Two Fiber Networks?

Image of Austin, Texas

Image of Austin, Texas (Photo credit: Wikipedia)

The conventional wisdom in the industry is that two companies would never invest in side-by-side fiber networks to serve residential customers. I have had this conversation many times with clients who were planning to build a fiber network and who were worried about the response of the incumbent providers. Everyone has always believed that the first fiber builder wins because there is not enough margin in the residential market to support two fiber networks. AT&T has shown that conventional wisdom to be wrong by announcing that they will build a second fiber network in Austin as a counter to Google’s announcement to do the same.

This is not without precedent, although on a much smaller scale. The City of Monticello, Minnesota built a fiber network to pass every home and business in the City. The municipal fiber build was prompted by the fact that the City had some of the highest telecom rates in the country. Soon after the City built their network, TDS Telecom, the incumbent telephone company built a competing fiber network.

And as expected, both fiber providers are not faring well. After building fiber TDS decided to win back customers with an aggressive price war. Charter, the incumbent cable company also got into the price war fray. And so customers in Monticello are benefitting from a price war while all of the companies are underperforming.

It is fairly easy to understand TDS’s motivation for building the fiber network and for the price war. The company serves numerous other towns like Monticello and I see their response there as a clear warning to anybody else who is planning on overbuilding their serving territory. It is also clear that they are hoping that the City will give up and leave the fiber business.

And now we are going to see this scenario play out in the much bigger market of Austin. Google already overbuilt one AT&T market in Kansas City and one can easily envision Google overbuilding many other large cities. AT&T’s response in Austin is the same as TDS’s response in Monticello. AT&T has made it clear to Google and others that they are not going to side idly by and watch their major markets go to somebody else.

So it will be interesting to see the impact of AT&T’s announcement. It’s possible that the announcement will cause Google to pause and not build in Austin. Certainly they will not do as well as expected if there are two fiber networks. It’s also possible that both companies will build fiber and we will see side-by-side competition with two fiber networks and the cable company – the kind of competition we have never seen in a major city in the US.

But the real impact of AT&T’s announcement is going to be felt everywhere else. One has to wonder what kind of impact AT&T’s announcement will have on any company, Google included, who is contemplating building a fiber network in a large city. Google has very deep pockets and might proceed anyway, but almost any other company would not be able to afford the much lower returns that come with hard competition.

While this announcement might result in real competition for the citizens of Austin, it also might have the effect of stifling anybody else from trying to build fiber in a large City. This announcement could result in killing anybody from building fiber in large cities due to the fear of a similar reaction. While hearing about two companies wanting to provide gigabit fiber sounds like a good thing, the long-term consequence of this might mean less overbuilding, less fiber and less competition.

And I don’t know that AT&T had any choice. Their only other option was to watch their large markets go to an aggressive competitor. Nobody knows what Google plans to do, but some have speculated that they might build in most of the major cities. Now we’ll just have to watch this one play out, so pull up a chair. This should be interesting.

5 thoughts on “Two Fiber Networks?

  1. From a customer/end-user point of viewpoint, what is wrong with TDS Telecom or AT&T (nee: SWBell) that it takes the entry, or threatened entry…, of a competitor to get them to make the investment to install a fiber-optic network?
    It’s not like we are talking about cutting-edge technology or rocket science here. Fiber-optic networks have been around — and installable — for at least 25- to 30- to 35 years. If it takes a competitive entrant to “move the immovable”, if those big corporations purposely choose not to invest in their network infrastructure until they absolutely have to do so, then a big corporation like TDS or AT&T deserves to lose market share!! (Think US Sprint vs. AT&T long distance back in the 1980’s and 1990’s…)

    Like

  2. I am not entirely sure that AT&T fully realizes what they have done. Cities all over the country will threaten to build a fiber network just to get AT&T to do what they already should have done. They made a well-documented corporate decision that they could get another 10 – 15 years out of their copper, while Verizon went and made the leap with FiOS. But now AT&T can no longer hide behind the idea that they won’t build fiber. It’s going to be hard to put that genii back into the bottle.

    I’m with you Ron. I scratch my head at this sometimes. Most of the rest of the world has been installing fiber like crazy while our incumbent providers have been working hard not to.

    Like

    • I think that AT&T’s strategy is more of capital management. Do you put your capital to work where the business is growing – WIRELESS – or do you put it into the ILEC side that is on the downside of its lifecycle? I believe that their strategy to invest enough to slow the bleeding in the ILEC, while getting an incremental ARPU lift may prove to be wise. FiOS announced in 2010 that they would finish building the franchises that they had, but not pursue additional franchises. That is largely because the investment could not be justified.

      If they were going to invest $750 per home passed (to use a #) for the basic infrastructure to acquire 33% of the market, they would have an investment of about $2,500 plus the success-based costs (drop, modem, STB, etc). As the ILEC, VZ already had the phone and data revenue stream. By overbuilding their ILEC footprint, VZ was really only gaining access to the video revenue stream $50 ARPU and 40% GM.

      That same investment made beyond their ILEC footprint would generate roughly $100+ of ARPU and 40% EBITDA.

      On another note, one must consider the changing technology and access to content online (OOT) versus the traditional linear cable programming. Netflix, Youtube, Hulu all represent business models that can utilize a carrier’s network for no cost. Before making the above-type investments, consider: Are there threats to the revenue stream being forecast in my model? That is exactly the question Monticello did not ask. When prices dropped, customer acquisitions slowed, revenue failed to reach projections, but the investment stayed where it was originally forecast.

      Like

  3. Interesting thing about Austin is that again, GOOG has chosen a market that already has (at least) 3 broadband networks. KC had TW, AT&T, and Everest. Austin has AT&T, the incumbent cable provider and Grande. GOOG will certainly take their share of the market with the latest technology and brand name, but without a truly unique experience, people will become price-shoppers as they are everywhere else. Barriers to change service providers are now very low. Not unlike the days of long distance wars where we changed every 90 days for the lowest rate and $100 check from a different provider.

    What is troubling about the Monticello example (and is repeating itself across the country) is that municipalities are getting into the fray with public money. This is a highly competitive game. It is capital intensive, requires real time adjustments in strategy, and high levels of customer care among other things. Not many governmental entities can lay claim to that list of attributes. Consequently, you have stories like Burlington Telecom losing $17 million of taxpayer monies (before the lawsuit).

    Private investors make decisions on a risk / reward basis, employ professionals with considerable experience in the industry, and are keenly focused on return on capital. Munis are more focused on “bringing new technology to the community so we aren’t left behind”. That ‘end justifies the means’ mindset coupled with not always recruiting from outside the ranks of the municipality employment roles is a recipe for a bad investment.

    Like

    • Google seems to be banking on the fact that they are offering a gigabit download speed as the unique experience. But in Kansas City they are selling that connection at $70 which is above the market price of the competitors products. It will be interesting to see what kind of churn they get over time and if the speed is important enough for people to pay the premium price.

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s