Diana GoovaErts recently cited Pascal Desroches, the CFO of AT&T, as saying that the cost of building fiber has increased. He said that increased costs are getting close to hitting the company’s goal of not spending more than $900 – $1,000 per new fiber passing.

Any time I see an ISP talking about fiber costs, my first question is what is included in the costs. Does AT&T’s number cover only the fiber on the street? Does it also include a fiber drop, customer electronics including Wii, and installation labor? AT&T operates a PON fiber network – does the cost include field splitters, cabinets and other such costs? We don’t have any context to judge AT&T’s number and that makes it impossible to compare to costs claimed by other ISPs.

To put the AT&T numbers into perspective, I work with ISPs that are building aerial fiber in county seats that hope to hold all-in costs to $2,000 per passing when building to everybody, but often go higher. That number includes all of the costs I listed above. But it also differs from AT&T because the higher number includes the cost of building to everybody in a community. We know that AT&T only builds to small pockets of customers, and it probably rarely builds to any parts of a city that are challenging or expensive.

The other big difference is that AT&T is mostly overlashing fiber onto its existing copper. That is a construction method that is not available to other overbuilders who have to pay for make-ready on poles. The only times when costs are low for other ISPs is when the poles are in great shape, with minimal make-ready work needed. AT&T’s low target number highlight two things – its advantage from being able to overlash, and a willingness to skip neighborhoods with higher costs.

AT&T’s low target price also highlights that AT&T is shooting for a higher margin goal than most overbuilders. There is a big difference in the short-term return between an ISP paying $1,000 and one paying $2,000 per passing. AT&T is clearly under pressure to make fiber profitable as quickly as possible. Interestingly, when looking out at a ten-year horizon, there is very little difference in the cash flow generated for the low or higher cost build. Most ISPs that overbuild fiber recognize that the business has relatively low-returns for the short run but eventually cranks a lot of cash flow.

The $1,000 top target of cost also tells us a lot about AT&T’s market plan. To stay under that number means being very careful about where the company builds. This explains why AT&T is building to small pockets of customers in its markets and not building to everybody. The low target cost number also tells us that there is very little buried fiber in AT&T’s plans.

To some degree, AT&T is following the model established fifteen years ago by Verizon FiOS. Local communities were incensed when the Verizon built some streets but not the ones a block away, or when Verizon built fiber in one subdivision but not the one immediately next door. I don’t recall Verizon in those days ever mentioning a target price for construction, but it was clear that it had a cost metric that was driving where the company decided to build.

Desorches also said that AT&T is only forging ahead because the company is seeing higher than expected customer penetration rates on fiber. That fact must be creating a chill in cable company board rooms. It explains why cable companies are moving as quickly as possible to boost broadband speeds through upgrades. Cable companies are hoping that matching the speeds on fiber will fend off fiber overbuilders. That’s going to be an interesting marketing challenge because it seems to me that a lot of the public now believes that fiber is superior to other broadband technologies.

Desroches said that AT&T is still holding to its goal to pass 30 million homes by the end of 2025. The company closed 2022 with 24 million passings and will need to pass 2 million new homes per year to meet that target.

It seems likely to me that inflation isn’t the only reason that AT&T’s costs are rising. I would guess that the company has already constructed to the locations with the lowest cost per passing and that the remaining 6 million passings  likely have higher costs than the places already built.

It’s going to be interesting to see what AT&T does when it hits 30 million passings. The company could do what Verizon did with FiOS and sit on the fiber portfolio and generate a lot of cash. It’s anybody’s guess if the company will roll any of those profits back into building more fiber.

AT&T announced recently that it is interested in pursuing some of the $42.5 billion BEAD grant funding to build in rural markets. I don’t foresee the company finding any grant opportunities where its cost for matching funds will be under its $1,000 target per passing. But I think all the big telcos are considering that a higher out-of-pocket cost for grant areas will be offset by the benefits of creating a virtual monopoly in those places.