Consolidation of Fiber Networks

I’ve written a few recent blogs discussing the amount of fiber that’s going to be needed to support the 5G networks envisioned by Verizon and AT&T. This blog in particular cited a recent Deloitte study that estimates that the cost to build the fiber needed to support a ubiquitous 5G network nationwide would be $130 billion.

We know that adding fiber is now a high priority for Verizon. They announced in April a deal to buy over $1 billion of fiber from Corning over 3 years. (As an aside, all of the press releases and articles about that purchase say that amount buys 12.4 million miles of fiber per year, or 37.2 million miles of fiber. There are only a little over 4 million miles of roads in the US, so that obviously means miles of individual fiber strands. Pardon the interruption, but misleading statistics drive me up the wall.)

We can almost be certain that Verizon plans to build fiber for backhaul to cell sites. There are around 250,000 current cell towers in the country, but the deployment of small neighborhood cell sites is going to explode that number potentially by millions. Years ago both Verizon and AT&T elected to let other companies build and own cell towers, which spun off a major new industry. And in that process both companies largely agreed to lease fiber transport to reach those towers. But as the cell industry margins are tightening the companies are now looking to directly own as many of those fiber routes as possible to hold down lease expenses.

While Verizon plans to build a lot of fiber, they are also on an obvious path to buy existing fiber networks that supply transport to cell towers. Last year they purchased XO Communications and just last week announced they were buying a Chicago-area fiber network from Wide Open West.

I have seen several analysts speculate that Verizon will be considering more fiber purchases. Interestingly the analysts focus on the potential purchase of large ILECs like Consolidated or Cincinnati Bell, which both own a lot of fiber. But much of the fiber in these companies is last-mile fiber to reach customers, and it would be curious to see Verizon buy back into that business. Just last year they sold off a significant chunk of their FiOS fiber network to Frontier and it would be a major reversal of that strategy to turn around and invest this soon in last mile fiber. We’ve seen big companies pivot before, but this would be possibly the biggest such change of mind our industry would ever have seen.

I think it’s more likely that they will consider buying transport fiber networks rather than last-mile networks. The problem the company faces is that there are not that many big fiber providers left. CenturyLink recently purchased the largest such network from Level 3, which owns over 55,000 miles of fiber. The only other fiber transport networks left that own over 10,000 miles of fiber are Birch, Zayo, EarthLink, Cogent and Lightower/Fibertech. There are only another half dozen companies that own fiber transport networks of between 5,000 and 10,000 miles. I have to think that Verizon and AT&T have considered buying many of these companies over the last year or two.

There is one other set of big fiber networks that don’t get as much national attention. These are fiber transport networks built largely by consortiums of independent telephone companies. Most of these networks were constructed as a way for the telcos to gain cheap fiber transport to the world outside of their operating territories. Many of these smaller telcos were held hostage to incredibly expensive special access transport from the RBOCs which made it difficult for them to buy affordable Internet access. Since these networks were originally built a lot of them now have expanded throughout their operating regions and are now connected to cell towers, large businesses, governments, universities and other customers needing fiber transport.

Most of these ILEC-owned networks have joined together to form INDATEL. Here is a map showing the wide-spread footprint of INDATEL-member networks. Through this consortium many of these networks are now interconnected, providing a nearly nationwide fiber footprint. The various members have POPs in all of the biggest cities in their region but then also go to all of the smaller communities that have largely been ignored by most of the other fiber providers, with perhaps the exception of Level 3.

I have no idea if either Verizon or AT&T has considered buying these networks. For a company like Verizon these fiber routes would provide transport into many areas where they don’t have fiber today. The owners of these networks might want to explore the possibility of selling their networks. Now that the networks are in place the ILECs that built these networks are no longer isolated from the rest of the world. A sale would let them capitalize on their investment in fiber at a time when fiber networks have an all-time high valuation.

Of course, the downside to all of this is that if Verizon, AT&T and a few others like CenturyLink gobble up the few remaining independent fiber networks they will have a virtual monopoly on fiber transport. During the XO and Level 3 purchases there were a lot comments filed with regulators expressing concern about the negative impact on competition from fiber consolidation. I’d hate to see us go back to the bad old days where the only option for transport was a handful of the big telcos.

The FCC’s Special Access Order

FCC_New_LogoThe FCC started the process last week of changing the way that the large telcos sell transport products on their networks. Transport products are products like T1s and larger circuits that are used to send data from one point to another and the telco market for these products is called special access.

I’ve often heard people ask how the big telcos can still make so much money since they have lost most of the voice lines that were their bread and butter products for a hundred years. And a big part of the answer is in special access. There is still a gigantic market today for transport for things like connecting schools to each other, for connecting bank ATM networks, for connecting cellular towers or for connecting all of the locations in a market together for a government or large business.

While there is a lot of special access sold to businesses the majority of special access is sold to other carriers. Special access is what gives most CLECs and other competitive carriers the ability to compete – it’s how they actually make a connection to buildings in a market. Very few companies own wireline networks that connect to all of the businesses in a community. In most larger cities there is some fiber owned by non-telcos, but except for the rare city that has built fiber everywhere, such fiber is generally limited to fiber strung along major roads or to business parks.

There is still a surprisingly large amount of the country where the telco is the only one that has ever constructed wires to reach all of the nooks and crannies of a city. It’s not hard to understand why this is so since it’s expensive to build fiber. You read in this blog all of the time about companies that are building fiber to serve residential customers. But it’s even harder to justify building fiber to serve only businesses – unless the businesses are really large or unless there are a lot of them in a single place – like in a business high-rise or in a central business district.

