Because we feel it’s futureproof, OTELCO is working to not only deploy new fiber but to replace old copper technology with fiber infrastructure when possible. With service footprints in 6 rural states, fiber deployment can be a challenge. As much as we’d like to bring High Speed Fiber Internet to every location in every state, it’s just not feasible from a business perspective.
Consider the following:
- What does a project cost?
- How many locations can be served?
- How many of those locations will buy the service?
- What is the return on the investment of a project?
What does fiber infrastructure cost?
There are many factors that impact the cost of building fiber infrastructure. One variable is whether the infrastructure aerial or buried? Buried fiber costs more to construct, however, pole mounted aerial fiber can have additional associated costs.
For an aerial build: If the poles are owned by the provider building the infrastructure, there is no attachment fee, but if the poles are owned by another utility, usually a power company, the Internet provider needs to get permission to use the poles and pay a recurring pole attachment fee to the pole owner. When pole mounting cable, another factor is what other pole attachments are in place and whether they need to be relocated or will need some other consideration when installing the new fiber infrastructure.
Based on these variables, a good estimate of cost range for the fiber infrastructure is between $44,000 and $55,000 per mile.
Making the Connection to the individual homes
Getting the fiber cable from the pole or pull box (if underground) requires drop cables between the house and the pole as well as equipment in the house. The cost of that equipment can cost between $500 and $750 per average location. Extremely rural locations can cost substantially more to connect depending on how far the home or business is away from connections at utility poles or pull boxes. Likewise, buried utilities can add significantly to the cost of a drop.
How does a provider decide where to build?
It’s all about return on investment (how quickly can the company get its cash investment back in order to reinvest in additional projects), and ability to grow the company.
Let’s look at a simple example making the following assumptions:
- $55,000 per mile for fiber infrastructure cost
- $600 per home to deliver service from the street
- 80 homes per mile
- Average monthly cost for the provider to actually deliver the service after installation is $32 per month
- The subscriber pays $65 per month for the service
- Net revenue per home is $33 per home
For a one mile build with 80 homes, the total project cost would be $55,000 PLUS the $600 for each home that connected to the service, about $1,287 per home – assuming that every home took service. If only 32 of those homes sign up for service, the cost per home served jumps to $2318. By dividing the cost per home by the net revenue per home of $33, you’ll see that it will take nearly six years for the provider to break even on the investment.
In our existing markets, costs are lower because we are already attached to the poles, but this cost advantage is often outweighed by the lower housing density in our most rural areas. The lower cost means the model works well down to about 50 homes per mile in these areas. However, in our most rural areas, housing densities are as low as 15 homes per mile. So, although the build cost per mile is closer to $35,000 in these areas, when you add that and 600 per home you find that the cost to serve every home is $2,933 per home. Many of these areas are not served by the cable company, but we still won’t reach 100% market share. If the provider is able to get 66% of those 15 homes, their cost to serve would be $4,100 per customer, and it would take over 10 years to break even on the project. With such a long payback on investment it is almost impossible to attract investment capital and some form of public subsidy is needed.
With such a poor return, why and how would any business make an investment in rural markets?
They likely wouldn’t or they would build very little if it weren’t for funding assistance from other sources. The FCC Alternate Connect America Model (ACAM) provides financial assistance to providers that agree to invest their own capital and deliver service to underserved (as determined by the FCC) census blocks. OTELCO participates in the ACAM program and has a commitment to achieve a minimum of 25/3 for approximately 13,400 unserved locations in a 10 year period. Our ACAM commitment drives investment in High Speed Fiber Internet infrastructure, because in many (though not all) cases it is more feasible to build fiber than to upgrade the copper infrastructure sufficiently to achieve 25/3 speeds. One example of this is our recently announced project in parts of Benson, Orwell, Sudfbury, Hubbardton and Cornwall, Vermont.
If high density areas and ACAM come first, what about everyone else?
Many ACAM eligible locations are extremely rural, and at the end of the line –one might say the last few feet of the last mile. In order for OTELCO to build to these locations, we, in many cases, have to pass many ineligible, yet underserved, locations. Where possible we build the infrastructure that allows us to offer services to the ineligible locations that we pass. An ACAM build to 30 eligible homes in Gray, ME allowed us to offer FTTP to an additional 88 locations that we had to pass on the way.
Where else does OTELCO spend capital funds?
Any funds that remain after our planned fiber projects are completed each year are divided between network maintenance and small fiber projects for Community Anchor Institutions (CAIs). Sometimes, we’re able to do this in a way that extends service to the homes that the build passes. We were able to do just that in Vermont where recently completed projects for the local school district allowed us to offer FTTP to the approximately 188 homes we passed to get to the school locations.
If we did have additional funds to expand our High Speed Fiber network, where would we spend it?
That’s pretty simple; we’d build where we know enough people are likely to sign up for the service. The two factors that dive that are housing density and take rate. The first example we cited above is based on a 40% take rate, meaning that 40% of the locations eligible for service will purchase it. With a 40% take rate housing densities would have to be 80 homes per mile in new markets or 50 homes per mile in existing markets. Multiplying these two numbers gets you the expected number of customers. The more customers we expect, the more likely we are to build in an area because it will likely provide more capital to invest in other projects.
Check to see if High Speed Fiber Internet is available in your neighborhood.