According to new data from the financial analysts at Cowen, some of the biggest fiber providers in the US – including AT&T, Altice USA, Consolidated Communications, Frontier Communications and Lumen Technologies – have cut back their fiber network expansion plans for 2023.

Figure 1: 2023 Fiber buildouts Analysts from Cowen point to multiple reasons for fiber providers' cutbacks such as rising interest rates, inflation and reduced competition.
(Source: Cowen. Used with permission)

"The reasons for the pullback vary," the analysts wrote in a recent report for investors. "Naturally the capital markets have made a business case more challenging as rising rates will lower the project NPV [net present value]. Rising inflation costs are also impacting the IRR [internal rate of return]. Permitting and licensing continues to be a market-by-market challenge. Some, like Frontier, are recalibrating their build engine and focusing on efficiency."

Continued the analysts: "However, a key reason for the pullback could simply be that new start-up entrants that posed an overbuild threat are imploding in this new environment; thus, the large incumbent carriers, all with some sort of FCF [free cash flow], balance sheet, dividend, and/or capital needs challenges ahead, have the luxury of taking a breather as overbuild threats fade."

Other analysts agree with that assessment of the US fiber market.

"It's too early to say a fiber bubble is about to pop. But we also think certain sub-scale, highly leveraged overbuilders may be in for a rather difficult 2023," wrote the financial analysts at Wells Fargo in a recent note to investors. They argued that AT&T and Lumen have clearly stepped back from their early 2023 buildout plans, and that Frontier, Windstream, Brightspeed and Consolidated have hinted at similar plans. However, a Brightspeed representative told Light Reading that the company has not changed its fiber plan.

The Wells Fargo analysts also pointed to another potential reason: Fiber buildout costs have risen by around 20% in recent months. Indeed, fiber vendor Corning recently instituted a "significant" price increase. They also noted that some markets have grown "frothy," specifically pointing to Mesa, Arizona, where there are six different companies promising fiber networks.

Warnings on warnings

This isn't the first time the fiber frenzy in the US has sparked concern among analysts. In November, the financial analysts at MoffettNathanson, a unit of SVB Securities, warned that investors could start to pull back from expensive fiber buildouts when returns start to look "inadequate."

"Indeed, this is how all bubbles ultimately pop," the MoffettNathanson analysts noted.

Already, executives at AT&T and Lumen have signaled a clear retraction.

AT&T CEO John Stankey said the company plans to construct 2 million to 2.5 million fiber locations per year, which is well below initial company targets of 3.5 million to 4 million per year, according to the Cowen analysts.

"The carrier essentially 'found' homes as it can still reach its 30 million long-term [fiber buildout] target while meaningfully cutting back on builds," they explained.

And Lumen's new CEO Kate Johnson officially confirmed a "pause" in the company's fiber expansion efforts that was about "figuring out how we can drive maximum shareholder value."

Similarly, Altice is "messaging a cut to their target of 1.6 million locations, specifically noting that permitting continues to be a challenge," said the Cowen analysts. They added that Consolidated Communications "could temper the build cadence" as it waits for better economics, including government subsidies, and that Frontier "may message a cut closer to ~1.4 million locations from prior messaging of 1.6 million."

Bumps and hiccups

Despite a potentially slower-than-expected buildout pace in 2023, analysts say there is still reason for optimism. For example, research and consulting firm Dell'Oro Group recently predicted sustained broadband spending globally through 2027, partly driven by deployments in North America.

The analysts at Cowen also stressed that "long-term build plans are still largely intact, though may be delayed by a year in some cases (2025 targets may become 2026 targets)."

They added: "We also stress that the pullback is not industry wide. There are smaller players such as Allo that are actually looking to accelerate builds, meanwhile Big Cable is entering the mix with aggressive fiber greenfield expansions."

And most analysts continue to point to massive government subsidies poised to flood into the US broadband market, likely starting in earnest next year. The FCC is working to finalize a map of broadband networks in the US, which is necessary to direct funding to locations without coverage. Those subsidies stem in part from the pandemic, which highlighted the importance of broadband connections for work and school.

"Customers show strong demand for the product in this post-pandemic 'criticality of broadband' era, as healthy organic growth and better-than-expected early penetration rates provide a compelling upside to the business case," the Cowen analysts wrote about fiber in general.

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— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano