CenturyLink Embraces Fiber

CenturyLink seems to have done a 180 in terms of embracing fiber. According to Jeff Storey, the CEO of Centurylink, the company is now defining itself as the ‘go-to provider’ for fiber-based services for business customers. This is in sharp contrast to just a year ago when Storey, as the new CEO said that the company would not be pursuing low-return infrastructure investments.

Storey says that CenturyLink added 5,000 business buildings to fiber in the second quarter, following 4,500 buildings in the first quarter of this year. This contrasts to Level 3 that historically added around 500 buildings per quarter.

It appears the company may be taking a page from the AT&T storybook. AT&T has been building fiber around locations where it already has a fiber POP. This strategy has helped AT&T to now pass over 20 million locations with fiber while avoiding the high cost of large overbuilds.

CenturyLink has an extensive national fiber footprint that it’s accumulated from the purchase over the years of Level 3, Qwest, Broadwing and WilTel. Like AT&T discovered, CenturyLink is sitting close to a huge number of existing opportunities with that existing network, and perhaps that’s the new company strategy – to edge-out and take advantage of nearby low-hanging fruit.

Storey says the company has ordered 4.7 million miles of fiber to add into its urban networks. You have to take that number with a grain of salt since one mile of a 48-strand fiber counts as 48 miles of fiber when counted this way. But this is still a lot of new fiber construction. The one thing that readers of this blog will notice is that the construction is likely to be urban – it’s doubtful that the company is ever going to put another dollar into rural infrastructure. The company recently quietly searched around for the possibility of spinning off its rural business but found no takers. This is likely to mean more of the same for its rural customers – mostly neglect.

The company continues to lose broadband customers. In 2018 the company lost 262,000 broadband customers for a 4.6% drop. In the second quarter of this year, the company lost 56,000 net broadband customers but reports that it lost 78,000 customers with speeds below 20 Mbps and added 22,000 customers with speeds faster than that. Like all of the big telcos, it’s losing DSL customers converting to cable modems.

The company has a long way to go to convince Wall Street that its stock has value. In a May blog, I wrote how the company stock had dropped 43% over a year to a price of $10.89. It’s still sitting in that range with the stock price sitting at $11.56 yesterday.

The Level 3 acquisition is likely to be one of the more interesting stories in the history of our industry. Level 3 was the high-flying telecom company, with stock prices that climbed steadily. It seems that Jeff Storey could do no wrong as earnings grew faster than the rest of the sector. But that all came to a halt with the merger with CenturyLink. I’m sure that both companies thought that Storey could pull CenturyLink upward by tying it to Level 3, but just the opposite occurred. This might be one of the biggest cautionary tales ever in our industry and shows how difficult, and perhaps impossible it is for anybody to turn around one of the big incumbent telcos.

What’s most interesting in this story is that Glen Post and the crew from CenturyLink were in the process of that a slow and steady turnaround. A few years before the CenturyLink merger the company had decided to build residential fiber in its many large city markets and take back a significant piece of the broadband business that had been leaking away. In the year before the Level 3 merger the company had built fiber past nearly 1 million urban passings. We’ll never know now if a few more years of that kind of investment could have turned the company around – not to be a high-flyer like Level 3, but to earn decent long-term returns on broadband infrastructure – the kind that come from making a hundred-year investment in fiber.

Shrinking Competition for Transport

Bloomberg reported that CenturyLink and Alphabet are interested in buying Zayo. It’s been anticipated that Zayo would be the next fiber acquisition target since the Level 3 merger with CenturyLink since they are the largest remaining independent owner of fiber.

As you might expect, the biggest owners of fiber are the big telcos and cable companies. Consider the miles of fiber owned by the ten biggest fiber owners – I note these miles of fiber are from the end of 2017 and a few of these companies like Verizon have been building a lot of fiber since then.

AT&T 1,100 K
Verizon 520 K
CenturyLink / Level 3 450 K
Charter 233 K
Windstream 147 K
Comcast 145 K
Frontier 140 K
Zayo 113 K
Cogent 57 K
Consolidated 36 K

You might wonder why this matters? First, Zayo is the largest company on the list who’s only business is to sell transport. All of Zayo’s fiber is revenue producing. While the companies above it on the list have a lot more fiber, a lot of that fiber is in the last mile in neighborhoods where there is not a lot of opportunity to sell access to others. The biggest independent fiber owner used to be Level 3, with 200,000 miles of revenue-producing fiber before they merged with CenturyLink.

The numbers on this chart don’t tell the whole story. Companies like Zayo also swap fiber with other networks. They may trade a pair of fibers on a route they own for a route elsewhere that they want to reach. These swapping arrangements mean the transport providers like Zayo, Cogent and Level 3 control a lot more fiber than is indicated by these numbers.

It matters because as soon as you get outside of the metropolitan areas there are not many options for fiber transport. A few years ago I helped a City look for fiber transport and the three options they found that were reasonably priced were CenturyLink, Level 3 and Zayo. If CenturyLink buys Zayo they will have purchased both competitors in this region and will effectively eliminated fiber transport competition for this community. Without that competition it’s inevitable that transport prices will rise.

