Open Access Networks Poised to Turn up the Heat in the U.S. Broadband Market

Jeff Johnston

October 26, 2023

Key Points

• National wireless operators and institutional investors are embracing open access fiber networks, a new broadband business model that could disrupt the market. 
• Open access fiber networks consist of a fiber network owner who sells wholesale access to multiple Internet Service Providers. The ISP is responsible for pricing, marketing, customer acquisition and billing.
• The shared nature of the network is a much more capital efficient way to build a network and will enable new ISPs to enter the market. The open access model has been a fixture in European markets due to telecom regulation requirements.
• National wireless operators are expected to be very active in this market – AT&T already is – as they build upon the success of their fixed wireless/smartphone bundle with a fiber-to-the-premise solution.
• The initial focus will include urban and suburban markets with DSL, and to a lesser extent hybrid fiber-coaxial networks with competitive rural markets likely several years away. Unserved and underserved markets eligible for BEAD support with the right cost dynamics should become targets for open access network operators. 

Background

The open access fiber network business model consists of a network operator who builds, manages and owns the fiber network and multiple ISPs who sell wholesale access to the network and resell it to residential and business customers. The ISPs are responsible for all the customer acquisition and support costs/activities, while the network operator is responsible for network operations. 

This type of shared network model is very popular in Europe largely because regulators have mandated it to level the competitive playing field. By mandating a shared network approach, regulators lowered the entry barriers, enabling a wider range of ISPs to enter the market. 

In the U.S., the open access network model has yet to catch on, but that appears to be changing. U.S. regulators do not require the likes of Comcast, Verizon or AT&T to open up their broadband networks to third party ISPs. In addition to the lack of regulatory mandates, U.S. operators have had little reason to launch an open access business to overbuild an existing DSL (digital subscriber line over telephone lines) market with a new DSL network. Now that fiber technology has arrived in scale, it is now starting to make sense for companies to leverage the technology and build open access networks where the incumbent network is DSL, and to a lesser extent, hybrid fiber-coaxial cable.  

Big telcos warming to capital efficient network model

The large telcos are realizing that giving up some network control to a third party while employing a more capital efficient network model is a promising strategy. Whether it’s driven by a capital structure mentality, the current interest rate environment, or a willingness on the part of institutional investors to fund open access networks, a new way of thinking is emerging.

The recent joint venture announcement from investment firm Blackrock and AT&T to establish a new open access network called Gigapower has put the industry on notice. Gigapower’s initial plans include building out fiber to 1.5 million customer locations outside of AT&T’s wireline footprint, with AT&T acting as the anchor tenant. The company has hinted at further expansion, but has yet to share any details. It’s safe to assume Gigapower will focus its future efforts on DSL and HFC markets as it looks to plant its fiber flag. 

T-Mobile has been dipping its toe into the open access model with trials in parts of Colorado and New York, but recent reports suggest they have much larger plans. According to Bloomberg, T-Mobile will be the anchor tenant in a newly formed, $500 million joint venture between Tillman FiberCo and private equity firm Northleaf Capital Partners. T-Mobile recognizes that its fixed wireless access service will eventually run into network capacity issues, constraining its ability to scale that business in the long term. Therefore, being an anchor tenant on an open access network and bundling the service with its smartphone offering is an elegant solution. 

The large telcos are hungry for growth but are becoming more open and creative in how they achieve this growth – especially as it relates to their capital budgets. This makes entering into a capital-light, open-access joint venture with infrastructure funds very attractive. Additionally, investors are placing a premium on owning fiber networks given the accelerated digitization trend we are seeing in how people live and work – the more fiber in a network, the more it is worth. 

Key success factors 

The competitive threat from open access networks boils down to three primary factors: 1) who is building and managing the network, 2) who is the ISP and what is their value proposition and, 3) what are the competitive market dynamics.  

