Mobile and Fixed Network Capex Assumptions are Changing

For those of you who follow mobile and fixed infrastructure payback models, we need to forget what we think we know. In the mobility realm, costs of infrastructure and expectations about indoor coverage are changing as we shift to higher frequencies which have severe limitations reaching inside buildings.

A shift to small cell architectures, certain to intensify as we move to xG networks beyond 5G, will shift capital investment assumptions as well.

All that occurs as revenue per account levels continue to decline, if at a slower rate than over the past couple of decades.

Fixed network models are shifting as well. Both cable operators and telcos have revised assumptions about payback from FTTH upgrades and the timing of such upgrades.

In yet one more sign of changing fixed network infrastructure costs, Virgin O2 is reportedly in talks with infrastructure funds to create a facilities-based U.K. alternative to Openreach.  The goal is to create new fiber-to-home coverage of seven million homes. 

Virgin O2 already has said it would upgrade all current 15.5 million gigabit connections to FTTH by 2028. 

Though the big story is the creation of a nationwide facilities alternative to Openreach. The new network would have Virgin O2 as an anchor tenant, but the network would also offer wholesale access to third parties. 

To be sure, since the U.K. market essentially has had two tier-one firms competing in the fixed access market--cable TV and telco--the shift is not new in principle, but new in coverage and ubiquity. 

The proposed additional upgrades of the full network, plus addition of seven million new locations, would create a second nationwide FTTH provider with wholesale access. 

Secondarily, the move ends the historic cable reliance on hybrid fiber coax--in the United Kingdom--forever. 

Also, the financing and business model for FTTH also changes. Where cable companies historically have financed all of their own access network, the new move creates a new entity to own the access infrastructure.

Setting up the new entity changes the payback model for FTTH deployment, even as it shares the revenue and profit upside with new investors. 

But infrastructure has taken on greater importance in private equity and institutional investor portfolios in recent years. So the desire by Virgin O2 to invest is matched with matching desire by investors to fund and own such infrastructure. 

All of our decades-long assumptions about FTTH payback models are thereby upended. In principle, co-investment is one solution for revenue assumptions that have drifted downwards from perhaps $130 a month to $170 per month in revenue to a more-dependable $50 per month to $70 per month revenue per household. 

Revised payback models therefore must be revised accordingly.