Is a Fiber Roll-up Coming?

When I look at all of the new market entrants into the broadband industry and the frenetic pace that ISPs of all sizes are building fiber, one of the first thoughts that come to my mind is this is an industry that is headed for a roll-up. I have to imagine that in the not-too-distant future that we’re going to see companies making offers to buy smaller ISPs that will be too good to refuse.

When I first joined the industry, there was a huge roll-up of small independent telephone companies. Companies like TDS, General Telephone, Consolidated, and a few others were competing nationwide to buy small family telcos. I think over a decade that probably four or five hundred of these companies sold to the bigger telcos. Interestingly, all of these companies except TDS eventually got rolled into even larger telcos that are now CenturyLink, Frontier, and Windstream.

The next big roll-up was in the cable industry. I can remember a few years when I heard of a purchase of a small cable company almost weekly. In this case, many of the companies doing the initial roll-ups eventually got bought by Comcast or Charter.

One of the most rapid roll-ups I can remember was when a few companies were gobbling up dial-up ISPs. This happened over just a few years.

I’m currently seeing a roll-up in the WISP industry with some of the large WISPs buying out small successful WISPs.

There have been a few less dramatic but still significant roll-ups. Companies like Level 3, Zayo, and others have been buying middle-mile and long-haul fiber networks. While many big CLECs crashed after the 2000 telecom implosion, the largest of the remaining successful CLECs were absorbed by the big telcos.

There has already been some consolidation of last-mile fiber networks, with some municipal ISPs and private overbuilders getting purchased by larger ISPs. But the handful of networks that have been purchased will pale against the big roll-ups that I think will be coming in a few years.

The industry will be ripe for roll-ups for several reasons. Probably the most important is that the private equity that is being invested in fiber today is not going to be satisfied with the slow but steady utility-like earnings made by last-mile ISPs. ISPs can become great cash cows and eventually spin off cash, but the long-term returns from operating a last-mile network are generally under 10% – not the kind of returns that private equity usually chases. The big return for private equity investors comes from the big bump that comes from selling the business at a high multiple.

I also think that the day-to-day hard work of operating an ISP will set in at some point. Growing ISPs into new markets is exciting. But as the huge amounts of fiber construction on the horizon come to fruition, the opportunities for additional expansion are going to quickly disappear. That’s the point when industries consolidate – because growing by acquisition can be profitable when organic growth is not possible.

The other reason for eventual roll-ups is that operating fiber-based networks is an economy-of-scale business. The overheads per customer are a lot less in an ISP with 200,000 customers compared to one with 20,000. Size also brings operational improvements in areas like customer service and software systems that favor big ISPs over small ones.

I could be wrong about this, but the evidence all points to an eventual roll-up. I’ve worked with several cities lately looking to attract an ISP to build a fiber network, and each got several responses from newly-formed ISPs that seem to have been assembled for the purpose of taking advantage of the current fiber land grab. I seriously doubt that these many fledging investor-backed ISPs intend to operate last-mile networks for the next fifty years.

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