The following transcript has been edited for length and readability. Listen to the entire discussion here on The Broadband Bunch. The Broadband Bunch is sponsored by ETI Software.
Pete Pizzutillo:
This episode of The Broadband Bunch is sponsored by ETI Software and VETRO FiberMap.
Hello and welcome to another episode of the Broadband Bunch. My name’s Pete Pizzutillo, and I am joined by Jeff Heynen from the Dell’Oro Group. Jeff, how are you?
Jeff Heynen:
I’m doing well. How are you, Pete?
Pete Pizzutillo:
I am wonderful. It has been a long two days here at the Fiber Connect 2023 in muggy Orlando, Florida.
Jeff Heynen:
We wouldn’t know. We’re inside.
Pete Pizzutillo:
I know. We’re freezing inside and sweating outside. You’ve been here before, obviously. You’ve been to a bunch of different shows. What are your reactions to the first two days?
Jeff Heynen:
Well, besides running from meeting to meeting every 30 minutes, this morning, getting the waiver rules from the Department of Commerce stole the show for me. Because of some of the announcements and some of the concerns that operators had with respect to Build America products, the waiver introduced the fact that whatever electronic is at either end of the fiber being the OLT or the ONT has to be manufactured or at least assembled here in the US.
So I think the effort here to expand manufacturing and expand the tech know-how to support these upcoming BEAD buildouts really kind of stole the show for me. There are always a lot of new technologies here and a lot of interesting ways to generate revenue for these fiber providers to help them stay sustainable once the buildouts are done. But yeah, I think it’s the larger political and macroeconomic conditions that are really kind of dominating the show conversations for me right now.
Pete Pizzutillo:
Yeah. I think there’s been a lot of better-organized lobbying and awareness from the industry groups. A couple of years ago, there was definitely more of a fragmented industry voice. And I do feel like, to Gary Bolton’s credit and some of the other groups out there, being able to have a more unified front in terms of identifying friction or obstacles that prevent this vision from happening. There’s still a lot to come. Is there anything else that you think is kind of a major obstacle that needs to be tackled or that you think will be tackled soon?
Jeff Heynen:
Well, I understand that this is a very fiber-centric show, but I think we’re going to find that more and more states when it comes to the allocation of BEAD funding relative to the number of unserved and underserved homes have to connect, fiber isn’t going to be available for everybody. And it’s going to cost too much, and it’s going to blow through the allocations that some of the states have been given.
So again, my stance has always been connectivity. This is a connectivity issue of getting everybody connected. It isn’t a technology issue. You’ve got to be willing to use cable, fiber, fixed wireless, and whatever it takes to get people connected because that’s the goal here. So I think we’re going to have to deal with that and continue to deal with some of the repercussions both politically and then, as you mentioned, from a lobbying perspective in the future.
Pete Pizzutillo:
So do you think fixed wireless and cable providers are hindered because of all the money coming to fiber and that there’s kind of that educational process but also a funding disadvantage perhaps?
Jeff Heynen:
I think in some instances, yes. For fixed wireless, obviously, there was a concern that you needed to have access to a licensed spectrum in order to deliver a qualified service, a BEAD-qualified service. And I think that states are going to have to work with the vendors and also with the operators themselves as they look to serve these communities as to what’s realistically going to work. And this goes to the larger question of sustainability for these businesses. We talked about it earlier. There aren’t a trillion people that live here in the US. With all these operators coming in and overbuilding, you have to take rates that are average for the industry, for subscribers, and there aren’t that many subscribers to go around.
Pete Pizzutillo:
It’s interesting because I do feel like there is kind of a pregnant pause, uncertainty happening, or there’s a feeling, right? And we talked a little bit about this. Twelve months ago, there was kind of an overreaction to the funding and overestimation or optimistic estimation to build the business cases to get the funding. And now reality is setting in, and people are kind of clawing back some of those expectations. But also, as people say, the supply chain problem, some people are saying it’s fixed. Some people are saying it’s not, but I think things just take longer. And I feel like there’s an optimistic perspective in there still, but people are saying, “Well, hold on. We need a little bit more time. We need a little bit more time.” What’s that impact overall in your mind?
