IdeaTek is making a go at it in rural areas where the conventional wisdom says that the cost of construction is too high to justify a business case for building fiber. The company considered building wireless networks, as is being done by numerous other rural ISPs, but decided that the wireless technology is not sustainable for the long-run.
So how do they make it work? According to Daniel Friesen, a Managing Member and Innovation Officer, the company is succeeding for several reasons. First, they have mastered the art of building fiber for less than the conventional cost. The founders of the company formerly built and operated a middle-mile fiber network that connected to cell towers and large businesses in the region. They built over 2,200 miles of fiber in that venture and perfected construction techniques, using their own crews, to lower the cost of building rural fiber.
Their other key to success is that they are operating in areas where there is almost no competition. Rural Kansas is like much of the country and has large geographic areas with little or no broadband. IdeaTek has found that most rural households and businesses are interested in their products, and so high customer penetration rates help to build a solid business plan.
Finally, they have a simplified product offering. For broadband they offer only two speeds – 5 Mbps and 1 Gbps. They sell the 5 Mbps connection to homes or businesses for $40 per month. They residential gigabit product has an introductory price of at $40 price for the first six months that increases to $70 per month. Business gigabit is priced at $150. The only other products they offer are a simplified telephone offering along with managed WiFi.
Like all fiber overbuilders IdeaTek’s number one challenge is financing new construction. It takes a lot of money to build last-mile fiber and they had to find a lender willing to finance the growth of their network. It took a lot of convincing, but they eventually were able to get a line of credit from a local bank that has allowed them to grow. But as the company grows, their need for borrowing grows and and they are looking for a new lender willing to give them a larger borrowing cap. As they look into the future they can see that financing is going to be their biggest ongoing challenge – something that any company building long-return infrastructure eventually encounters.
Most our banking institutions no longer make loans to build long-term infrastructure. There are numerous reasons for this. Probably primary is that banks don’t want to tie up large amounts of money with one borrower for the 15 – 25 year terms needed to fund infrastructure loans. There has also been structural changes in liquidity and reserve requirements that make it easier for banks to make shorter-term loans. Many banks are uncomfortable assessing the risk for infrastructure projects, which a key element to choosing an interest rate and loan term. In today’s banking world fiber overbuilders have an uphill battle convincing lenders they are a good risk.
So what can we learn from IdeaTek?
- They are showing that it’s possible to be profitable in rural areas for the operator who can control costs. The most significant cost for a fiber overbuilder is the cost to build fiber and IdeaTek is able to build fiber for less than the conventional cost.
- The company is also demonstrating the advantage that comes from selling into markets with no other competition – the higher customer penetration rates can make up for lower customer density.
- IdeaTek is having no problem finding customers in rural America because of the lack of good broadband. They feel they are surrounded by opportunity.
- Their biggest constraint is finding enough money to build to the opportunities they identify. Like all fiber overbuilders, IdeaTek was surprised by the amount of management effort required to find and keep a line of credit. This is a common story I hear from all fiber overbuilders. Our banking system is not aligned with the needs and financial characteristics of anybody building long-term infrastructure. Anybody building a lot of fiber needs to put banking at the top of their priority list.