Rural Broadband “Gold Rush”

Even before COVID exposed the need to expand broadband access universally, both public and private investment activity connecting rural customers represented a significant sector driver. Since the pandemic hit, Telecom sector investors, operators and suppliers have all looked to capitalize on an unprecedented increase in business demand. Hosted by Accord Finance and Northland Securities, symposium panelists addressed several critical topics including: What makes a great operator? How do you own the customer experience? What is the impact of this flood of public funding? Fixed wireless versus fiber? What stage of the game are we in? What’s the outlook for industry consolidation?

Dubbing broadband as a ‘Super Cycle,’ Tim Savageaux, Senior Communications Infrastructure Research Analyst, Northland Securities and Pat Clemens, Accord Financial, led a distinguished panel including Wisper Internet (fixed wireless) CEO Nathan Stooke, Allo Communications CEO Brad Moline (fiber), and Matt Dement, Managing Director from Stephens Capital Partners (telco PE).

Access is a Necessity

Discussing the attractiveness of access as an anchor service offering, Tim noted that the cable broadband businesses throw off 50% margins and are growing at double-digit rates which “sounds OK to me.” Nathan/Wisper shared that COVID has shown the world what he and his fellow operators already knew (and Wisper’s increase in installs, customer activations and the rush of follow-on investor monies supports): “high-speed broadband was as important as water,” given the significant COVID-driven increases in household demand for Wisper’s bandwidth (WFH, schooling, etc.). As COVID hit, Brad/Allo moved 4,500 end users home in four days and witnessed its utilization spike from 35% to 42%; the performance, reliability of its network responded. Matt/Stephens shared that these operators have built out defensible, future-proof, utility-like presence within their footprints stating “over time, in 10 years when someone moves to a new home, they’re going to call to hook up their water, they’re going to call to hook up their gas, they’re going to call to hook up the best broadband internet that they can have at that location.”

Owning the Customer Experience

Transforming a good business into a tremendous one requires the ability to roll out new services and own the customer. Carl stated, “The physical layer is ante to the table. Access is a de minimis speed game. We live in the world of the ‘device-enabled’ subscriber, whose communication tools share an LCD screen, an IP address, a control mechanism, and a wireless physical interface. It doesn’t matter whether it’s an iPhone, or an HDTV, or my Chevy Bolt, they’re all devices that have a wireless spy.” Brad and Nathan are brutally focused on the subscriber experience such that the subscriber would never consider leaving, no matter who came down the road with whatever the pipe was.” Nathan shared that Wisper “has to own the Wi-Fi experience in the house because we’ve accepted the fact that we have to control that for the customer to provide them an amazing experience.” Wisper is always concerned about ‘false loyalty’ where new entrants “come in and overbuild you, so we want to be the one that has that amazing experience that it doesn’t matter what other people do.” Brad added that, “we’re 100% hosted Wi-Fi in our footprint. And on the business side, hosted PBX Teams integration, AWG Connect partner: those types of things change the overall experience. It creates what I call a Gigabit-Society.” In reference to cable’s 50% access margins Carl stated that “50% might be good enough today, but it isn’t going to be what these folks (Wisper and Allo) can deliver in the future.”

Show Me a Great Operator

High take rates, low churn and exceptional customer service ratings are the characteristics of a great operator according to both Carl and Matt. Carl asked “how about the multiple of a fiber-based provider that has 40% take rates and 1% churn or 2% churn and another fiber-based subscriber, a provider that has figured out how to get 80% take rates and has no churn. Brad and Nathan are kicking it on the subscriber experience. Just scaling it. And their net promoter scores are better than Apple.” Matt responded that if an operator gets its churn levels that are effectively the move rate or the death rate of the community, you start looking like a water or gas or electric utility. Carl remarked that operators who properly build out their businesses are “witheringly competitive.”