Jeff Heynen:
Well, so I look at it from the perspective of the equipment that I track, which is the OLTs, ONTs, all the cable broadband equipment, modems, gateways, et cetera. So we’re seeing the impact of this pause right now across the board.
Now, keep in mind that over the last two years, we’ve had phenomenal growth in broadband access equipment and phenomenal amounts of spending to support connectivity levels that haven’t been seen before because of the pandemic. So there was bound to be a pause in the purchasing as operators figured out that they are not adding 300,000 subscribers every quarter anymore. It’s more likely that they are 10,000 or 15,000. And also, they are facing more competition, so there’s more churn. They don’t need to be sitting on 2 million extra ONTs or 2 million cable modems if their net subscriber adds are less than 10,000 or 15,000 per quarter.
So they’re figuring these things out. Again, they’ve moved from having to move as fast as they can in order to support all these new connections, to fighting and scrapping with their competitors to try and get those subscribers and maintain them.
Pete Pizzutillo:
So is this a natural correction in the demand?
Jeff Heynen:
The demand side is natural. It’s been exacerbated by the changes in the supply chain. So these same operators who had become used to purchasing 12 months out are now moving back to a situation where they’re purchasing three months to six months out, which is more normal for them. However, there’s this gap. There’s this gap that now exists. Until that gap is essentially filled, they don’t have to buy as much. And so we’re seeing that reflected in the equipment shipments now.
Pete Pizzutillo:
So there’s no concern or panic we should be thinking about?
Jeff Heynen:
I don’t think it’s a panic. I think it’s just a realization that the boom times of the pandemic have come to an end. And we’re moving back to a more normal rate of business. And people’s memories are short. They may have forgotten what it was like before 2020. So that may be the perception that is causing some of the concern, I think.
Pete Pizzutillo:
Yeah, it’s interesting because I do feel like on top of all that, we drew in all of these Wall Street expectations on these companies’ performance and all this private money coming in with these grossly optimistic returns. There was always talk about how much powder people had left, and now everyone’s kind of clawing back some of that powder. So I think that’s what’s kind of overshadowing this uncertainty. And I think you’re right. If things are just left to work itself out, we’ll get there. People forget. And I think people always said from this industry that this stuff takes a long time. The timeframes are just not realistic.
Jeff Heynen:
And you’re going to throw in the largest government funding effort to support connectivity that we’ve ever seen. And we know from history, that BIP and BTOP, CAF, and CAF II, all projects take much, much longer than the initial timeframes suggest.
Pete Pizzutillo:
Well, it’s five-year funding from BEAD right? So cynical folks like us, or myself at least, are wondering when we are going to realize that we’re not spending the money as wisely as we could have.
Jeff Heynen:
When it’s all over, I guess? I think there are already concerns about that. I was reading today about the initial 20% and how that has to be spent according to some states. And people are saying, “Well, it should be spent on further refining the mapping and taking care of some of those upfront issues,” which I think are valid concerns. There’s still a comment period. There are still people challenging unversed and underserved in certain communities. And it’s not an efficient distribution of the money, and it never will be. There’s no perfect government model.
Pete Pizzutillo:
It’s the fourth different model that we’ve tried to get this money out there.
Jeff Heynen:
Exactly.
Pete Pizzutillo:
Everybody criticized all the other methods. And will the challenge process ever end? Because private money is outpacing public money in some areas. So next year when you get to those places that were unversed or underserved and you got some startup that came out of nowhere, it’s going to be this cascading challenging process, which should be interesting. I don’t know what will happen to the funding after that. Will things get reabsorbed back in there or reallocated? I don’t know.
Jeff Heynen:
Well, look at RDOF, right? We’ve allocated less than 20% of that money. So a lot of it is still sitting out there, and I don’t necessarily know what the status is. And some of these BEAD projects are predicated on the Affordable Connectivity Program being extended. Well, there’s no guarantee of that either. So there are still a lot of variables that are going to have to be reconciled and dealt with over the course of the next five years.
