysmian.
While Verizon’s new stance could alter its existing wholesale partners, the wireless operator has indicated it will consider the business case to build or buy fiber in each market.
A number of wireline operators—ranging from large incumbents like CenturyLink and Windstream to competitive carriers like Zayo and Uniti Fiber—are poised to get a big part of the 5G and small cell migration.
Given the momentum large wireless operators are creating for new fiber backhaul, wholesale wireline providers are faced with a dilemma: accommodate their wireless customer pricing demands or risk losing to a competitor.
While every wireline operator is at a different stage in their wireless backhaul journey, wireless operators’ call for lower priced circuits is a common requirement that’s affecting wireline carriers’ bottom lines—a trend that was evident in the first quarter.
Take Consolidated Communications. The service provider reported in its first quarter earnings results that commercial and carrier revenues did not move much. Consolidated will likely benefit with a larger fiber network and connections to towers when it completes its acquisition of FairPoint Communications later this year.
“Commercial and carrier revenue, despite the strong growth in Metro Ethernet, was relatively flat due to continued price compression, largely from the carrier channel,” said Bob Udell, president and CEO of Consolidated.
Udell added that that a number of wireless operators that are offer unlimited data plans are looking to revisit contracts. Depending on the market, Consolidated weighs which contracts and deals it’s worth pursuing.
“In order to get access to some of the small cell deals or additional sites, we’ve seen the larger wireless carrier’s muscle the 15 years of sites they have built even when they are only three years into a term,” Udell said. “They will say if you want 100 more sites, you need to open up your agreements.”
Regional ILECs like Ritter Communications, which operates in Arkansas, Missouri and Tennessee, is seeing similar pain.
“We have certainly seen downward pressure,” said Greg Sunderwood, VP of engineering for Ritter. “When you look at when we first started with Verizon six years ago, they funded a lot of construction costs and they were willing to pay to get fiber into those towers, but over the last few years wireless operators aren’t willing to talk about up front capital costs.”
Sunderwood said that in some cases even if a wireless operator is two to three miles away, it can’t build a business case.
“We’ve seen ourselves losing some opportunities to incumbents that have fiber near or at those towers because we can’t make a business case,” Sunderwood said.
TDM transition pressures
Being pressured by carriers to renegotiate pricing is just one issue wireline wholesale operators face.
Similar to the business market, wireless operators continue to migrate from copper-based T-1 circuits to either IP-based Ethernet or dark fiber. However, this transition results in near-term revenue losses for incumbent wholesale players.
Regional operators like Cincinnati Bell and Hawaiian Telcom are certainly seeing this trend.
Cincinnati Bell, a regional ILEC that has been expanding its residential fiber and business network, noted that wireless operators transition off of copper-based circuits ate into its first-quarter wholesale revenues.
“Carrier market revenue was down $2 million over the prior year due to ongoing switched access rate reductions and the impact of national carriers increasing their focus on reducing costs and network grooming,” said Leigh Fox, president and CEO of Cincinnati Bell.
Hawaiian Telcom saw a similar trend, adding that it is seeing an uptick in higher speed services.
“In the first quarter, while we continued to experience some revenue pressure as wireless carriers continue to retire low-bandwidth legacy TDM circuits to migrate to Ethernet solutions, we also saw robust demand from other wholesale carriers for additional high-capacity circuits,” said Scott Barber, CEO of Hawaiian Telcom, in its first quarter earnings call.
Given the revenue and pricing squeeze they face, what are wireline operators going to do to overcome pricing and legacy migration pressures?
In order to monetize their fiber to the tower and small cell deals, wireline wholesalers are using the same fiber to accommodate other nearby commercial business opportunities.
Uniti Fiber, the fiber arm of real estate investment trust (REIT) Uniti, is finding such synergies from its pending Hunt Telecom purchase, for example. The service provider said that in one market where Hunt is installing fiber for a school district, it overlaps with fiber Uniti is building for a wireless operator.
Jim Volk, VP of finance and investor relations for Uniti, told investors during the recent 45th Annual J.P. Morgan Global Technology, Media and Telecom Conference that Hunt’s build is “going to allow us on a combined basis to save a couple of million dollars in capex.”
Fatbeam and Zayo are finding similar methods.
When Fatbeam initially targets a community with fiber services, the service provider will seek deals with local school districts. After it wins a few contracts, Fatbeam will then pursue other nearby opportunities with local businesses or wireless operators.
Fatbeam recently won two dark fiber-based FTTT contracts in Washington and Idaho. In another contract to serve schools in four other states, the carrier intentionally installed 200 miles of extra fiber with the aim of attracting other wireless operators.
Zayo has leveraged the fiber it deployed for FTTT to win a large school district deal with the Texas Education Service Center Region 11, for example. The 1,178-mile platform consists of 440 miles of fiber for a previously planned FTTT build, 443 miles of existing network and 295 miles of new construction.
For others like Consolidated, the opportunity is one to get a better return on investment.
“We look at the tower backhaul deals as an enabler to pass more opportunities for commercial, consumer and multidwelling unit opportunities,” Udell said.
While there are certain near-term issues to overcome, wireline wholesale providers will need to be flexible if they want to advance their wholesale revenues. Having a flexible attitude will help not only in gaining near-term revenues, but setting a long-term growth pattern based on an evolving relatoinship between the wireless carrier and fiber supplier.--Sean | @FierceTelecom