Taking an infrastructure approach to the last mile is a natural development for enterprise networks. As the US aims to bridge the digital divide between rural and urban areas we should look at this natural progression of business models: Middle-mile and enterprise networks have long understood how to build a fiber infrastructure and with a wholesale approach partnered with a wide range of Service providers/ISPs (Internet Service Providers).
For those looking to accelerate growth and improve return on investments on fiber assets by fully monetizing their network, owning the infrastructure to the home and wholesaling to ISPs at the home is a natural next step with keeping full control of the asset and significantly improved margins.
In Sweden and many other countries in Europe, this business model has evolved over the past 10 years whilst fiber penetration has gone from around 50% to around 95% of all households having access to fiber-based broadband. It has been a natural development given that infrastructure investments are normally shared and the large number of service providers in the market. It has not only proven to be successful but also improved fiber asset operators’ financials and valuations for the last 10 years!
COS System’s CEO Mikael Philipsson was himself part of a Nordic network’s journey expanding from building and operating a backbone and middle mile network addressing the Enterprise market and other operators to adding FTTH with a wholesale approach to the existing business lines. Over 7 years revenue grew 500%, and EBITDA margins were over 80% which led to the enterprise valuation increasing 15 times.
Here are his top three reasons why you should build and stay in charge of the last mile:
1. Lower risk and full control
If several ISPs operate on the same network you’re not dependent on one single service provider to be successful (or only your own ISP-service). This also lowers the risk for overbuilds as well as the competition with other technologies such as Wisps, cable operators, etc.
Ideally, instead of competing with them, you partner with these Service Providers so they can use (and pay for) your infrastructure in order to reach their customers with their own services and technology. The important part is that you keep control of the fiber termination in the house and the speeds/services available, and let the ISPs take care of the WiFi and in-house experience.
Takes rates for this business model are normally above 80%, whereas the average take rate on a single ISP network is somewhere around 30-50%.
2. No churn due to the great variety of services on your network
If customers connected to the fiber network are unhappy they can easily switch providers and you would still get a wholesale fee, hence no churn.
The barriers are low for new service providers to enter the network as no capex needs to be spent and less networking competence is needed. This will fuel the Service Provider market and the assortment of services and providers will grow. This makes your network more attractive and in the end, improves customer satisfaction! Moreover, you stay in control of your fiber network with available services and can focus on optimizing the wholesale business and expanding your footprint.
A real-world example is a network built and operated by an electric utility that after 10 years of being their own service provider had managed to get a take rate of very respectable 52%. They decided to shift to a Wholesale FTTH model (and implement COS Business Engine), partnered up with all possible ISPs in the area, and sold their retail service revenue. As a result, they could focus on wholesale revenues/margins. After only three years their total revenue increased by almost 40%, their staff decreased by 25% and their Ebitda margin increased from 6% to 57%. Today, 10 years after the shift, the figures have been further improved.
3. Higher valuations
With this strategy, the business dynamics are similar to a long-term infrastructure asset instead of a regular telco operating in a competing market. This generates valuations two-three times higher than a traditional telco and attracts infrastructure funds/investors.
The time to drive fiber deeper into our society is now. Federal and state funders have an obligation to create public-private partnerships and the open wholesale model drives more fiber to more homes. So make sure you don’t give away the gold!