Pete Pizzutillo:
We talked a little bit about the ACP in terms of it being a subsidy, right? And it’s well-intended. There are folks that are of the level that need help, but is it a de-incentive to build affordable systems? So is connectivity the goal, or is affordable connectivity the goal? And I just don’t know if the government has actually tried to figure out how to mandate that process or that objective.
Jeff Heynen:
Yeah, I can only speak from our experience. My wife is a public school kindergarten teacher. And during COVID, when they allocated all this money for the kids to get Chromebooks and get internet access at home through Wi-Fi devices with fixed wireless, the concern was never the availability of those. It was the communication of the availability. So parents didn’t even know that they had this as an option. And these were parents who couldn’t afford to go out and just drop a couple hundred dollars on a Chromebook and an internet connection until somebody told them it was available. And I think the same is true with the ACP. The operators that made that available were required to publicize that you could get a reduced or a subsidized internet connection, but it was fairly buried on a lot of their pages.
So from a regulatory standpoint, the program has to be really enforced well to ensure that every community and all the service providers providing coverage in that community have been communicating the availability of that service. That’ll go a long way to making sure that it actually does what it’s intended to do.
Pete Pizzutillo:
Well, a thought just occurred to me. There has been no talk of satellites since I’ve been here, right?
Jeff Heynen:
Well, it is a fiber show.
Pete Pizzutillo:
Well, yeah, right. Are satellites going to contribute to solving this problem at all?
Jeff Heynen:
To a certain degree. There are going to be very rural remote areas where fiber is going to be cost prohibitive and fixed wireless with license spectrum is also going to be cost prohibitive because there aren’t enough subscribers within that area to justify the cost. And that’s where satellite has a role to play. Certainly, we see satellites very popular in the RV market and mobile internet, that’s where you can go anywhere and you can be sure that you’re going to have an internet connection.
And we’ll also see it outside of the US in Sub-Saharan Africa, places that have never had wired connectivity of any kind before. So it does have a role to play. I’m fairly conservative, I guess, on my estimates of the growth of LEO-based satellite solutions like Starling, but they do have a role to play. And I think ultimately, across the globe, they will end up supporting millions of subscribers.
Pete Pizzutillo:
So if you have enough to buy a quarter-of-a-million-dollar RV, you can get affordable LEO satellite service.
Jeff Heynen:
Exactly. Well, you’ve got to spend $500 on the dish unit anyway, right?
Pete Pizzutillo:
We talk about fixed wireless and satellites. What about cable? I mean, so you go to some of the cable events, and they’re very bullish on DOCSIS 4.0. And they feel like they can deliver. I think the enthusiasm for that has tapered off since last fall, I guess, when they started rolling that out. How do you see cable operators contributing or at least having some obstacles overcome?
Jeff Heynen:
Well, I think that they are going to be very big players in the BEAD allocations. And they’re going to use that for edge-out projects to extend networks where they’re currently serving to areas where they don’t. We see that with Charter Cable. Charter took a lot of RDOF money, plus added in their own additional capital expenditures, to grow their network organically. And I think they’re realistic, like a lot of operators, in saying, that this is an unprecedented time where we can take money to grow our network and grow our homes past, where historically we’ve relied on organic growth in terms of new homes constructed and people moving to generate our subscriber growth.
Well, now we have a much bigger net to address those subscribers. So they’re going to do a lot of that with fiber. But in their existing locations, they’re going to do DOCSIS 4.0. Cable has so many tools in their tool chest, which I think certainly here at the fiber show, people tend to discount. But they’re working on DOCSIS 3.1 high splits now, which they’ll be offering two gig services with 200 megs up. And fairly shortly, they’re going to be rolling out DOCSIS 4.0 modems. Even before the outside plan is upgraded to support full DOCSIS 4.0, they’ll be able to do up to eight gigs has been demonstrated, even over eight gigs, with those DOCSIS 4.0 modems in a DOCSIS 3.1 environment.