The telcos have been adept at taking advantage of their monopoly position in the special access market. They have priced transport products high and also imposed scads of rules on these products over the years that are all in their favor. The recent order took the first swipe at abolishing some of the more unfair rules.

For one the FCC got rid of termination charges. The telcos have been selling special access only under term contracts. If a competitive carrier was buying a special access for a two or three years period and their end user customers stopped paying them – because they moved or shut down – the carrier was still on the hook to pay for the circuit for the rest of the contract period. The FCC also abolished a number of rules that twisted the arms of carriers to buy special access – rules called tie-ins. If a carrier wanted to buy a large quantity of circuits in one market they were pressured into buying special access in other markets where they might have instead found a competitive alternative.

The FCC has also started the process of trying to regulate special access by market. They are contemplating doing this by determining first if various markets are competitive, and then imposing stricter rules for markets that are considered as non-competitive. And my guess is that will be most markets since there are not a huge number of markets where somebody else owns a lot of alternative wires. Interestingly, this is happening at the time when Verizon is trying to buy XO Communications – one of the largest alternative fiber providers. The fear among other carriers is that merger will take a big pile of competitive fiber transport off the market and turn it into special access.

The FCC also said that that they are considering making the cable companies subject to the new transport rules. The cable companies are late comers to the transport world since they largely shunned building to businesses when they first built cable networks – not enough businesses bought TV to justify the construction. But cable companies have extended fiber markets in many places to cover business parks and business districts and have become a major player in the transport business. But like with other duopoly competition, they often ‘compete’ with prices and terms that are not that different from special access so that they and the telcos can split the lucrative revenue stream. So there will probably be non-competitive markets where the FCC’s new pricing rules apply to them as well.

The Ongoing Special Access Battle

eyeballThere is a big battle going on at the FCC over special access rates and the FCC has promised to finally weigh in later this month. Special access in the industry refers to the sale of dedicated TDM circuits like T1s and DS3s. To some extent this is a fight between the big RBOCs and all of the CLECs and other carriers that need special access circuits to reach customers. But this battle actually affects all of us because the businesses you deal with such as banks or other entities (like your local government) are big users of these products.

There are several different issues being contested in the special access investigation currently underway at the FCC. But most of the battle is about the price of special access as well as the unfair practices of the big special access providers like Verizon and AT&T. This whole fight comes down to money and special access is still a major source of revenue for the big telcos. To show you how big, USTelecom, the lobbying arm for the big telcos sponsored a study that said that regulating special access rates could cost 43,560 jobs and $3.4 billion in economic growth over five years.

Special access rates are very high. They were set in the days when TDM circuits were the state of the art technology. We all remember when it could easily cost you $700 per month or more to get a T1 to a business – a lot of money to pay for a symmetrical 1.5 Mbps connection. Last year I looked at the data bill for an urban county and they were still buying millions of dollars of these special access circuits – at nearly full cost. I estimated they could cut their bills by 50% to 60% by shifting to an alternate provider.

But therein lies the big rub with special access. Once you get outside of the main business district in most cities the RBOCs are still the only ones that have wires connected to most buildings. And so as absurd as it sounds, for a huge percentage of geography in the US special access is still the only way to provide dedicated transport to a business (meaning their data doesn’t get commingled with some other business). And this means that special access is what CLECs and other carriers must buy from the telcos if they need access to a given business.

The RBOCs make deals with the largest carriers – Level3, XO Communications and Sprint. These carriers can get a substantial discount on buying special access due to the volumes they purchase. That doesn’t sound unfair until you look into all of the strings that come attached with the volume discounts. For example, Level3 has complained in the FCC docket that there are markets where Verizon requires them to buy 90% of their connections from Verizon – or else not get the discounts. All of the carriers complain about termination charges. Should a customer of one of these carriers move or go out of business the RBOCs still demand that the carriers pay the cost of the circuit for the length of the involved contracts – lengths upon which the RBOCs largely dictate.

And of course, if you are not a huge carrier you don’t get the bulk discount. A business who wants to buy special access on their own (such a bank that wants to connect to multiple ATMs must pay the full tariff rates.

Another part of the battle at the FCC is that the carriers want more access to the fiber and Ethernet services owned by the RBOCs. But the telcos are very judicious about deciding which of their facilities are open to competitors and which aren’t.

Of real concern in the carrier world is the announcement that Verizon wants to buy the fiber assets of XO Communications. Today most businesses and smaller carriers will buy from the big carriers like XO, Level3 or Zayo because it’s cheaper, there’s less paperwork and these companies are far easier to work with than the telcos.

By buying XO, Verizon will be eliminating one of their largest and more vocal opponents. They also will be folding a lot more fiber into the Verizon networks. The fear is that Verizon will either convert the XO network to special access, meaning the price will go up, or they will consider it as fiber needed for Verizon’s own needs only and withdraw the networks from the open market.

In any market where there is a limited amount of fiber built to businesses, removing one of the biggest fiber owners like XO is going to be a big blow to many of those who use it. Many of them are either going to see rate increases or else have to find alternate transport elsewhere.

There is no telling what the FCC will order in this docket. But the position taken by the telcos is typical and a bit scary. They claim that there is vibrant competition available in the marketplace and they accuse the CLECs and carriers of whining to get cheaper prices. They love their monopoly power in most markets and aren’t going to give it up easily.