Build It and They Will Fill It

Early in my career as a consultant, I advised clients to not adopt the philosophy of “build it and they will come”. Fifteen years ago, when fiber networks were first being built to residential communities, I had clients who were so enamored with fiber technology that they couldn’t imagine that almost every household wouldn’t buy broadband from a new fiber network.

I saw clients invest in fiber networks and take bank loans based upon irrationally high customer penetration rates, with no basis for their projections other than hope. Fiber overbuilders who counted on everybody taking fiber were inevitably disappointed, and over time I saw most fiber builders become more realistic about penetration rates and engage in surveys and pre-sales efforts to get a better idea of how well they would do.

Interestingly, I’m seeing this same concept creep back into the industry. This time it has to do with building middle-mile transport fiber. I have heard the phrase ‘build it and they will fill it’ a number of times over the last few years. There are examples of fiber transport routes being subscribed quickly, and the exuberance from a few such examples has some fiber builders believing that they can’t fail in building transport fiber.

Unfortunately, for every fiber route that is a huge success, I can point to a dozen fiber routes that languish with little traffic. As it turns out, middle-mile fiber is probably the one product in our industry that best illustrates the classic economics of supply and demand.

Buyers of middle-mile transport have explicit needs to get from point A to point B. If a given fiber route can be part of such a solution, then they will consider buying transport. But buyers of transport usually consider all of the alternatives to buying on a given fiber route – there are almost always alternatives. I know one case where three different carriers built fiber to reach a large rural data center. This instantly created price competition and none of the carriers are seeing the revenues they hoped for when building the fiber.

Some of the companies that buy transport will also consider building fiber rather than buying dark fiber of lit bandwidth. Verizon is probably the best example of this – they seem to have an internal formula that determines when building is better than leasing. Even worse for fiber owners, once Verizon builds fiber it is instantly competing with the existing fiber.

Companies that lease fiber also have to deal with other issues. The ideal long-haul fiber route has a minimal number of POPs, and some carriers avoid routes with too many stopping points. Intermediate stopping points and POPs increase electronics costs and maintenance costs and each electronics site degrades the light signal a bit.

I advise that anybody building transport fiber needs to have an iron-clad reason the justifies building a specific route – even if there are no other revenues. If the carrier can’t enter a new market without the new transport, then the route is mandatory. But a carrier ought to have already lined up enough basic revenues to justify building a non-mandatory transport route. If one major fiber tenant pays enough to recover the cost of building the route, then it might be a good risk.

The same advice to be careful applies whether a route connects major cities or goes to rural areas. I remember years ago helping a client find a connection between Dallas and Kansas City and we found seven separate fibers that made the connection. This level of overbuilding drops the lease price for the route.

We had an interesting national experiment over a decade ago in building a lot of middle-mile fiber to rural communities that were funded by the ARRA Stimulus grants. A lot of the fiber built with those grants was pure middle-mile transport, with only a few stops along the routes to serve a handful of rural anchor institutions. Looking back a decade later is a great example of today’s topic. Many of the ARRA routes have attracted almost no interest even after a decade. Some routes built with the grants are doing well and gained transport sales to cellular carriers and to ISPs wanting to serve the last mile. It’s a challenge when comparing the winners and losers among those routes to understand why some rural routes attracted transport customers while other similar routes have not.

Leasing transport in rural markets is a tough business. The big wireless carriers like Verizon and AT&T have grown increasingly leery of entering into long-term fiber leases. Carriers that want to reach small rural towns to provide last mile fiber can’t afford to pay a lot for transport. Many WISPs are notoriously overextended and can’t afford expensive leases. While school systems might lease fiber for a while, they are always looking for grants to build and own the routes directly. The bottom line is that if you build it, there is no guarantee they will fill it.