Tag Archives: infrastructure returns

The Google Fiber Rumor

googlefibertruckMy wife went into a Best Buy this week and when she was talking with the salespeople there they found out that we are fiber consultants. The first thing they wanted to know from her was if the rumors were true that Google Fiber was coming to our town early next year. They firmly believed this was the case and they were really excited about the possibility.

I live in a small town halfway between Fort Myers and Sarasota in Florida. Google Fiber had been in talks with Tampa which is about two hours north of here. But I can’t imagine that our community is on anybody’s radar to build fiber. I live in a snowbird community, meaning we are where northerners come to get away from winter. For about six months a year this is a ghost town. Most of the houses in my neighborhood are dark for half the year. It’s hard to think that anybody would build fiber in an area where half the potential customers are gone half the year, and where a lot of the customers are elderly and not particularly interested in fiber broadband speeds.

But I find it intriguing that there is a strong rumor about getting fiber in this area. I am sure that this rumor started from folks in Tampa since Google Fiber has been in talks with the city for the last few years. I guess people assume that if they come there that they will come to the whole region.

But I think this rumor speaks to how much fiber is wanted. These salespeople were young techie guys and would be expected to part of the fiber demographic. There are a number of people in every community that would love to buy fiber and who would sign up for it as soon as it is available. But the big question that still has to be answered is if there are enough people willing to pay a premium price for fiber to even create a business plan.

It certainly doesn’t seem like Google Fiber has been going gangbusters. They don’t release customer numbers, but the general buzz in the industry is that they haven’t picked up as many customers as they had hoped for. And that, possibly more than any other factor has probably led to them taking a ‘pause’ from new fiber expansion.

Building fiber networks is expensive. I create fiber business plans and have studied every size market possible from farmlands to NFL cities. The one common feature of every fiber business is that there is some minimum customer penetration rate needed just to break even – with breaking even meaning being able to cover all of the costs of operations including capital.

When municipalities and cooperatives look to build fiber they want to make sure that they do a little better than breakeven. They will obviously be pleased if a fiber business does even better and spins off cash, but they worry more about having to subsidize a fiber business. And it is this perspective that makes it seem easier in some ways to build fiber to small towns and even to farms than to big cities. For these builders, breakeven is good enough.

But Google Fiber or CenturyLink or any of the other commercial fiber overbuilders want to do much better than breakeven. These big companies are beholden to shareholders who expect a significant increase quarter-over-quarter in profits and returns. And the need for significant profits means they have to get a lot of customers to meet their financial goals.

Frankly, the desire for high profits and high capital costs don’t jive very well. Fiber is infrastructure and it’s a real challenge to get high returns out of any kind of infrastructure. Other utilities like electric or water are a lot more realistic and hope to make a modest, but steady profit and make it for a long time. If fiber overbuilders were being realistic they would have the same perspective – but tech companies are not utilities and their stockholders are not going to be patient with slow steady returns.

Google Fiber is now on hold and will consider expanding again if they can find a way to use wireless technology to build the last connection to customers. Assuming that such a technology lowers costs (not a given), then this would reset the bar and lower the breakeven needed – and also make it easier to make profits. But even then it’s going to cost a huge amount of money to build broadband in a city. Wireless networks like the ones Google is envisioning still require a lot of fiber, and that means they will still be an infrastructure-heavy business.

I think there is a good possibility that Google Fiber will never resume their expansion plans using an infrastructure model. This is going to disappoint millions who have been hoping for fiber like the guys at Best Buy. Google Fiber might still consider opportunities like Huntsville, Alabama where the city paid for the fiber network. But my guess is that the Google parent company doesn’t have a real appetite for infrastructure returns, and that is why Google Fiber is on hold.

Amazon as an ISP?

amazon_logo_rgbThere is an article on The Information that says that Amazon is considering becoming an ISP. They cite an unattributed insider at Amazon who says that the company has been discussing this. Officially the company denies the rumor, which is consistent with the way that Amazon has always operated.

It’s an interesting concept, but I honestly have a hard time seeing it. Amazon has been growing in Europe and it could make a little sense there. There are a number of cities on the continent as well as a few national ISP networks that allow open access to any ISP. On those networks Amazon could easily develop an ISP product. They already have massive data centers and it wouldn’t cost all that much to add the ISP functions.

But I just don’t see any big benefits to Amazon for doing this in the open access model. Due to price competition there are not a lot of profit for ISPs on the open access networks. But maybe Amazon can have some edge from somehow bundling ISP access with its Amazon Prime video and music. But every ISP already carries Amazon’s content today and unless bundling somehow sells a lot more Prime subscriptions it’s hard to see this as a big win.

I also can’t see any sense of Amazon being an ISP in the US. There are no open access networks to speak of outside a tiny handful of small municipal networks. One only has to look at Google’s foray into broadband in the US to see that it’s really hard to make money by building broadband infrastructure – at least the kind of money that excites stockholders. There are decent long-term infrastructure returns from building and operating a fiber network well, but those returns are miniscule compared to the returns on tech ventures.

