November 15, 2022
The financial analysts at Wells Fargo said in a new report that they're lowering their fiber buildout forecasts for this year and next. But even the reduced expectations reflect a significant amount of growth.
"The end destination has largely remained the same, but the road to get there could have a few detours along the way," the analysts wrote. Specifically, they noted that AT&T, Lumen Technologies, Altice and other US fiber builders are running into problems ranging from permitting challenges to labor shortages to supply chain troubles.
As a result, the firm said it now expects the fiber industry to collectively construct fiber connections to just over 8 million new locations throughout the US over the course of 2022 – down from the roughly 9 million they had expected. For 2023, the firm now expects the industry to grow to 10 million new locations, down from their previous expectations of around 11 million.
Figure 1: (Source: Pixabay)
The situation doesn't come as a total surprise, however. "The bigger problem in the short term isn't one of demand, but of supply," analyst Jeff Heynen of research and consulting firm Dell'Oro Group wrote in the early days of 2021. At the time, he argued that shortages of fiber components and installation technicians could hamper a buildout of fiber that the financial analysts at Cowen called "historic."
Fiber players stumble
"Although we're pleased with the 72,000 fiber service addresses we deployed so far this year, our service address delivery is slower than planned due to some industry-wide headwinds, such as labor shortages and permitting complexities, which are putting pressure on our service address targets," said Michelle Brukwicki, CFO of fiber player TDS Telecom, during her company's recent quarterly earnings call.
Despite the difficulties, TDS officials said they continue to believe the company can cover 60% of its existing network footprint with fiber by 2026 – a total of 1.2 million locations – up from around 36% today.
Similarly, Lumen Technologies had hoped to build fiber connections to 1 million new locations by the end of this year. But many analysts don't think that's going to happen due to shortages in labor and components.
And Altice has reported permitting problems. "The state of New York has been somewhat of a bottleneck in terms of permitting," said Dexter Goei, the company's executive chairman and former CEO, during his company's recent earnings call. "We probably have 200,000 to 300,000 permits we're waiting on in the State of New York. We've been able to redirect some of our efforts into New Jersey and Connecticut this year as we await permits in the state of New York."
Even AT&T, which has perhaps the nation's most ambitious fiber buildout program, is encountering hiccups. The Wells Fargo analysts noted a drop in the operator's quarterly fiber buildout figures, from around 1 million in the second quarter to just 500,000 in the third quarter of this year. And AT&T's capital expense projections for 2022 imply a slowdown in network spending in the fourth quarter.
Nonetheless, AT&T maintains that it is on track to double its fiber footprint to around 30 million locations by 2025.
Of course, building fiber networks isn't the same as making profits from them. Most fiber providers acknowledge that they will need to acquire a sizable number of customers – generally in the range of at least 30% or 40% of those touched by fiber – in order to turn a profit.
The financial analysts at Wells Fargo calculated that such figures mean that the US fiber industry will need to grow by around 20 million new customers over the next decade for operators' math to work. That is an achievable goal, they wrote, "but certainly one that comes with risks."
Nonetheless, the market frenzy around fiber shows no signs of slowing. For example, Verizon has indicated possible interest in expanding its One Fiber buildout beyond its current markets, as noted by FierceTelecom. And both AT&T and T-Mobile are reportedly eyeing joint ventures that would involve deploying fiber to millions of new locations.
Hanging over all such discussions are billions of dollars in government subsidies designed to help finance the construction of fiber networks in rural areas and to help low-income Americans afford speedy Internet connections.
"Fiber always wins – until it doesn't," summarized Jim Patterson of Patterson Advisory Group in his weekly newsletter. "Upstream, long-haul and purpose-driven fiber efforts have been around for decades. Now comes the hard part – connecting to the home/business, especially when they are not in major metro areas."
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