Another key mark of a great operator is their track record of expanding their networks and market footprint. Brad has built Allo over the last 18 years with the same playbook. “I tell our team over and over, we do what we do. We go in, we build ubiquitous markets, not just with fiber to the home, but fiber to the prem with the expectation of getting 60% market share in business, governmental and residential. Rinse, repeat, keep moving on.” According to Nathan, his cost to connect customers to Wisper’s broadband service approximates 20% to 25% of fiber. “Now I need only one tower in the middle of town that I already have that’s fiber fed. And I can cover 95% of the town. We’re able to put 200 to 300 and still provide 400 meg plans.”

Fixed Wireless Versus Fiber is not a Zero-Sum Game

“The right tool for the job” is how both Nathan and Brad described which access technologies are most appropriate to deliver broadband to customers. Geography and topology are the biggest factors on which access technology is best. Nathan shared, “When fiber says, ‘it’s a really rocky area, and it’s really hard to run fiber,’ trees used to be fixed wireless’ rocky area equivalent.” Now we have technology that is able to burn through that interference and provide reliable service. Given its install cost advantage, Wisper can deploy towers and begin connecting customers in the time it takes fiber to complete its construction design. Speed and network scaling disparities between the two technologies have also closed. Brad weighed in that for his target market – the cable footprint at the edge of a city – Allo looks at its network as a 30-year asset. “We break it into ‘developmental versus mature’ markets.” In a separate panel with technology OEM providers, Clearfield CEO Cheri Beranek stated she doesn’t believe it’s an ‘either-or’ world. “It’s not uncommon for an operator to be in an environment with both fiber and wireless. They may start with a fixed wireless environment, establish a subscriber base, and then use that to actually create to pay for the wireline network. We expect to be working with both for 10 years, and then some.”

What Inning are We In? What’s the Endgame?

Predicting the current stage of the broadband upgrade starts with an examination of the flood of public funds which launched the cycle. As an investor, Matt shared that “there’s a ton of Federal and State funding and you have to know where it’s going, who’s receiving it and analyze whether it causes you as an investor to play offense or defense.” It was noted that outside of the Tier-1 carriers, most of the networks are still sub 1 gig. An upgrade cycle in those networks will run seven to eight to nine years. And with the Tier-3 operators – which are more dependent on the public programs – the difference in rollout schedules will break along carrier size. As to the endgame (i.e. M&A), it was noted that there are key metrics that are divergent between public and private acquirers. AT&T is trading at 6.0x while these private exit multiples are north of 12.0X. Matt shared that “the all-in cost to hook up a fiber subscriber approximates $2,750. We’re seeing those subscribers being sold at north of $13,000.” As Tim wondered why there are not more of these tier 2/3 carriers in the public domain, Matt suggested that public investors don’t understand or like CapEx, especially EBITDA, net of CapEx, being negative. The exception: the few public operators that view the longer-term value in its infrastructure investment being more important than a term strategy at the end of the reporting quarter. Carl concluded with his belief that “Both Nathan and Brad will emerge as winners in this potential consolidate. With their business model, they’re positioned to acquire other assets that were strictly access pipes at a lower multiple, and then apply their business models over those connections.”

We’ll See You at WISPAPalooza!

Pat Clemens will join Rise Broadband CEO, Jeff Kohler; Stephens Capital Partners, Matt Dement; and Searchlight Capital’s, Darren Glatt, on Wednesday, October 13^th at 11:45 AM for a keynote panel “Beyond Bootstrapping: Unlocking Funding To Grow.”

If you’re interested in meeting up, click here to connect with Pat.

Pat Clemens, Head of Accord’s Communications Capital Finance initiative, has a 25-year plus track record of providing financing to middle-market companies up and down the Communications sector. Possessing deep experience as an investor, advisor and solutions provider to client executives and their investors, Pat brings exceptional knowledge and expertise throughout the Communications value chain: from the technology infrastructure OEM’s to the service providers. Pat recently co-hosted Rural Broadband Forum 2021 featuring a broad panel of investors, OEM’s and operators discussing the latest service provider and infrastructure trends in high-speed broadband.