KBRO Report - Rise of the Horizontally Aligned Fiber Company - A Newly Defined Opportunity

Colby Synesael and Jon Charbonneau of Kaufman Brothers have recently produced the first really solid piece of research on dark fiber-based service providers in a long time - Rise of the Horizontally Aligned Fiber Company - A Newly Defined Opportunity

What is a horizontally aligned fiber company? 

In their own words:

"Horizontally aligned fiber companies focus almost entirely on IP based/data oriented services. We estimate a 15% three-year industry CAGR for revenue, more than double wireline telecom, based on increasing bandwidth demand for things such as 

1) low latency requirements, 
2) use of online video, and 
3) storage/SaaS/cloud computing. 

We also believe demand for fiber-to-the-tower backhaul service will accelerate demand, although its longer payback period has limited the amount of companies chasing this opportunity thus far."

How do horizontally aligned companies differentiate themselves? 

"Although IP-based/data oriented service is the fastest growing sub-segment for both horizontally and (typically larger) vertically aligned wireline service providers, many horizontally aligned companies have been able to differentiate their offer by focusing on 

1) unique routes, and 
2) unique locations. 

In addition, pricing for intra-city and regional-based fiber solutions has been relatively stable compared to legacy circuit switch pricing that is being impacted by increasing pressure from cheaper IP-based offers and the current economy."

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This is really good research because it focuses on the real issues and where the real value is found:

1) In dark fiber control - "ownership", either by IRU, or long-term lease. This controls underlying costs as well as provides for the control and flexibility of technology advances in DWDM, Ethernet and IP by those that actually deploy the network.
2) Unique routes! Physical diverisity is one thing, but also fiber type, age, count, aerial, or burried and points of interest that can actually be interconnected to along the way - such as NEW data center sites and, or towers (that currently have NO fiber)
3) Low Latency - this is very route specific, such as New York to Chicago and back, and VERY important to those that seek it as milliseconds equate to millions of dollars.

A few things of interest to note are that they see this is a NEW opportunity. What is so NEW about fiber? The truth is that what is NEW is the understanding of its importance and relevance in networks. Those that have it and control it will matter and succeed and those that do not will not and won't. Period. Creating new and unique fiber routes builds value.

Also and probably most telling is that they believe that "Today, only a few horizontally aligned companies are public..."

This indicates that there is a large investment opportunity in this segement of the market - the segment that truly supports all others in a networking sense.

As for the comment about FTTT it will certainly accelerate demand, but the "longer payback period" needs to be understood a little better. That belief is probably based on a traditional fiber extension model with laterals being built off of existing fiber rings and also based on a single provider of Ethernet/IP transport services needing to absorb the full cost of construction to the tower. If that's the case it is true that the payback period will be long and few will chase it. 

There is another way to get fiber to towers though... and another model for dark fiber to towers and lit services over that fiber to co-exist...

More to come on this after my visit with KBRO...