The U.S. is headed for a fiber bubble, according to financial analysts at MoffettNathanson. Several trends are driving the industry in that direction, the analysts said in a research note released today.
Among these: increases in fiber deployment costs, anticipated price increases that will prevent companies deploying fiber from achieving anticipated take rates, and an increasing cost of capital or even a pullback in capital.
And while some forecasts call for fiber broadband to be deployed across as much as 70% of the U.S., the analysts say those forecasts are “badly overstated.”
Fiber Bubble
The MoffettNathanson analysis is quite different from how some stakeholders see the market. There is a school of thought that says telco fiber deployments enable the telcos to take broadband share from the cable companies, which rely on asymmetrical hybrid fiber coax technology.
But while that may have been true over the last year or two, the analysts don’t see it being true moving forward.
According to them, service providers deploying fiber broadband made those plans when the weighted average cost of capital (WACC) was around 6%. The analysts estimate that the service providers’ projections called for internal rates of return (IRRs) of about 19%.
But taking fiber deployment costs up by 20% and increasing the cost of capital to 9% yields “dramatically lower” IRRs and would result in a 77% decline in the project’s net present value (NPV), MoffettNathanson said.
The analysts also noted that “higher operating expenses would depress yields still further, quite possibly taking NPV into negative territory.”
They also note that fiber deployments would need an average revenue per user (ARPU) of nearly $110 to “achieve the same NPV modeled when the plans were first being hatched two years ago.”
Bullish on Cable
This analysis bodes well for cable companies, the analysts said. Although cable companies are not seeing broadband growth, the analysts cite several steps that cable companies are taking to shore up the business, including bundling broadband with wireless to retain broadband subscribers.
MoffettNathanson also notes that cable companies are well positioned to offer price discounts as needed to respond to or even forestall competitive fiber builds.
The analysts downplay the threat to cable companies from T-Mobile and Verizon fixed wireless services. They see fixed wireless increasingly becoming a rural offering as wireless network resources in urban areas increasingly are devoted to more lucrative mobile offerings.
The Rural Exception
It’s worth noting that while the analysts make a strong case for why the market might have been over-optimistic about fiber broadband deployments, those arguments apply primarily to urban areas. Rural areas lacking high-speed broadband will be getting government funding to cover some of the costs of deploying broadband, and rules for the funding programs increasingly are favoring fiber deployments, which are seen as the most future-proof.
