Is Now the Time to Invest in Fiber?

Fiber CableIt’s been obvious for a decade that the ISP market is not going to get competitive until new entrants join the market and build fiber networks. We don’t need the government to tell us that there is not very much head-to-head competition between large ISPs. Verizon is the only large incumbent that has built any appreciable amount of last-mile fiber, although there has been a lot of fiber built in smaller markets by the independent telephone companies.

Until now there has been virtually no competition from new market entrants other than Google and about a hundred municipalities that have built fiber in their own towns. And even most of those municipalities took advantage of the facet that they were already in the electric business. But I think the market forces are finally lining up to make this a more attractive market for new entrants.

There certainly seems to be a demand for fiber. Households clearly want faster and more affordable broadband and better customer service and are clamoring for competition. Cities everywhere have been crying out for fiber investments and have offered incentives to anybody who will build it. Certainly Google has awakened this demand by elevating the conversation to be about gigabit fiber service.

On the supply side it’s getting easier all of the time to build fiber. The cost of the electronics needed to serve customers has dropped steadily over the last decade. Where fiber used to require an expensive box on the side of the house, the ONT is now a tiny device with an integrated WiFi that can be powered from inside the house. And 802.11AC WiFi has enabled ISPs to be able to deliver services within many homes wirelessly, allowing them to ignore the costs and problems of using existing wires. There are now also more cost-effective ways of getting the fiber drops from the curb to the home.

On the supply side you also have to consider the lack of competition from the incumbents. The Department of Commerce just released numbers that show that vast majority of customers who want Internet speeds of 25 Mbps or faster only have one ISP option.

It’s also gotten easier in the financing world. The economy has improved significantly since the sub-prime mortgage meltdown of 2007 and the consumer confidence index has risen steadily. Interest rates are still low and investors have built up a huge war chest of investment money looking for good shovel-ready projects.

All of these factors are coming together to enable new entrants to look at fiber as a profitable market opportunity. Certainly the margins on data products are sky-high with operating margins of at least 80% compared to margins on voice at about 60% and on cable TV of maybe 20%. A competitor can look at those margins, along with the public’s general dislike of large ISP customer service and see an opportunity to make money.

There are a handful of new market entrants that are building fiber networks. Consider the following examples:

  • Tucows from Toronto has already made a name in the US through Ting wireless. They have done well in wireless through great customer service and by pricing so that cellphone customers only pay for what they use. Tucows just purchased Blue Ridge InternetWorks in Virginia and plans to build fiber in Charlottesville, the home of the University of Virginia. They see room in the ISP market for companies with great customer service and competitive pricing. They plan to offer gigabit speeds and will by eyeing additional markets.
  • Brooklyn Fiber is building gigabit fiber in Brooklyn and surrounding areas. It comes as a shock to people when they learn that Brooklyn and many other older east coast communities never got Verizon FiOS fiber. Brooklyn Fiber offer speeds up to a gigabit at affordable prices.
  • Sonic is an ISP in California that has installed gigabit fiber in Brentwood and Sebastopol. The company has been an ISP since 1994 and has resold service on incumbent copper. But with superior customer service they have become the dominant ISP in their neighborhoods.
  • US Internet has been building residential fiber in small parts of the Twin Cities in Minnesota. They offer 1 Gbps servive for $65 per month and have just announced a 10 Gbps product at $400 per month.
  • RS Fiber Cooperative is a new cooperative that will soon be bringing fiber to rural Sibley and Renville Counties in Minnesota. I can’t remember the last new telecom cooperative that was formed. The Cooperative model is an interesting one since the customers own the business. Over the long run cooperatives can thrive where other providers can’t due to not needing to make big profits In fact, by law cooperative are largely required to plow profits back into their businesses. This new business is particularly interesting since they are bringing fiber to the farm.

These handful of companies don’t yet constitute a movement, but perhaps they are the first of what may be many new competitors. The actions of the incumbents – poor service, high prices and relatively lows speeds – are inviting competition into existing markets, and so perhaps we have finally reached the time when it’s a great idea to invest in fiber.

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