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$1.45 billion is a lot of money that T-Mobile will be investing in a fiber joint venture via Lumos
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T-Mobile’s CEO indicated that the company’s success in fixed wireless access (FWA) is a big driver for its investments in fiber
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In places where Lumos currently operates, T-Mobile has “a long waitlist of people” who’ve applied for FWA
For a couple of years, T-Mobile has been playing it cool about its ambitions in the fiber broadband space. On earnings calls and other investor events, the company’s CEO Mike Sievert has repeatedly downplayed its fiber moves, talking about capital-light approaches and "exploring opportunities."
Then, bam, last week T-Mobile announced it was spending $1.45 billion to join with the private equity company EQT in a 50/50 joint venture that will own the fiber operator Lumos Networks.
To give perspective, that’s more money than most states are receiving from the federal government for all their Broadband Equity, Access & Deployment (BEAD) projects.
T-Mobile will pay $950 million upfront and $500 million more in late 2024 or early 2025. EQT, which owns Lumos now, will contribute $500 million, plus its 320,000 existing fiber passings.
The JV will aim for 3.5 million fiber-to-the-home (FTTH) passings by the end of 2028.
Currently, Lumos Networks provides fiber internet to homes and businesses in North Carolina, South Carolina and Virginia. None of those three states are listed on T-Mobile’s T-Fiber website as locations where it currently offers broadband. So the mid-Atlantic region will be a new area for T-Mobile fiber.
Mike Sievert on Q1 2024 earnings
Sievert’s comments on the company's quarterly earnings call last week indicated that T-Mobile’s success in fixed wireless access (FWA) is a big driving force for T-Mobile’s investments in fiber.
“Fiber can be a strategy that relieves some pressure on the 5G network and extends the total addressable market,” said Sievert.
He said that in places where Lumos currently operates, T-Mobile has “a long waitlist of people” who’ve applied for T-Mobile Home Internet.
“They put their address in our system. They applied to be a fixed wireless customer, and we haven't accepted them yet because their address isn't one of those places that I described where we have the predicted excess capacity,” he said. “So there's lots of opportunity there.”
T-Mobile’s FWA strategy has always been about selling excess capacity in places where normal cell phone usage isn't using all the capacity.
T-Mobile currently has more than 5 million FWA customers with a goal to serve 7 million to 8 million customers by the end of 2025.
Of the new fiber JV, Sievert said, “Our strategy is to be able to get augmentations to an already nationwide multi-million customer broadband strategy. I think it's about getting a better return based on our embedded assets and complementing a product that's already scaled.”
Cost per passing
One analyst asked Sievert if it was really worth $1.45 billion to own 50% of a relatively small number of subscribers.
Sievert said, “If you think about close to $1.5 billion spread over in time, 3.5 million passings being the goal for that funding from the capital we put out, that's less than $500 per passing.”
Of course, T-Mobile will be a 50% owner, so the total cost of a passing would be about $1,000 in Sievert’s estimation.
After the call, some analysts made their own calculations about the cost of a Lumos FTTH passing.
New Street Research wrote, “We would assume $1,200/location to pass and $800/location to connect. If we assume 45% penetration, this suggests a total cost per home passed of $1,560.”
Dividing that $1,560 in half would provide T-Mobile with a “not-bad” return on investment in five years, according to New Street.
Open access
Lumos doesn’t currently build open access networks. But all of T-Mobile’s fiber projects to date are open access. And Lumos will transition to an open access model with T-Mobile as the anchor tenant.
This arrangement is similar to AT&T’s joint venture with BlackRock. That JV, which is called Gigapower, is also building open access fiber networks.
The analysts at TD Cowen wrote, “We have noted in the past that a largescale version of an open access model has the potential to highly disrupt the industry for both cable and FTTH operators alike. While the Lumos JV is still relatively small compared to the industry's >8.5 million FTTH passings in 2024 alone, this could pave the way for a larger initiative in the future or for others to follow.”
TD Cowen also noted that some investors may be concerned with the monetization of an open access network. They may fear that it will lead to lower prices.