Limited revenue capacity?
October 7, 2008
Got a comment from a reader on the tortoise and the hare post that said
Fiber providers have a limited client base, which means a limited revenue capacity. You can only sell to people on your route — or more precisely in your lit buildings. You can build laterals but that will cost you big dollars.
Here’s my take: Fiber owners can have whatever size or type of customer base we choose. This is called segmentation. Owning fiber allows this to occur more easily than renting from the ILEC. For example, AFS chooses not to be in the low-end, T1/IAD/DSL space. With those offerings, there are many customers, but a lot of competition. Also the ARPU’s are low, margins are low, bad debt high and high churn. Moreover, there is no barrier to entry in serving the copper low end of the market. All you need is a CLEC license and a resale agreement with an ILEC, and you too can be the 55th competitor at this segment of the market. No thanks, at AFS we pursue real broadband customers.
Sorry to report, we can sell to companies not on our routes if we choose type 2 as a strategy. However, our wisdom has been to deploy UNIQUE fiber routes whereby network diversity becomes its attractive feature and differentiator. We own 99.8% of our fiber … and I mean the fiber sheath. Do not confuse a fiber IRU with a fiber sheath. In addition, 90%+ business buildings still do not have pipe #2 in a building. If you were growing at 40% a year top line, gross margins exceeding 70% and doubling EBITDA year-over-year by selling on your own unique footprint, why would we wonder off this success rate?
The fools in this game are the ones that believe that they can get 100% market share. It is also foolish to build out a fiber network to 100% of businesses in a given market. Capital isn’t free and being a steady tortoise pays off – one highly profitable building at a time, day-after-day, week-after-week, month-after-month and year-after-year. Sounds boring, but it keeps you out of bankruptcy.
On revenue growth, many a Captain of Telecom have come and gone chasing that Holy Grail of revenue growth into bankruptcy. High revenue growth driven by revenue testosterone levels has killed many. At AFS we choose to focus on profitability growth. With the economy in a state of uncertainty – cash flow, quality of EBITDA and margin growth of EBITDA is fast becoming more important than chasing the Holy Grail of revenue growth.
Laterals – if you know what you are doing, they are not an obstacle.
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Written by Dave Rusin - Telecom Executive
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Thanks for reading my comment, but you didn’t really reply. I didn’t say become a DSL provider. I don’t know where you got that.
You have a finite number of buildings lit which means a finite customers, especially without Type II. That means a limited revenue model.
I not only need to respond to your question but I also have an obligation to the entire audience that reads this blog. I prefer to offer insight, context and substance over conjecture such that it benefits every reader.