Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast where the world of emerging tech lives. I'm your host, Eric Hanselman, Chief Analyst for Technology, Media and Telecom at S&P Global Market Intelligence. And today, we're going to be discussing the fiber optic market. And to discuss it with me, I've got 2 guests from our Kagan team, Natalie Colakides and Mohammed Hamza. Welcome to the podcast. Well, actually, I guess, Natalie, welcome, and Moh, welcome back.

Natalie Colakides

Thanks, Eric. Thanks for having us.

Mohammed Hamza

Thanks, Eric. Looking forward to an interesting conversation.

Eric Hanselman

Well, and we've talked a lot about interconnection in different ways. Of course, all of the general enthusiasm about what's been going on with wireless connectivity and all the rest of it. But the fundamental interconnection technology, the real thing that is the backbone of environments, the high-capacity capability is all of the fiber that's out there. And you both cover the fiber market.

Eric Hanselman

So I guess before we go too far down the road, if you could just give our listeners a little bit of background about some of the market, the dynamics and your take on really what's happening in the markets today.

Natalie Colakides

Yes, sure. I can take that. So basically, especially since COVID, we've seen like a high demand for ultrafast broadband and that has surged amount -- a big amount of investments in order to build that last mile of fiberoptic to the home. And that's the most costly part of building out fiber. The dark fiber, which is the backbone is already available, but that last mile has been the challenge in most markets. But that's also what you need to get those really fast broadband speeds of above 500 Mbps, for example, to your home.

Eric Hanselman

We were just talking to Justin Nielson and John Fletcher about some of the challenges in some of that last mile. We were talking about the U.S. market, but of course, in international markets, that can be even more challenging, just in terms of both urban density, as you pointed out, Natalie, the cost that's involved. There are a whole set of things that can stand in the way, not the least of which are, in many cases, regulatory constraints. Even though there can be regulatory incentives or legislative incentives to move this forward, the regulatory piece can be a challenge on top of that.

Mohammed Hamza

Yes, absolutely. And there's -- I mean, there's a plethora of issues potentially. I mean there's a lot of different working parts to fiber to get the most effective investment, if you like, per home. If we go back 3, 4, 5 years and before that even, the cost of building fiber per home was easily over EUR 2,000/GBP 2000 kind of level to what it is now in places like the U.K., anything between GBP 500 to GBP 700 within probably more of the urban areas and the rural areas.

But the regulation acts as a key enabler because it provides things like regulated access to groundworks, to ducts and pipes and poles and things like that. Beyond that, there is the kind of administrative part, which is also critical. So we've seen in places like Germany, for instance, where a huge amount of paperwork and bureaucracies involved in getting fiber works approved. So the regulation is absolutely critical in getting things moving. All the while that kind of impedes, especially the smaller players in the market that require that access more than the incumbents or existing network owners, if you like. So yes, that regulatory part is critical for sure.

Eric Hanselman

Well, we talk about investment in spectrum for wireless, but take a look at fiber, I mean we're really talking about a much more fundamental direct investment in the build-out in the direct cost to actually reach new subscribers, new locations. There's that whole question of do you have access, how far can you take it, and again, to your point, being able to actually get that last mile connectivity can really be particularly challenging.

I guess one of the things that seems to -- in the fiber market to really make this a much more direct consideration about what that investment looks like, what the return is, and for providers, what that calculus is that they're actually working to decide on investment. Although, again, as we look to do things like increase access, bridge the digital divide, there are a lot of overarching social incentives to make that happen. But yes, that's got to be balanced with the economic side of things.

Natalie Colakides

That's where regulation also comes in to also secure competition because within urban cities without -- like with the lack of competition, you would have monopolies. But in rural areas, if you're not securing that -- the investors, then you're limiting their own profit margins. So that actually disincentivizes operators from building out and bridging that digital divide. I think they are still leaving those so-called white areas, which are the remote areas, isolated and uninvested.

Eric Hanselman

And so we've got regulatory incentives to try and push that. I know in the U.S., things like the BEAD initiative. And if we look globally, there certainly are strong incentives to try and balance some of that. But it really is this very careful mixing of incentives to ensure that, that really starts to make sense for both the providers and those that the subscribers they are serving.

Mohammed Hamza

I think especially on the rural side for sure, the urban kind of setting is completely different because the returns -- the margins on rolling out in greenfield areas are much harder to kind of attain in terms of establishing some kind of profitability over a time period, and we're looking probably at least 10 years.

And in those greenfield areas, the take-up can be much harder as well, so where you might see 40%, 50%, 60% take-up rates in cities. You might see half of that in some of the rural areas. And that comes down partly because to the fact that in a lot of the rural areas, it's normally the known kind of established network owners that are taking the initiative in terms of rolling out fiber. And so you get these smaller players that are not known, untrusted brands, if you like, that people aren't used to.

And so it can be a lot harder to kind of, one, roll out rurally, but also to kind of market the product in rural areas as well. So, yes, the cost factor is a big issue in terms of determining future profitability. And then there's a lot of things that are happening at the moment around that don't help, and it goes back to regulation, and it goes back to kind of overbuilding as well.

Eric Hanselman

Well, and that's one of those challenges, I think, because Natalie, to your point, with the pandemic push, suddenly, there was a massive focus on remote connectivity. Everybody needed high-performance capacity at home. We were all working remotely, and that was what was needed.

