Zayo says that the density of its fiber networks puts it into a good position to take advantage of small cell backhaul opportunities as they arise.
Ken desGarennes, CFO of Zayo, told investors during the MoffettNathanson Media and Communications Summit that its fiber network aligns well with where wireless operators will build out small cells.
“From our standpoint, we have the assets that are going to be relevant to where small cells need to go,” desGarennes said. “I think the largest cost and the most important piece of the small cell solution is the fiber and we have a lot of fiber so it’s pretty evident.”
Despite the promise for small cell backhaul, Zayo is being realistic about the near-term prospects for small cells. Some of the unknown issues include what will municipalities charge to install small cells on utility poles and how the carriers can prove a business plan by figuring out what they will charge consumers for new unlimited data plans.
“A couple of years ago, small cells were like an idea and everyone was trying to figure out where it was going to manifest itself,” desGarennes said. “It has taken longer to materialize than people have expected and I don’t think the economics of small cells are fully figured out yet.”
A migration process
The migration to small cell backhaul could play out like the macro cell fiber backhaul opportunity.
After finding low-speed T-1 copper-based circuits were not feasible for growing data traffic needs as a result of the iPhone, wireless operators slowly migrated to a mix of fiber-based TDM circuits, Ethernet and finally dark fiber.
“It took years to figure out to figure out the economics of backhaul on the macro tower side,” desGarennes said.
Zayo saw macro backhaul services play out on a joint process where it had to rework its approach and offerings to accommodate wireless operators’ needs.
“What we saw in the macro tower space is backhaul evolved over time as carriers figured out what the demand and what economics that worked for them,” desGarennes said. “We had to adjust to figure out the economics that worked for us.”
desGarennes cautioned that “we’re not looking to add small cells to our network at some rapid pace to hit some revenue growth rate or point to some number of small cells if we don’t judge that to be a good use of our capital.”
One customer that will be a bellwether for small cell backhaul will be Verizon Wireless. Earlier this month, Verizon set a path to deploy more of its own fiber network infrastructure. The service provider signed two large fiber purchase agreements with Corning and Prysmian.
Verizon signed a $1.1 billion, three-year fiber and hardware purchase agreement with Corning to support a next-generation fiber platform that will support all of the company's businesses. The service provider will purchase up to 20 million km (12.4 million miles) of optical fiber each year from 2018 through 2020.
Later, Verizon signed a $300 million deal with Prysmian to procure 17 million kilometers (10.6 million miles) of ribbon and loose tube cables.
At first blush Verizon’s new fiber thesis could be an issue for Zayo, but the company has a number of things going for it to ensure it will continue to be a key supplier to the telco.
For one, Zayo currently has a number of long-term fiber contracts with the telco. Verizon will look at various fiber expansion options, including a mix of its own fiber or purchasing fiber from other providers, to satisfy its current 4G and upcoming 5G network rollouts.
“Depending on the location, it may mean us building the fiber network,” said Matt Ellis, CFO of Verizon, during its first quarter earnings call. “If there are great assets already in place and there’s an opportunity to acquire them we’ll look to do that.”
desGarennes said it still sees Zayo as having plenty of new opportunities to be a key fiber supplier to Verizon.
“If they are shifting to more of an internal build versus leasing or acquisition, it does not mean that they will do less with us,” desGarennes said. “Revenue is under long-term contracts and they have even said they will do both and likely end up some mixture of build, buy or lease.”
desGarennes added that “they will need a lot more fiber so that should manifest itself in growth with us.”