The broadband industry is facing a crisis. We are poised to build more fiber broadband in the next few years than has been built over the last four decades. Unfortunately, this peak in demand hits a market that was already superheated, and at a time when pandemic-related supply chain issues are driving up the cost of broadband network components.
The numbers I am hearing from clients are truly disturbing. Just in the last few weeks, I’ve heard that the cost of conduit and resin-based components like handholes and pedestals is up 40%. I’ve heard mixed messages on fiber – some saying that prices are up as much as 20%, while others are seeing little price increases. I think the increases have to do with the specific kind of fiber being purchased as well as the history of the buyer – the biggest increases are going to new or casual fiber buyers. I’ve heard the cost of fiber-related components like pigtails is also way up.
The kinds of numbers I’m hearing can only be classified as hyper-inflation. It’s way outside the bounds of normalcy when the cost of something is up 20% to 40% in a year. I’ve been listening to a lot of economists lately who say that many price increases that are due to the pandemic are temporary in nature and that what we are seeing is a price bubble – they predict prices ought to revert to old levels over time in competitive markets where multiple providers of components will be bidding for future business.
But I keep looking at the upcoming plans for the country collectively to build fiber, and it looks like we might be seeing a superheated industry for the rest of this decade. When much of the rest of the economy gets back to normal, it’s not hard to envision that not being the case for fiber.
This leads me to ask if this hyper-inflation is going to kill fiber projects? I start with the RDOF winners – the amount of subsidy they get is fixed and won’t be adjusted for higher costs. At what point do some of the RDOF projects stop making sense? The business modelers for these companies must be working overtime to see if the projects still work with the higher costs. It won’t be shocking to see some of the RDOF winners give up and return Census blocks to the FCC.
But this same thing affects the winners of every other grant. Consider the recent grant filings with the NTIA. Those were some of the most generous grants ever awarded, with the NTIA program picking up as much as 75% of the cost of a project. What happens to the winners of those grants if materials are much more costly when they go to build the project? Any extra cost must be borne by the grant winner, meaning that the real matching could be a lot more than 25%. Some grant winners are going to have a hard time finding extra funding to cover the extra costs. Some of these projects are in extremely rural places, and one has to worry that having to pay extra might make the difference between a project making sense and not. Even with grants, it’s often a fine line between a project being feasible or not.
This same worry has to be spreading through the big ISPs. Companies like Frontier, Windstream, and Lumen are betting their future viability on building more fiber. How do those plans change when fiber is a lot more expensive?
The worst thing is that we have no idea where prices will peak. We’ve not really yet seen any market impact from RDOF and other big grant programs. We’ve seen some impact from CAREs spending, but that was a drop in the bucket compared to what we’re likely to see from ARPA and federal infrastructure spending.
I have a lot of nervous clients, and I have no good advice for them on this issue. Should they buy as much fiber and components as they can now before prices rise even more, or should they wait and hope for parts of the market to return to normalcy? What we’re experiencing is so far outside the bounds of normal that we have no basis for making decisions. I chatted with a few folks recently who speculated that the best investment they could make this year would be to buy $1 million of fiber reels and sit on them for a year – they might be right.