Tuesday, 8 November 2016

Fibre is badly needed to connect 5G base stations

Yesterday’s announcement that Windstream will purchase EarthLink for $1.1 billion – thus gaining EarthLink’s 29,000 route miles of fiber – is just the latest in a series of high-profile, fiber-related telecom mergers and acquisitions. And 5G and wireless network densification sits near the heart of many of these transactions. “Fiber is a critical component of 4G densification and 5G network deployment. Specifically, denser networks will be needed to support the expected rise in mobile data, a dramatically broader array of connected devices, and increased machine-to-machine transactions, all at materially lower latency and at higher quality of service levels. Thus, fiber will be a critical component of next gen network infrastructures,” noted the analysts at Barclays in an evaluation of the recent blockbuster $34 billion purchase of Level 3 by CenturyLink – a transaction that would give CenturyLink an additional 200,000 route miles of fiber. Indeed, the Windstream/EarthLink and CenturyLink/Level 3 tie-ups are just two of several recent major actions on the fiber front. Just last week, Crown Castle said it will acquire FPL FiberNet from NextEra Energy for about $1.5 billion in cash, giving it 11,500 route miles of fiber. Separately, Google announced it would halt its own fiber buildout efforts, news that coincided with the departure of Google Fiber CEO Craig Barratt. And of course, Verizon continues to work to acquire XO Communications, which owns around 33,000 route miles of fiber. What all this news indicates is that putting fiber into the ground is difficult, and that fiber likely will play a critical role in the future of next-generation networks, up and to including 5G. Why is fiber so critical to 5G? Barclays’ analysts offer this explanation: “Mission critical applications running on 5G will tolerate no more than 1 millisecond of latency, meaning traffic can no longer travel from the terminal to the core and back out to another terminal; more traffic has to initiate and terminate within the edge/access network. The speed of light, at which data traffic travels over an optical network, means 1 m/s of latency has a geographical limit of 50-100km. Given this geographic restriction, the caching of content closer to the user will be required. In order to implement this infrastructure, fiber will need to run between each tower with small cells feeding into a base station, consuming a lot of fiber in the process.” Historically, wireless networks enjoyed success in part because they didn’t require much in the way of wired support. After all, one macro cell site could blanket miles and miles of geography with LTE. Today, though, the equation is changing because operators are increasingly looking to densify their wireless networks with the addition of small cells and other technologies, which generally require more fiber connections. Further, newer wireless network designs also may require more fiber: For example, a C-RAN network centralizes the baseband functionality of a cellular base station within the network and then connects the baseband functionality via fiber with the distant radio elements, which are located at the cell site. Tower company Crown Castle has made no secret of its interest in small cells and fiber. In 2014 the company purchased 24/7 Mid-Atlantic and its 800 route miles of fiber, and last year Crown Castle purchased Sunesys, giving it access to 10,000 miles of fiber in major metro markets across the United States. Crown Castle’s recent FiberNet acquisition would give the company another 28,500 route miles of fiber. In Crown Castle’s latest earnings conference call, company executives offered a real-world look at the company’s return on its fiber and small cell investment. According to a Seeking Alpha transcript of his remarks, CEO Jay Brown explained that in 2013, Crown Castle counted 300 “tenant nodes on air” on approximately 100 miles of fiber in Chicago, or approximately 3 tenant nodes per mile of fiber. “Fast forward to today, we have approximately 1,100 nodes on air and under construction on 250 miles of fiber, with the tenant nodes density at approximately 5 tenant nodes per mile. This results in a yield on our investment in Chicago of about 10%,” he said. To be clear though, AT&T and Verizon still command the lion’s share of fiber in the U.S. market. Last year, in a ranking of metro route miles of fiber, AT&T, Verizon and CenturyLink took first, second and third, respectively, in fiber ownership. Moreover, it’s important to note that owning fiber isn’t a prerequisite for launching 5G. For example, the analysts at Barclays noted that Verizon has inked wholesale dark fiber agreements with more than a dozen fiber providers in order to access fiber services in areas where the company doesn’t own its own fiber connections. “We agree that as 5G deployments progress, the third party fiber leasing business model should become increasingly more attractive as a means to efficiently and economically increase fiber’s reach and breadth. For those that don't have any wireline assets, it will become all the more important to rely on third party providers outside of their footprint,” the analysts wrote. Additionally, access to fiber connections may become cheaper for some players if the FCC decides to rule on the issue. During its open meeting this month, the FCC is scheduled to vote on “business data services,” or BDS, which is also called special access. Smaller telecom companies like T-Mobile and Sprint have argued that the FCC needs to set rates in the special access market so that fiber owners like AT&T and Verizon can’t place onerous charges on access to fiber and other business-level internet connections. Nonetheless, it’s clear that fiber has become a valuable asset as the wireless industry hurdles toward a 5G future. I expect further fiber-motivated consolidation (potentially involving the likes of Zayo, Lumos Networks, FirstLight Fiber and other smaller players) as Verizon, Comcast, T-Mobile and others work to reinforce their market positions ahead of the rollout of this technology

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