I still don’t fully understand why Google got into the broadband business. In the fiber business they are investing a lot of money that is going to make relatively small returns compared to the rest of their core business. Google’s stock value comes from the company making high technology returns and infrastructure returns can’t do anything better than pull down their overall return. I can’t imagine how it will be any less so for Amazon.

Perhaps Amazon is intrigued by the idea of gigabit wireless connections.  But I think everybody looking at this new technology is going to figure out that millimeter wave spectrum technology is still going to require a lot of fiber in the urban network.

And even if Amazon is comfortable with the lower returns, they still have to deal with network neutrality. It would seem that the best advantage to Amazon from being an ISP would be to somehow bundle their content and broadband connections together – something that is not allowed in the US, and only barely allowed in Europe.

The biggest problem we have with getting real broadband in the country is that big money is chasing big returns. There was a time in our past where there were a lot of conservative investors who were very happy having part of their portfolio invested in safe and steady telephone, electric and water companies because they knew that they would receive secure dividends forever in these safe investments.

But it seems today that investors look at all of the instant tech billionaires and they don’t want to pour money into the basics any more. To compound the problem the big telcos and cable companies invest no more than absolutely necessary in capital to meet basic customer expectations. But big company networks are not nearly as good as they should be. You can’t watch a quarterly presentation of one of these big companies without hearing them talk about how they have plans to curtail capital spending.

So is Amazon really going to become an ISP? They certainly have access to the cash if they really want to. But it’s just hard to believe that they want to shift the company to be more brick and mortar company since they have fought hard to not be that. I just can’t see enough benefits to a publicly traded tech company to be an ISP.

Investing in Fiber

fios vanThere is a recent short article in Forbes titled, To Evade the Wheeler Tax, Capital is Fleeing Digital Infrastructure by Hal Singer. The premise of the article is that the FCC’s move to regulate broadband under Title II has somehow driven the large ISPs to stop investing in broadband. He cites the fact that Verizon has used their excess cash to buy content and software rather than invest it in infrastructure. Just in the last year Verizon has bought AOL for $4.4 billion, Fleetmatics (connector of smart devices) for $2.4 billion and recently announced the purchase of Yahoo for $4.8 billion.

But Singer couldn’t be more wrong. It’s obvious that Singer has a bias against broadband regulation by the title of his article, and certainly Forbes is in generally favor of the unregulated marketplace. But for his premise to be true, Verizon would have to be stopping its expenditures for broadband and instead be choosing these new paths. And that has not happened.

Verizon stopped building FiOS fiber well over a decade ago. It’s been clear for a long time now that Verizon doesn’t think their future is in landlines. For a very long time they have considered themselves as a wireless company. One only has to look at their annual report to understand that somebody who didn’t know the company might barely realize they are in the wireline business. Those reports talk almost entirely about cellular, which makes sense since the wireless business dwarfs the broadband business.

Singer is right that Verizon has been ditching landline properties. But these were mostly in areas away from Verizon’s northeast core and included both copper and fiber assets. But it’s also clear that Verizon hasn’t given up broadband in the northeast. They are currently in the process of buying XO for $1.5 billion, one of the larger fiber-based CLECs that’s centered in the northeast. Verizon also recently announced they were going to bring broadband to Boston, and it now looks like this will become a test bed for using millimeter wave radios as a fiber-to-the curb deployment, rather than building traditional FiOS networks. My guess is that Verizon sees wireless local loops for broadband as their next big use of their cellular spectrum and existing fiber assets, and if Boston proves the new technology then Verizon will probably begin making huge investments again in broadband.

The problem with articles like Singer’s is that rich people that make big investments read Forbes and might decide that investing in broadband is a bad idea. Before they do that I hope that they look at broadband investments with the right perspective. Investing in broadband is an investment in infrastructure. And that means that such the investment is going to earn infrastructure-like returns. Anybody that builds broadband networks is likely looking at long-term returns of 10% to 20%. The returns can be a little higher for cherry-picking only the best neighborhoods. And the returns will probably be higher if wireless local loops can save on capital expenditures.

But infrastructure returns are not venture capital returns. Investments today in software and content are seeking returns of at least 30%. But such investments are a lot riskier than investing in broadband – and thus the relative returns.

The fact is that for the last ten years almost nobody has invested in broadband in this country. Most of the new construction since Verizon stopped building FiOS has come from independent telephone companies, municipalities and cooperatives. Today we are seeing more activity with the two biggest players being Google and CenturyLink, along with a dozen or so smaller urban fiber builders. We also now see the cable companies making significant investments to move cable modems to the next generation DOCSIS 3.1.

So the decision by the FCC to regulate ISPs under Title II has changed almost nothing because big telcos like Verizon were not investing in landline broadband before that decision. Certainly that decision might eventually put a cap  on the returns of the largest ISPs like Comcast and Verizon. But mostly the FCC rules are going to stop the large ISPs from ripping off the public with data caps or by raising the rates through the backdoor by inventing imaginary fees. But the FCC rules are not going to change the fundamentals of the marketplace that understands that investment in broadband is infrastructure investing. Companies that make such investments will still make infrastructure-like returns, like has been true during all of my career. The much more fundamental question that Singer ignores is, why aren’t there more companies looking to make 10% to 20% infrastructure returns? Answering that question might require a book rather than a blog or a short article.