How open access model disrupts, offers potential to more rapidly scale FTTP infrastructure.

Open access infrastructure, wherein service providers lease the access layer of fiber to the premises (FTTP) networks to gain access to subscribers, offers substantial potential to alter the economics of deploying FTTP. FTTP deployment has lagged in the United States – currently passing less than half of all homes – because the business case for its deployment is based on recovering capital investment in a short term time horizon of 5-7 years from residential subscription fees. These deployers sell both access to its proprietary delivery infrastructure and bundled services delivered over a vertically integrated offering of web, email, as well as video channels and voice over internet protocol (VOIP).

Their business case analysis considers internal rate of return standards, the number of homes likely to purchase known as “take rate,” and projected average revenue per household unit or ARPU. That calculus has historically favored household density and income with the former carrying the most weight since the cost of deployment would be spread across more homes.

Open access infrastructure changes this revenue structure. Instead of solely relying on end user revenues, it derives some from leases to service providers. In the case of Utah’s UTOPIA Fiber open access network, fully 70 percent comes from service providers and the balance from end users. Open access infrastructure must attain significant scale to reach a lot of end users in order to offer an attractive market to service providers to lease access to the network.

The open access model also lengthens the investment time horizon allowing deployers to attract more patient capital that doesn’t need to hit ROI over the short term. It’s in it for the long game. The demand for FTTP is there – owing in large part to the fact that more than half of U.S. households lack access to it - and will continue to be. It’s also a long term asset with a life span of 30 to 50 years. And it’s sticky, affording deployers first mover advantage. Whoever deploys first is likely to own that end user premise customer for decades.

As one of the first open access networks formed in the early 2000s, UTOPIA Fiber has achieved the scale necessary to make the model work, serving 20 Utah municipalities that collectively own the network. The financial appeal of the open access model has also attracted private players including SiFi Networks, which according to its website is now in 11 American cities. More recently, AT&T is getting in on the open access action, forming a joint venture with BlackRock to deploy open access FTTP outside of AT&T’s existing service area.

Northern California could potentially host the nation’s largest regional open access network in terms of scale and geography, serving 40 member counties of the Rural County Representatives of California (RCRC) with the RCRC’s nascent Golden State Connect Authority, formed in 2021 as a joint powers authority. There, the open access model could provide FTTP in less densely populated areas passed over by the large, investor owned telephone and cable companies under the traditional closed access bundled services business model. Many households there are forced to rely on substandard, expensive wireless services.

More patient capital meets burgeoning demand for fiber

A shift is underway in capital investment in fiber to the premises (FTTP) advanced telecommunications infrastructure. In the United States, FTTP investment has lagged for decades due to the capital investment limitations of investor owned telephone companies. They are constrained by overleveraged balance sheets and investor expectations of traditionally high shareholder dividends that necessitate rapid returns on any capital investment. Those limitations became apparent in the late 2000s when Verizon faced a shareholder revolt, forcing it to scale back plans to modernize its legacy copper outside plant to FTTP. It later moved into fixed wireless that offered lower capital costs. Infrastructure investment is a long term proposition that requires patient capital not found in these companies.

Now AT&T is attempting a workaround to access more patient capital with its Gigapower joint venture with investment firm BlackRock to invest in open access FTTP delivery infrastructure outside of its service area. That patient capital includes state and local pension funds, sovereign wealth funds, and family endowments, Adam Walz, told a panel presentation this week by Broadband Breakfast. Walz is managing director of BlackRock’s Global Infrastructure Fund focused on investments in digital infrastructure opportunities across fiber networks, data centers, and wireless infrastructure.

Notably, other builders of open access FTTP also rely on patient capital including UTOPIA Fiber, owned and financially backed by a 20 Utah municipalities and privately owned SiFi Networks, funded by European pension fund APG. However, Gigapower CEO and retired AT&T executive Bill Hogg, said these players have “nowhere near the scale we will have,” claiming Gigapower will be “much larger than any other provider in the space. The scale at which we are going to operate will be a differentiator in the U.S. marketplace.”