I think back to the early days of competition after the Telecommunications Act of 1996. I remember working with clients in the 1990s looking for fiber transport, and there were many cases where there was only one provider willing to sell transport to a community. If the sole provider was the local telco or cable company it was likely that the cost of transport was four or five times more expensive than prices in nearby communities with more choices. When I worked with rural providers in the early 2000s, one of the first question I always asked was about the availability of  transport – because lack of transport sometimes killed business plans.

Since then there has been a lot of rural fiber built by companies like statewide fiber networks and others who saw a market for rural transport. Much of the rural construction was egged on by the need to get to cellular towers.

My fear is that we’ll slide back to the bad-old-days when rural fiber was a roadblock for providing broadband. I don’t so much fear for the most rural places because those fiber networks are owned by smaller companies and they aren’t going away. I fear more for places like county seats. I worked with a city in Pennsylvania a few years ago where there was a decent number of competitors for transport – Verizon, Zayo, Level 3 and XO. Since then Verizon bought XO and CenturyLink might own the other two. That city is not going to lose transport options, but the reduction from four providers to two giant ones almost surely means higher transport costs over time.

I am intrigued that Alphabet (the parent of Google Fiber) would look at buying an extensive fiber network like Zayo. Google is one of the biggest users of bandwidth in the country due to the web traffic to Google and YouTube. Their desire for fiber might be as simple as wanting to control the fiber supply chain they use. If so, that’s almost as disconcerting as CenturyLink buying Zayo if Google wouldn’t remain as a fierce transport competitor.

Where Will 5G Find Fiber?

I was talking to one of my clients about 5G. This particular client is a fiber-overbuilder and they verified something I’ve suspected – they don’t plan to ever make any of their fiber available for a 5G provider wanting to deploy 5G small cell sites. They reason that 5G point-to-point radios, like Verizon is now launching, would compete directly with their retail broadband products and they can’t think of a scenario where they would assist a competitor to poach their own retail customers.

This is a break with the past because this client today provides fiber to a number of the big cellular towers and hopes to continue those sales. These are good revenue and help to offset the cost of building fiber to the towers. This leads me to ask the title question of this blog – where are the 5G providers going to find the needed fiber? A lot of the rosy predictions I’ve read for widespread 5G deployment assume that 5G providers will be able to take advantage of the fiber that’s already been deployed by others, and I’m not so sure that’s true.

I have no doubt that big backhaul fiber providers like Level 3 or Zayo will sell 5G connectivity where they have the capacity. However, much of their fiber network is not strategically located for 5G. First, 5G networks are going to need to get to numerous poles, and that requires fiber with existing access point. Much of the fiber built by companies like Level 3 was built to get to specific buildings or big cellular towers that anticipate the need for other access points. These fiber companies are also leery about tapping into fibers feed their largest customers, who often pay extra for guaranteed service. A lot of their fiber is underground and not easy to get to the needed pole connections.

Of more relevance is that these carriers are not going to own a lot of fiber that goes deep into neighborhoods where the 5G providers want to deploy. Most of the fiber built deep into residential neighborhoods has been built by fiber-to-the-premise overbuilders or cable companies. These companies use their fiber to sell retail broadband to residents and businesses. Fiber overbuilders, from Google Fiber down to the smallest municipal fiber network are not likely to sell fiber to the pole in neighborhoods where they are already a retail ISP.

The cable companies are not going to make their fiber available for 5G – they’ve made it clear that their future path lies in the DOCSIS 3.1 upgrades, including upgrading beyond gigabit speeds as needed. All of the major cable companies have said that have the ultimate end-game of fiber-to-the-premise. They’ve all cited 5G as one of the reasons they are increasing speeds and are not likely to sell access to a major competitor.

AT&T is the only other carriers with an extensive fiber network that goes deep into many neighborhoods. However, AT&T has been building FTTP connections in neighborhoods where they have fiber. For now, they don’t intend to mimic Verizon and are going to stick with FTTP rather than 5G. It would be tactically smart for AT&T to refuse to sell 5G connections to others. But AT&T is the hardest company in the industry to predict because they wear so many hats, and their retail fiber ISP business is in a different business silo than their wholesale fiber connection business – so who knows what they will do.

I don’t see a glut of existing fiber sitting waiting to sell to 5G providers. That seems to be the major hurdle for the rapid 5G deployment that the FCC, the White House and the cellular carriers have all been loudly touting. How many 5G companies are going to want to make the gigantic needed investment in fiber to get deep into neighborhoods?

I think the folks in Washington DC have gotten a false sense of the potential for 5G by seeing what Verizon is doing. But Verizon is taking advantage of the many billions of dollars of fiber they have already built over the years, and their 5G network is going to follow that fiber footprint. There are not many other companies with a glut of fiber that can be leveraged it in the same manner as Verizon.

Verizon has already announced that they will be passing roughly 11 million homes with fiber. They can be that specific because they know what’s close to their existing fiber. I doubt that they are going to expand anywhere else, just like they didn’t expand FiOS where the construction costs weren’t low. If Verizon can’t afford to deploy 5G where they don’t already have fiber, then how can anybody else justify it? Deploying 5G is like deploying any new network – it is only going to make financial sense where deployment costs are reasonable – and for now that means where there is already easy access to fiber. I think the opportunities for rapid 5G deployment are a lot less than what policy-makers think.