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Dark fiber — the dirty word of early-2000s telecom — is back en vogue in the wireless backhaul market. With the pending initial public offering of Zayo Group, it seems the time is ripe to discuss dark fiber’s role in the U.S. mobile backhaul ecosystem and its implications.
Discussion around dark fiber backhaul today is driven by U.S. mobile network operator economics. Evolving thoughts around mobile network economics and end-user requirements are driving operators to look at the opportunity which, in turn, is creating significant opportunities for U.S. fiber infrastructure providers to support the movement. All of this drives the end-game question how the current movement toward dark fiber impacts the ecosystem as a whole.
With the movement to LTE came the migration of backhaul networks from copper-based T-1 private line services to fiber-based Ethernet services. As LTE networks have expanded and devices have gained widespread traction, traffic has grown. Traffic growth, combined with end-user pricing actions, have driven mobile network operators to look for more cost effective methods of managing networks. This search over the last four years has opened the door for dark fiber-based backhaul and the slew of new dark fiber providers. In the long term, questions remain about its impact on the ecosystem. Is dark-fiber-to-the-tower the next move for all macrocell environments or is it only applicable to towers in tier-one markets?
Shifts in mobile operator network cost models
Atlantic-ACM estimates that with the move to LTE, bandwidth for backhaul at U.S. cell sites has grown five times over the past four years. As mobile operators increasingly compete on price in parallel with increased consumer bandwidth consumption, dark fiber backhaul has the ability to allow mobile operators to move from an operating expense-intensive, lit-service model to a capital expense-driven, dark-fiber model. Each move has pros and cons, but in essence, the capex model empowers providers to create significant room for bandwidth expansion at a much lower ongoing operating cost (with very small remaining opex as operation and maintenance fees are minor compared with leased service models). In essence, dark fiber allows mobile operators to gain owner’s economics at the cell cite. (It’s worth noting that the upfront costs of moving to the dark-fiber model are significant, with mobile network operators rumored to pay in excess of $100 million to cover fiber builds in certain regions.) At the end of the day, taking away or cutting the increased operating costs of incremental bandwidth upgrades affords operators better control of their network costs, which allows them to better support aggressive end-user usage growth without cutting deeply into margin profiles.
Dark-fiber demand from mobile operators creates opportunities for new entrants and for organic fiber footprint expansion
Offering dark fiber has never been of interest to, or a strong suit of, traditional ILEC backhaul providers. This drives wireless operators looking for dark-fiber based backhaul solutions to engage in regional sourcing models to meet their needs and creating opportunities for fiber operators like Fiberlight, Fibertech and Zayo. These fiber providers use fiber-to-the-tower builds to subsidize network expansion, increased reach and greater densification. All in, the network builders are gaining entrance into new markets via the dark-fiber-to-the-tower play while network operators gain access to an easily scalable network element.
It’s not as easy as it looks
Moving to the dark fiber model requires significant upfront capital, which mobile network operators must balance against other capital requirements. Dark fiber providers are generally not built out to all the locations mobile operators need, leaving significant build requirements to meet backhaul demand. Deals often require significant upfront costs on the parts of mobile operators in order to subsidize fiber builds to towers under contract. These significant costs create questions with respect to how far network operators will go to acquire dark-fiber-to-the-tower as these builds must be balanced against other capital requirements (e.g., cost of lighting and/or acquiring new spectrum). Ultimately, these builds are a balancing act in resource allocation, requiring deep assessments of how investments in network elements drive, or support, end-user spending.
The bottom line to all of this is that dark fiber will play a role as a key element in mobile ecosystems going forward. Since mobile operators are managing tradeoffs from a budgeting perspective, backhaul providers must understand where to bid on dark fiber opportunities and where to hold strong on lit services. The key here is understanding ground level, metro-by-metro economics so both parties can build a sustainable ecosystem that meets the needs of end-user demand.
Aaron Blazar works as a VP for Atlantic-ACM on projects ranging from market sizing and forecasting to corporate strategy covering both the wireline and wireless telecom markets. Blazar has a broad perspective on the telecommunications industry and expertise in market segmentation, market analysis, market entry strategies and statistical analysis.