But patient capital doesn’t mean it isn’t concerned about maximizing returns. All these players are targeting more densely developed areas most likely to produce strong ROI and ARPU, capitalizing on the strong demand for FTTP delivered services. Had U.S. telecom policymakers made more erudite decisions decades ago, fiber would have reached nearly all American doorsteps by 2010 at the latest instead of the estimated 40 percent currently. That gives Gigapower lots of runway as well as first mover advantage: first with fiber owns the location for the long term. “We’ve found plenty of attractive locations to build fiber where there’s no fiber today,” Hogg said, pointing to Las Vegas (Google Fiber is looking at that metro as it enters Nevada) and locales in Florida and Arizona. 

The concentration on densely developed areas will require patient capital investment by governments and consumer utility cooperatives to serve less developed areas, particularly those at the exurban edges of metro areas that have seen in migration by knowledge workers as knowledge work decentralizes out of urban cores.

Metro fiber “overbuilder” SiFi Networks announces $350 million JV debt raise

SiFi Networks, an investor owned delivery fiber infrastructure company, announced its Future Fiber Networks LLC joint-venture with European pension fund APG raised $350 million of bank financing in its debut debt raise. The company said the financing will be used alongside APG’s $500 million equity investment in Future Fiber “to deliver future-proof FTTH connectivity and smart city solutions across the U.S. via its fiber wholesale business model.”

SiFi Networks is one of several non-incumbent fiber players targeting metro markets in the U.S. including most prominently Google Fiber and Ting Internet. Sonic, currently in Northern California, is another among what incumbent telephone and cable companies describe as “overbuilders” within their nominal service territories.

Private and public financing schemes emerge to finance fiber telecom infrastructure

In the absence of an aggressive federal initiative to timely replace obsolete, decades-old copper telephone lines that reach every doorstep with fiber, local U.S. governments are looking to connect homes, schools and small businesses lacking fiber connections or unable to afford them and to promote economic development.

A major stumbling block is they lack the financial resources to build their own networks. Despite low interest rates, they are reluctant to issue bonds to cover construction costs and more specifically, to secure the debt. With taxpayers reluctant to support new tax levies, politicians are leery of asking voters to approve them. In addition, local government officials -- still scarred by the penury of the 2008 financial crisis -- aren’t inclined to pledge their general funds as security.

Private and public financing schemes have emerged to try to help localities secure fiber construction bonds. One private scheme is being utilized by a telephone company, Consolidated Communications. The local government issues a bond and retains full or majority ownership of the network infrastructure. The telco secures the bond until it’s retired in 20 to 30 years and then assumes control of the network assets. By which time equipment replacement and updates will likely be needed. But the telco gets network revenues both during the bond term and afterwards and doesn’t have to commit as much capex up front, offset by the muni bond proceeds. That meets telcos’ need to avoid capex that suppresses earnings as well as incurring more debt load given already overburdened balance sheets among investor-owned telcos.

Another private financing method utilizes European pension fund investment capital. Under that scheme, the local government does not own the network, which remains under the control of a private sector operator. The model provides more patient capital than shareholder owned telephone and cable companies. But like the investment capital of those companies, it is risk averse and aimed at densely populated urban areas.

A public bond securitization method is under development in California. Legislation enacted in 2021 authorizes the California Public Utilities Commission (CPUC) to annually loan funds from its advanced telecommunications infrastructure subsidy program to a loan loss reserve fund. The current state budget appropriated $750 million to seed the fund. It will cover costs of debt issuance, obtaining credit enhancement and funding of reserves for the payment of principal and interest on debt incurred by local government and nonprofit organization projects.

The CPUC is in the process of developing eligibility requirements, financing terms and conditions and allocation criteria for advanced telecommunications infrastructure projects as mandated by the legislation. According to the Golden State Connect Authority, a multi-county joint powers authority formed in 2021 to construct advanced telecommunications infrastructure and provide technical assistance, the legislation authorizes a joint powers authority to issue revenue bonds supported by the loan loss reserve fund.

U.K.-backed FTTP builder plans first U.S. projects in California

According to the story in the Monterey County Weekly, SiFI Networks will construct fiber to the premise infrastucture in Pacific Grove using a mixed architecture apparently designed to lower deployment costs using aerial lines and existing municipal infrastructure: the sewerage system.

The Monterey County Weekly reports SiFi has London-based backers interested in U.S. projects and has targeted two California cities as the first ones.

Under the public-private partnership with Pacific Grove, the city is providing in kind services in the form of staff time for planning and permitting. SiFI Networks is seeking funding for the estimated $30 million to $40 million capital cost of constructing the network.