Top operators in the U.S. are pushing to reach nearly 8 million new passings with fiber this year. In 2023 and beyond, the bar is even higher at 9.5 million or more. But a pair of analysts warned this week long-term fiber growth projections are wildly overstated and will fall short for one simple reason: economics.
In a note to investors on Monday, MoffettNathanson flagged a bubble in the fiber market which is primed to burst. They argued the past couple of years created a unique environment in which broadband was very much in demand and “interest rates had fallen so low that money was, quite literally, being given away. Infrastructure projects that under other circumstances would never have seen the light of day suddenly seemed attractive.” Hence, operators came out with massive fiber build plans collectively targeting tens of millions of new passings through 2025.
But now, with interest rates and the cost of labor and materials rising, cracks are beginning to show as operators have started to miss their build targets.
Among others, MoffettNathanson noted AT&T, Altice USA and Lumen Technologies have reported slower than expected fiber deployments this year. “Taken together, the aforementioned companies are on track to miss their 2022 fiber homes passed target by ~1.2M,” the firm wrote.
The aforementioned rising interest rates and other costs mean fiber overbuilders may be forced to raise service prices to compensate. And that, in turn, could impact their ability to rapidly penetrate markets and thus achieve the return on investment they forecast as part of their build plan.
“Taken together, it seems clear to us that IRRs can be expected to fall sharply over the coming years, quite possibly (probably?) into negative NPV territory if the cost of deployment and capital continue to rise,” MoffettNathanson concluded. “Capital markets will sniff out this dynamic long before the companies themselves do, and they will withdraw capital. This is, of course, how bubbles are popped.”
Recon Analytics founder Roger Entner agreed that fiber overbuilders could be in for a rude awakening in a few years’ time, particularly those who find themselves up against another fiber player or two in a given market.
He explained that in order to generate sufficient returns, an overbuilder needs to secure a minimum of 25% to 40% market share, depending on the geography. In markets where there’s one fiber overbuilder and one cable incumbent, things typically work out in fiber’s favor with a 60-40 market share split. The situation starts to get dicey with three providers, with Entner noting the market share divide typically breaks out to a 50-30-20 split. Any more competitors than that and things get downright ugly.
Entner said scenarios like the one playing out in Mesa, Arizona – where a total of six fiber players have announced plans to build and take on incumbent cable operator Cox Communications – are pure “insanity.”
“That is not going to have a happy ending for several of them,” Entner predicted. “You can’t build five fiber networks and come out alive in the end. I know consumer advocates want that, I would like that too. But…it just doesn’t happen.”
The takeaway, he said, is operators can’t blindly overbuild and expect that fiber will win when so many others are doing the same.
He concluded: “In a couple of years there will be very cheap fiber assets available” in markets with too many fiber players. And eventually “in every market regardless of how many people come in, the number of players will consolidate to two or three and in some markets maybe even down to one because it’s so challenging.”