Regional fiber rollups may scream monopoly, but it’s complicated

With all of the recent buzz about fiber players getting prepared for acquisitions and incumbents expected to gobble up billions in forthcoming government funding, it’s not a far stretch to wonder if the rollup will result in less broadband competition across the country. But according to two leading telecom analysts, this is very unlikely to be the case post-mergers. And even if there is less competition, it likely won’t impact the quality or pricing of fiber to the consumer, they said.

Blair Levin, Equity Analyst for New Street Research, conceded that it’s likely that a few players will control large territories when the dust settles post-acquisitions. “In the same way that a cable footprint reaches 80-90% of homes, there will be a fiber network,” Levin explained. “I don’t think it will be owned by one entity, but it will be a relatively small number of entities having a very large footprint.”

That said, it's already easy for consumers across the United States to gain a specific impression about their ISP optionality: that they have very few choices depending on where they live. If they have an issue with their provider, there often isn’t a comparable alternative to go to instead. In fact, June 2021 data from the Federal Communications Commission proved this point: 97.7% of the country has access to three or more providers offering speeds of 25 Mbps downstream and 3 Mbps upstream. But competition is severely lacking for faster speeds. Only 30% of people have access to three or more operators offering 100/10 Mbps. That drops even further to 6.5% for 250/50 Mbps packages.

But Levin is quick to note that even in areas where one ISP has a broad market reach, there is more often than not still an alternative. “It’s one thing to say that there [is] no competition, it’s another to say that there was one competitor who was superior to another…This raises an interesting question: Does Walmart compete with Nordstrom?”

The reason why, historically, large American cable companies haven’t entered markets where there was already an incumbent is the same reason why one Telco won’t enter a market with another reigning one: Companies, more often than not, do not want to overbuild something that already exists. The fixed costs are too high to make the returns worth it.

That's the same logic behind the low number of competitors in public utilities, like electric, water or sewer systems, where there is a high cost to build and a low variable cost to operate. “[Those things] are monopolies, but they’re public monopolies. [And that works because] if you lived in a community with two water providers, it would likely be very expensive,” Levin explained.

The question of fixed costs gets even more complicated when one compares how broadband construction economics shake out across the United States. Roger Entner of Recon Analytics explained to Fierce that it costs anywhere from $60,000 to $100,000 to lay one mile of fiber, $60,000 being the low end by using utility poles and $100,000 on the high end by trenching underground. In a rural community, it can cost between $100,000 to $200,000 to connect to a single customer, but in a more urban or suburban location, that cost would be $500 to $5,000.

While monopolies often get the blame, part of the reason broadband costs are higher in the U.S. than in many parts of Europe and elsewhere is because of the financial considerations of building out rural America. When communities are more densely populated, whether they’re in Germany or Canada, the final service cost will be less expensive since the initial fixed cost was lower by comparison.

“[In the United States], we also have a commitment to have very similar prices regardless of where you live,” Entner- added. “[It’s] in order not to punish people who live in rural [areas]. I think that’s the right decision, but some people argue that’s the wrong decision. Some people think that people in rural America who earn less money should pay more for fiber because they get directly subsidized by people who live in urban areas.”

In fact, Entner predicted that, even if a fiber rollup occurs, pricing will actually go down, not up. “The $42.5 billion in BEAD money will help build out really large parts of the United States that don’t have fiber or broadband right now,” explained Entner. Plus, a lot of customers, even with the option for fiber, may not want it because they don’t need phenomenal speeds. That’ll open the doors for fixed wireless, DSL and other cable packages that may provide lower prices and speeds.

To Levin, it’s clear that a fiber rollup won’t change the core facts of the modern moment: there is more competition for broadband than there has ever been before. “If the argument was that a rollup would lessen competition, I would say, ‘I don’t think so.’ If the argument is, ‘We should have more competition,’ I would say great, but how are we going to do that?”

Entner theoretically agreed more competition would be nice, but said the reality of market economics makes that hard to achieve. The lower the population density there is, the fewer competitors that can be supported. Unless competition is subsidized, there are certainly areas in America that will continue to only have one competitor post rollups, he said.

Take Mesa, Arizona. “Mesa has six broadband competitors, and that is economically not sustainable,” explained Entner. “[Economically], one competitor takes 100% of a market. With two, it’s usually 60/40. With three, one usually has 50, another has 30, and the third has 20. The guy with 20 is barely breaking even.”

If there are four or more players in a market, the reality is that at least one, if not two, are losing money. “[Mesa’s competition] won’t last unless we decide to subsidize companies. And I don’t think we should do that,” Entner concluded.