The organization building and managing the network is a very important piece to the overall success of the open access business model. Building and running a fiber network demands deep operational and technical experience and access to sufficient capital. Utopia Fiber is the current poster child for municipal open access fiber networks and has its fair share of detractors, which speaks to the challenges facing the model when an inexperienced operator is building and running the network. In its early days, Utopia Fiber failed its $185 million bond commitment as the business did not grow as planned. And more recently, a filing made by the Advanced Communications Law and Policy Institute at New York Law School with the California Public Utilities Commission said a recent shift in Utopia’s strategy to shore up its financials delayed deployment across some of its member cities, almost 17 years later than initially promised. 

Obviously in the case of AT&T – and T-Mobile if the reports are accurate – Utopia-type growing pains will not be an issue. Both operators have vast resources and experience they can make available to a joint venture, and building and operating a network is their core competency. 

The ISP plays a critical role in determining the success of the business. For example, if an ISP offers a standalone service at market rates with poor customer service, low brand equity and no bundling options, it could struggle to compete with larger, well-established broadband operators. It’s important to note that while this scenario is certainly possible, we think most open access networks will start with an anchor tenant that will justify the network investment and insulate the network operator from poorly managed ISPs. 

Market competitive dynamics are an important factor for open access networks. Based on some of the early moves by Gigapower and their public comments, they appear to be focusing primarily on DSL markets, which makes sense given fiber’s superiority over DSL. However, if an open access network is built in a three-player fiber market, it will likely struggle to gain significant share unless the ISP is willing to sacrifice broadband margins to drive some other business objective. 

For example, let’s say Amazon wanted to offer broadband service in a competitive fiber market with the goal of increasing Prime subscriptions (a major strategic focus for the company). Amazon could act as an anchor tenant and offer a bundle discount on a Prime + broadband service, undercutting the competition. It’s not dissimilar to what Amazon and Apple are doing to the Hollywood content producers – they are offering great video content at aggressive prices to drive hardware sales, in the case of Apple with Apple TV+, and Amazon Prime subscription (Prime Video). Unlike the Hollywood producers, Amazon and Apple don’t need to make money directly from their video investments, and as a result they are wreaking havoc on the Hollywood business model. Could they do something similar in the broadband market?

Lastly, from a time-to-market perspective, open access networks could have an advantage over the traditional ISP-owned infrastructure model. Permitting has become a major bottleneck in the network build process, however the open access nature of the model is very appealing to state officials. According to Bill Hogg, CEO of Gigapower, state officials like the open access network as it gives their residents more choice and the states don’t need to pick a winner when issuing financial support. This preference could lead to a more efficient permitting process for open access providers, and enable them to garner more state funding dollars.  

Impact on rural operators

It appears that the open access network builders will focus primarily on urban and suburban markets first where the competitive dynamics and growth prospects are favorable. These markets will attract more ISP partners and offer a higher return on investment cash flow generation. Generally speaking, rural markets will be a lower priority, especially ones that are considered high-cost markets. Open access network operators will likely explore Broadband Equity, Access and Deployment (BEAD) program financing options for these markets, and therefore could be a competitive force in surrounding markets if they pursue an edge out strategy from their BEAD markets. 

However, despite the lack of any major, near-term competitive threat, rural operators should not dismiss future competitive threats. Institutional investors have raised a significant amount of money and are actively looking for opportunities to invest it in the U.S. broadband market, and it’s a land grab for markets with the right competitive dynamics. Therefore, as urban and suburban markets will be first to be built out, some rural markets could become fertile ground for open access network operators hungry for growth and backed by deep-pocketed investors. 

Conclusion 

The shared nature of open access networks is an efficient way to deploy capital and a change of thinking is afoot in the C-suites of major telcos. These networks will usher in a new set of ISPs, giving customers more choice and the industry more competition. They will also enable the wireless operators to build upon their wireless / fixed wireless bundle – where they’ve had tremendous success – with a future proof and scalable fiber-to-the-premise option. Initially, these networks will be built in urban and suburban markets where DSL and HFC networks are the incumbents. Rural markets are probably safe for now. But as institutional investor money looks for new fertile ground, rural markets where the competitive dynamics are favorable should become a bigger priority for open access networks.