So they can be very competitive very quickly and even exceed what a lot of fiber providers are able to offer. And so, I think it’s difficult to discount cable just because of the cost advantage they have in sunk infrastructure and infrastructure that, like fiber, can be upgraded to support the kinds of speeds that residential customers need and want.
Pete Pizzutillo:
So that’s interesting. A lot of us are talking about consolidation happening and what has been happening with some smaller operators getting rolled up. I think some fixed wireless folks are getting picked up by some traditional fiber providers. But does that put cable operators in an acquisition mode right now? If they have to operate fiber anyway, can they go and pick up a near fiber to the premise provider and add it to their portfolio? Do you see any of that happening?
Jeff Heynen:
Yeah, I think we’re going to see more consolidation as time goes on because not all of these ISPs are going to be sustainable as a standalone business. And it’s also a reason why we’re seeing more interest here in the US in open-access networks, which has been, up to this point, purely an international phenomenon.
So people are looking 10 years down the road. And some are saying, “I’m a broadband service provider for these communities, but I could also take that brand name in an ISP-type situation, where somebody else owns the infrastructure. And I can specialize in being the gaming provider.” T-Mobile, I’m sure, is partnering with fiber operators, and open-access wholesalers, to be a fiber provider in those communities where they don’t have fixed wireless or maybe where they do have fixed wireless and they don’t want to lose those customers. If they want to turn to a faster service, hey, stick with T-Mobile.
Pete Pizzutillo:
Yeah. They’re here, actually. I don’t think they were here last year, but I think there are some new operators here, which is pretty interesting.
Jeff Heynen:
And those open-access models, I think that’s going to be very interesting. These joint ventures between AT&T and private equity as well, we’ll see more of those situations as long as the valuations for these networks remain fairly high. They were much higher before. They went through a little bit of a correction themselves. Now they’re starting to tick back up. If there’s value in the infrastructure, then there are going to be people willing to invest in it and expand.
Pete Pizzutillo:
So looking ahead to Fiber Connect 2024, it would be about 12 months into some of the first BEAD money dropping into the marketplace. What are your expectations of what this event looks like next year?
Jeff Heynen:
I think a lot of the panel sessions are going to be about how terrible going through the paperwork process is and actually getting the money and the draws. I think there’s going to be a lot of focus on best practices on how to navigate the system. There’s some of that here this year, but it’ll really come into play once people have had that firsthand experience of trying to deal with it.
Pete Pizzutillo:
So it’s a double-edged sword. So the government’s paying for innovation, but you got to move at the pace of the government’s ability to innovate, right?
Jeff Heynen:
That’s right. That’s right. Yeah. I was on a moderated panel today where we were talking about shortages and locating, permitting, the real really upfront steps that are gates to getting a fiber construction underway. And I still think that’s going to be a big issue. Labor is still going to be a huge issue next year. It’s going to be an even bigger issue because all these projects are going to get green-lighted for funding. And they’re going to be waiting for the crews to be ready to go.
Pete Pizzutillo:
So the ramp-up is coming. But even in a normal case, permitting takes 18 months to two years anyway, right? So I feel that managing the expectations, that it’s not a flat allocation. There’s kind of this slow ramp up and then you get to a critical mass; you break through some of those; and then you get going. All right. Well, thanks for joining us.
Jeff Heynen:
Yeah, thank you for having me.
Pete Pizzutillo:
And where are you off to next?
Jeff Heynen:
Back home to finish my Q2 numbers.
Pete Pizzutillo:
Okay.
Jeff Heynen:
Yeah.
Pete Pizzutillo:
Sounds like fun.
Jeff Heynen:
It is. I enjoy it.
Pete Pizzutillo:
All right. We look forward to hearing what you have to say there. So thanks for joining us at the Broadband Bunch.
Jeff Heynen:
Thank you very much. I appreciate it.
Pete Pizzutillo:
All right, that’ll wrap up another episode of the Broadband Bunch. Thanks for joining us from Fiber Connect 2023.
