Will Fiber Pay For Itself? Now You Ask!!!! Why Debt is Important

Implications: I learned years ago that the financial community can spin just about any bad news into good news.

Analysis: I don’t disagree with the recent studies on fiber deployment costs at all.  In fact I am wondering why it took so long for any financial analyst to say anything.  I gave up talking about the cost of fiber years ago because the investors did not appear to care.  The news stories of companies like Verizon installing massive amounts of fiber (billions of dollars worth) with no clear plan on how the companies would recoup their costs seemed to be an afterthought to the investment community.  I believe the reason behind the intentional past ignorance was “stock speculation”.  The news feeds simply escalated the price of the stock and people (investors and brokers) made billions buying and selling stock.

However, today people are now asking the question: “Now that the fiber deployments are clearly underway and many communities have a critical mass of fiber installed, when do the companies start recouping their investment”?  A natural question.

The cost of content will eat up profits.  The cost of content will continue to rise as content creators demand a bigger piece of the action.

Stock speculation works in two instances:  During the growth phase of a company and during the revenue phase of a company.  People buy stock when they believe the company will succeed in is business.  Stock brokers rack up the fees when people buy and sell.

This situation with fiber applies to every technology deployment a carrier performs.  Unlike the old days before the MFJ, the carrier community no longer has the ability to depreciate is equipment over a 40 year period and there is competition as well.  The carriers are spending billions of dollars buying and deploying technology.

Landline telephone companies have been able to achieve some savings with fiber through their rights-of-way and their established customer base.  However, these advantages do not automatically result in positive margins.

Carriers today borrow money from lending institutions.  Before the Telecom Act of 1996, the big carriers had no substantive debt.  In fact I recall some of the largest lenders in the country were completely unfamiliar with capex spending needs & patterns of companies like Verizon or AT&T because up until the mid-1990s the carriers did not borrow money from them.  Remember carriers use to self finance their projects.

After the Telecom Act, every carrier in the country was carrying substantial debt.  During the 2000s meltdown, the financial community was concerned about the debt load of some of the nation’s largest carriers.  The meltdown resulted in hundreds of startup carriers filing for bankruptcy or simply liquidating.  Hundreds of startup carriers were acquired during this time by surviving carriers.  Billions of dollars of losses were simply written off in corporate taxes filed by investors.  Bear in mind that real money lent to these failed businesses was lost not just stock equity.

Given the pace at which technology is deployed, no carrier will ever see a full return on investment for any network equipment.

What the stock broker refuses to accept is that the telecom business is an infrastructure business.  Hence, the telecom business requires a period of time to infuse itself into a community and time to generate sufficient revenue to recoup investment.  With the recession in full swing, consumer and corporate spending for new technology is beginning to wane.  Telecom carriers will delay, for as long as they can, any new technology deployments that are not necessary.  Unlike Sprint, it is in Verizon’s best interests to “smart rollout” its new technology called LTE (long term evolution).  When carriers do smart rollouts it is done in order to preserve cash.  All of this makes Wall Street analysts crazy because they make their money on speculation (and transaction fees generated by the speculation).

Smart rollouts also enable a carrier to hang onto old technology for as long as possible in order to monetize the technology.

I am not faulting stock brokers; it is what it is.   The carriers will continue to rollout technology and continue racking up debt.  Carriers will generate revenue to partially cover the costs of technology.  Carriers will sell more stock to partially cover the costs of technology.  Carriers will borrow more money from banks and other lenders to cover the remaining costs of technology.  Carriers will renegotiate the terms of past loans with bankers in order to continue borrowing money from the same bankers and to extend terms.  In the end the creditors will end up running the carriers and vendors.

I am not criticizing the investment bankers or lenders.  I make a good living helping out creditors.  I am simply explaining how fiber costs will be covered over the long term.

Investors are correct in asking questions.  It is important to remind companies and management they still have to make as much money as possible and not appear to be making money.