Thursday, October 19, 2023

Near term outlook, trends for advanced telecom infrastructure

U.S. telecom policy will continue to favor investor owned, market-based advanced telecommunications infrastructure despite its higher cost compared to public and consumer-owned (utility cooperative) infrastructure. The predominant role of privately owned legacy telephone and cable infrastructure reinforces path dependency.

Government and consumer utility coop owned open access fiber to the premise infrastructure missed significant expansion opportunity from 1998 to 2019 as telephone companies made minimal investments in fiber to the premise (FTTP) delivery infrastructure, keeping legacy copper outside plant in place. Lack of political will, unrealistic expectations of incumbent providers, unfavorable demographic and economic trends, tax resistance and reliance on limited grant programs for majority of funding versus organic debt funding severely limited their expansion.

Boosted by infusions of private equity investment, investor owned FTTP builds will be expanded beyond what providers could otherwise achieve on their own due to limited capex constrained by overleveraged balance sheets and dependence on expected network revenues to meet rate of return goals. Private equity investment is motivated by a potential premium upon exit in five to seven years through sale of their stakes to their provider partners and/or network consolidators. Investment will be primary focused on newer existing and planned suburban developments in selected metros. Private equity investment is predicated on regarding FTTP as long term asset that affords first mover advantage. Connecting the customer premise means owning the customer since only one fiber connection will meet current and future service needs.

Advanced telecommunications infrastructure subsidies allocated by the 2021 Infrastructure Investment and Jobs Act will mostly go to large telephone and cable companies to incrementally edge out their networks in rural and exurban areas, primarily to dense clusters of homes and those in areas of cut off density not reached by existing landline advanced telecommunications infrastructure. Some BEAD funding will subsidize wireless in remote rural areas to provide both fixed and mobile services.

FTTP networks in less densely developed areas will receive some subsidization from existing programs as well as a new potential high cost area subsidy program to replace the FCC Universal Service Fund, particularly if the FCC reclassifies Internet protocol telecommunications service as a common carrier utility.

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