By Ryan Carr, Partner, M/C Partners
America has a broadband problem.
While COVID-19 supercharged an era of working and learning from home, many people have been left out of the remote-productivity equation due to a lack of high-quality broadband access. And the reason is simple: there is not enough fiber.
We’ve seen the numbers before, but I want to state them again to highlight the massive opportunity in front of us – both in human potential and investment capital.
Broadband by the Numbers: U.S. = Laggard
A 2019 Council on Foreign relations report, “Open Access Fiber to Improve U.S. Internet Connectivity,” found U.S. fiber-to-the-home (FTTH) deployments lagging those in other countries. Consider:
- 70% of households in China had fiber service compared to 32% in the U.S.; in 2013, China lagged the U.S., providing fiber connectivity to only 17% of premises.
- In countries with similar population density, the U.S. has “the second worst coverage, leading only Ecuador (18%) and trailing Mexico (37%), Belarus (60%), Sweden (90%), and Lithuania and Latvia (100%).”
- The U.S. ranks 28th in fiber-connection rates out of 37 Organization for Economic Cooperation and Development (OECD) countries.
And while this report has yet to be updated, best estimates for 2021 put U.S. broadband penetration at ~40%, still significantly behind most developed countries.
We’ve seen numbers like this before, and it’s easy to skirt past them, especially from the comfort of our fully-tricked-out, fiber-fed home-offices and corporate buildings. But we need to remind ourselves that when a large percentage of the populous lacks access to high-speed Internet, tens of millions of our citizens are falling behind – which hurts us as a country – and billions, perhaps even trillions, of dollars of economic opportunity are being squandered.
This is an issue that we as investors look to rectify and it is clearly a priority for the Biden Administration as well, which earmarked $65 billion in the bipartisan infrastructure plan for “broadband for all” initiatives, as well as $25 billion from the American Rescue Plan.
This potentially fresh, large investment in democratizing broadband builds on years of government-led support for expanding high-speed Internet nationally. Programs like the Connect America Fund or the $20.4 billion Rural Digital Opportunity Fund have provided ample incentive to tackle America’s at first nascent, and now critical, fiber access problem.
Yet, despite the scale of the problem and the largesse of the Federal government, the solution has not been, nor is it being, delivered by big-name cable and telco companies. In fact, they’ve been a big part of the problem. Over the years, their investment in high-speed network infrastructure, particularly in rural areas, but also in less-affluent urban areas, has fallen woefully behind.
In some cases, that has been a story of 80/20 thinking (both in terms of population and, frankly, revenue projections), while in others – look no further than incumbents such as Frontier Communications and CenturyLink – the capital needed to support major network upgrades just wasn’t there. No matter how you slice it, “broadband everywhere” – and to be fair, “everywhere” is a gargantuan task – has been a better catchphrase than practicable ethos.
Filling the Void
But that’s where this story gets interesting. Where there is a void, there is often opportunity for entrepreneurial moxie and investment, and that is exactly what is happening in this space.
Around the country, in places as varied as Nebraska, Los Angeles, Rochester, N.Y., Cleveland and Detroit, a new breed of broadband entrepreneur, one seeing an opportunity to address a key need in their own neighborhoods, is emerging. While many of these companies began as bootstrapped startups, some have grown by tapping into government broadband funds. Those that have been successful, whether through government assistance or not, are now growing into companies ready to take on more outside capital.
At M/C Partners we see these underdog regional and local ISPs comprising a multi-billion-dollar investment opportunity, one shored up by an exceptional capital return profile. A sampling of players, includes:
Allo Communications – Targets communities in Nebraska and Colorado with fiber Internet, TV, and phone offerings and, after originally receiving funding from local businessmen, has garnered the attention of the investment community, which has provided capital to continue to expand.
BAI Connect – Resulted from the merger of Bel Air Internet and AerioConnect, two M/C Partners-backed Internet Service Providers bringing fiber solution to multi-family and commercial clients in Los Angeles and Las Vegas.
Everywhere Wireless– Another M/C Partners investment, Everywhere Wireless is one of the largest private Internet Service Providers to multi-family and commercial clients in Chicago and its suburbs, currently connecting over 60,000 active users in nearly 800 buildings.
Greenlight Networks– The company was founded by a long-time communications/telco exec who saw opportunity in bringing fiber connectivity to more homes and businesses in the greater Rochester area and has recently attracted significant investment from another private equity partner.
What’s interesting to me about these companies is that there are literally hundreds, perhaps even thousands more like them, each motivated to bring extremely fast and affordable Internet solutions to communities that desperately need them. These companies deploy service-delivery methods as varied as the communities they serve, with some being fiber-centric and others focusing more on fixed-wireless deployments. However, in all cases, these independent providers are filling a void left by the major telco and cable operators and expanding broadband connectivity, enhancing the economic, educational and social benefits in the areas they serve.
Smaller ISPs like these require funding throughout their growth cycle and also present excellent rollup opportunities. What’s more, they are literally renewing their communities. High-speed broadband brings new life into homes and neighborhoods, creating business opportunity and growth that is revitalizing cities and towns across the country. An estimate by researchers at Purdue University cites a potential 400% return in the form of economic benefits to communities that deploy high-speed networks where previously unavailable.
For those of us enjoying the convenience of glitch-free Zoom video conferences and the comforts of streaming our favorite content on Netflix or Hulu, it can be easy to forget that this new normal does not yet belong to everyone. There are huge broadband gaps to fill across the country.
We are still in the early innings of what will be at least a nine-inning game, one full of base hits, home runs, lots of lead changes, and a growing roster of players. What is interesting is that in all cases, the only way to solve the problem is going to be through additional investment, investment to expand fiber deeper into the networks and closer to the end user. The numbers tell us so:
- Global IP traffic, as measured in exabytes, is growing at a 27% CAGR through 2022. (Source: Cisco)
- Broadband-only homes are anticipated to account for nearly a third of U.S. households by 2023. (Source: Cartesian)
- While the FCC estimates there are over 14.5 million people in the U.S. without access to broadband, Microsoft estimates the number is more than 8x that, or 120 million.
- Average consumer broadband speeds are expected to more than double between 2018 to 2022, driven by a confluence of demand trends, including OTT video consumption, remote working and education, online gaming, home security and cloud adoption. (Source: Cisco and Gartner)
The fiber era of speed-of-light connectivity is here to stay. A new generation of ISP is bringing it “the last mile” to every mile of America. It needs a new generation of investor to recognize, accelerate, and monetize the opportunity.
About the Author
Ryan Carr is a Partner at M/C Partners, where he leads origination, deal diligence and portfolio company support for investments in a variety of communications and technology services segments. He serves on the Board of BAI Connect, Denovo, and Everywhere Wireless. Ryan previously served on the Board of Thrive Networks (acquired/recapitalized by Court Square) and as Board Observer of PlumChoice. Prior to joining M/C Partners in 2016, he worked at MVP Capital, a telecommunications, media and technology focused boutique investment bank, where he completed a number of financing and M&A transactions in wireless communications and infrastructure, fiber infrastructure and media sectors. Ryan also previously worked as a certified public accountant in the energy and telecommunications sectors of KPMG. He holds a B.B.A. in Finance, Accounting and Entrepreneurship from Gonzaga University. Ryan currently lives on the South Shore of Boston with his wife and two children. He enjoys golfing, skiing and college basketball.