Investors bet on US metro fibre market

Investors bet on US metro fibre market

03 December 2019 | Abigail Opiah

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As Metro Fibre and small cells solidify their place in the limelight. The natural progression is to highlight its glamorous side, which is where investors should pump their cash into. Abigail Opiah reports.

The demand for metro fibre is developing at rapid rates thanks to the copious need for fast broadband connection. In 2019, imagining a world without fast connection would be as impossible as imagining a world without mobile phones.

The need for limitless broadband in the US and across the globe has been welcomed by a flood of new construction and acquisitions in the sector, as key players in the industry boast about their expanded footprints. Hunter Newby, American entrepreneur, investor, conservationist and the owner of Newby Ventures meticulously describes the US metro market’s state as healthy, established, and growing from an investment viewpoint.

“More investments are required everywhere, and in certain places, it is more near term than others relative to the return on investment capital. Metro fibre has reached a level of general acceptance in the industry,” he adds.

“Everybody now realises the need for fibre which helps to attract more capital. There has been some very successful and high-profile transactions that have taken place in the sector, which is a testament to both the stability and credibility of the market.

“There are, however, still places where there is a big lack of metro fibre, but as the investments continue to happen, the core of the metro continues to bubble out so that each step to reach the next town or neighbourhood is not a major stretch,” he continues.

However, it is not the same narrative for all parts of the US as Hunter explains that a lot of places still have to wait because they are just not close enough to the metro fibre core. It does not take a rocket scientist to observe that where there is a lack, there is an opportunity. “Investment appetite is routed in dark fibre. Dark fibre is what large entities that are moving a lot of data need and require,” continues Hunter. “Many of them have invested their own capital in dark fibre as a result and even build their own submarine cables now, which would have been unheard of just ten years ago.” A quick search on Google evokes a plethora of subsea cable investments from the likes of Google, Amazon and Microsoft. Off the top of the list is Google’s 10,500km Curie cable designed with four 18Tbps fibre-optic pairs, which delivers 72Tbps of needed bandwidth to South America from the US And it doesn’t just end there as the nature of the subsea cable customer is changing.

The new customer

Traditionally the prime (and for most of history, the only) customer had been the major telecommunications companies and, of course, the military. Now the prime customers are becoming the mega data centres, primarily owned and operated by the social media/cloud computing providers - Facebook, Google, Amazon, and Microsoft. These companies are not only customers, but they are so deeply involved that they are equity owners and active participants in entire subsea cables. No longer is it desirable to bring a subsea cable to a landing station and from there interconnect with the major telecommunications providers.

Now the need is to take a significant portion (or the entire cable) directly to a private data centre.

“If they are going to build their own submarine cables they are certainly going to build metro,” adds Newby.

“There is a hierarchy of demand for dark fibre too, which has a lot to do with distance and the challenges of constructing fibre routes over great distances, and the cost that comes with that. I believe that every entity that could potentially use dark fibre would like to have it but they cannot necessarily afford it on an individual bases in a country like the US.”

The US metro fibre market is on a steady rise because of digital transformation. Those in the industry may deem this as a buzz word chucked in at tech conferences and other industry events, but digital transformation is the master key unlocking an abundance of opportunity.

Marc Dyman, chief revenue officer, FibreLight, paints a similar picture regarding the metro market to that of Newby.

“There is a lot of building and constructing happening in non-traditional areas as enterprises continue to embark on digital transformation. These entities are applications that use to exist in-house at their location but they are now living somewhere else. The reliance on metro fibre is becoming more important than it was in the past,” he adds.

“In regards to the metro fibre, there is a lot happening with data centre interconnection, which is exploding in the metro fibre networks. On the wireless side, inside those metro networks, there is an increased bandwidth move. We have clients that are asking, in the metro networks, for dark fibre.

“The challenge is continuing to have the CAPEX to address and participate in all the projects that are available, so the trick is to pick the ones that will yield the greatest margin and profitability. The flip side is that there are so many projects that are going on in those different areas, and we are seeing an influx of demand in the markets that we are in.”

FibreLight, a company that designs, builds, and deploys custom fibre networks and responsive customer experiences, is focusing on the transition off of using IP networks to get to the cloud versus a layer two Ethernet network, which is big in the enterprise segment according to Dyman.

“Originally when they got into the cloud game, it was about bringing your own bandwidth and having an IP connection, but now as you move more mission-critical applications into the cloud or a hybrid data centre location, it requires a different type of connectivity, which is a big future opportunity.

“The wireless guys are leveraging small cells to make more of their spectrum and to create a better user experience. Where we see growth is from the guys who are mounting small cells on buildings. We can look at other revenue streams and make that business case look a lot better.” 

Future gains

Last year, CTIA commissioned consulting firm Accenture to do a study which found that by 2019, there would be 200,000 small cells deployed.

The study assessed the impacts of regulatory reviews required for the National Historic Preservation Act and the National Environmental Policy Act (NHPA/NEPA) on 5G small cell roll-outs by US wireless carriers. 5G alone is expected to require hundreds of thousands of small cells, therefore NHPA/NEPA review costs are expected to significantly impact 5G deployment based on predictions. Accenture estimates the industry could spend an incremental $2.43bn related to NHPA/NEPA reviews through 2026.

To the untrained eye, these are just predictions, but to those in the know, it is a wealth of knowledge for those who have the power and capital to invest. “In regards to investors’ appetite, FibreLight would direct investors to networks that hit on key components like investing in fibre networks where you can build a network that has high density of fibre, and can touch wireless applications as well as interconnect data centres and those markets,” he concludes.

Biggest Metro Fibre M&A in 2019

Zayo Group signed a definitive merger agreement to be acquired by Digital Colony Partners and EQT Partners in a cash transaction valued at $14.3bn.
Shareholders will receive $35.00 in cash per share of Zayo’s common stock, including the assumption of $5.9bn of Zayo’s net debt obligations.

Marc Ganzi, managing partner of Digital Colony, said: “We believe the company has a unique opportunity to meet the growing demand for data associated with the connectivity and backhaul requirements of a range of customers. We are excited to work alongside the management team and EQT to grow the business and expand its presence in the global market.”

The deal will transition Zayo from a public company to a private company while the Zayo team continue to lead the company forward, base in Boulder, Colorado.

“The general US metro fibre market is supported by great demands from 5G roll outs amongst other things and we are building tons of small cells, towers and metro dark fibre in the US as a result,” added Jack Waters, president, Zayo Networks and chief operating officer, Zayo Group.

“We have a transaction on the path to close in the first half of 2020, which is a part of our company’s strategy to get that done for shareholders. The acquisition is a public to private transaction.”

The deal is expected to close in the first half of 2020 subject to customary conditions, which include regulatory clearance and Zayo shareholder approvals.
“Digital Colony and EQT share our vision that Zayo’s Fibre Fuels Global Innovation, “said Dan Caruso, Zayo’s Chairman and CEO. “I am confident this partnership with EQT and Digital Colony will empower Zayo to accelerate its growth and strengthen its industry leadership.”