We've now started to see at least a moderate return to office and a shift to that dynamic. But that's also, I think, maybe highlighted some of those contrasts because, again, now we are back in a world in which we need at least sufficient connectivity. The question, of course, now is who's going to continue to pay for those ongoing capabilities and the capacity, but we've got other market drivers that are in play as well.

The 5G build-out, of course, needs fiber infrastructure to be able to build capacity. We talk about using things like fixed wireless in remote locations. But you still have to have capacity to get to the base stations, it's going to be sufficient to manage it. So we still have got such a strong dependence on that back-end fiber to make sure that those connections all run in those environments as well. It sounds like that makes the markets themselves relatively complex to understand and at least identify what some of the fundamental drivers are. I'm curious about your takes on what those -- how those have shifted and how you see those changes going forward.

Natalie Colakides

I think each market is very different, especially in Europe. It depends on the maturity levels. Like, for example, we have Spain who built out fiber way back when -- I mean, now I think about 90% of households can have fiber to the home. And even though they subscribe to fiber, they won't necessarily subscribe to those fast speeds because they've learned of the reliability of fiber, and that's why they need it. But at the same time, that 1 to 10 giga bps that people have started advertising, that's not something that households need.

So that take-up rate is a lot lower that minimizes the profit margin, so to speak, for each telco. But then we see markets such as like Denmark or Germany where penetration for fiber-to-the-home is a lot lower, but take-up rate is actually a lot higher in comparison. And that's because they were used to a lot lower broadband feeds.

Eric Hanselman

So you've got this -- the ubiquity of access. And we see it in other markets, especially in Asian markets where home passings and fiber-to-the-home are relatively high. And yet there is that -- I guess there's the expectation, and of course, people want the fastest, the best they could possibly get. And the reality is that, in fact, people can be perfectly happy with not getting the absolutely zippiest connections possible, especially if it's got good performance, low latency that you get with fiber, a set of things that stand together to make that market dynamic much more complicated.

Mohammed Hamza

Yes. And the speed thing is one of those kind of inherent problems with fiber in a sense that to convince consumers to upgrade from relatively fast DSL speeds that they might be happy with to fiber, but it's the network stability that ultimately makes the biggest difference. And fiber is vastly more stable than DSL copper services everywhere or even cable HFC networks. And that makes a big kind of cost impact on operators having to deal with callouts and customer service calls and things like that.

But I think in general, the consumer issue for me is one of pricing and the kind of macroeconomic environment. So if you're looking at the cost of fiber within the context of high inflation, like how much more can you charge people for these products? And that's a big kind of current issue in the markets at the moment. And so in a lot of markets in Europe, you do see fiber pricing pretty much on a par with DSL, and that kind of helps to incentivize people.

But then you have kind of almost forceable migrations that happen when operators reach a certain level of fiber take-up in an area they might just switch that network off and just migrate everyone to fiber automatically. So the inflationary part of it is for certainly a massive issue for consumers. If you go back a few years, fiber was way too expensive. Now it's much more affordable, but getting the marketing is -- right is probably the hardest part for operators these days, especially given some markets where they had historic kind of rollout of much faster kind of DSL services via VDSL and fiber to the cabinet. And those were kind of marketed as being fiber connections over the last 10 years or so. So that skews the market as well.

Eric Hanselman

Well, it sounds like there's -- the good news is that you've now got a stable base of your network plant. The bad news is you don't have the revolutionary improvements to be able to market to consumers because the step from DSL level service into fiber, suddenly you're a lot more reliable, you've got more capacity. But then how do you make that next step? What's the -- how do you put sufficient value into that from marketing perspective to get people to take that next step upward? That seems like that starts to be a little more challenging.

Natalie Colakides

Yes. I think a key step to that or one is pushing for copper switch-off, which we've seen like in Spain and helped a lot with fiber take-up. But in terms of marketing, it's more about education. It's about advertising the benefits of fiber versus DSL, which like in the U.K., they used to advertise fiber to the home, it was actually fiber to the curb, for example, and you weren't getting the speeds you were promised. And that image needs to change basically.

Eric Hanselman

It seems like so much -- so often we get early-stage deployments. We get overpromise that happens, and they'll identify 5G and that certain amount of 5G malaise, everybody got 5G. It was suddenly going to revolutionize everything. And yes, it was kind of faster, but there wasn't that -- yes, there wasn't all of the supporting infrastructure in terms of services that actually leverage those speeds to be able to actually take advantage of it.

Now, of course, I think everyone has gotten accustomed to the kinds of speeds you can get on higher performance networks and just going from a 4 to a 5 is no longer the big motivation. It's that next stage of really helping people understand what they can do with it. And again, so often, that challenge is finding that, that application that's really going to drive usage.

Yes, with wireless, we had increasing app markets. When we start looking at fiber, especially consumer-level fiber, that winds up being something that being able to identify those key applications, it seems like it's been a lot harder to communicate for the operators. And again, not that the operators have always been amazing marketers of their services in the broader sense.

Mohammed Hamza

I think it's a lot simpler than that, actually, Eric. I mean, I know we're always looking for that kind of killer app, and we've been talking about that for decades. But I think the characteristics of fiber are more important. So I think if you marketed the stability and the surety, if you like, of that connection, playing on people's frustrations potentially with previous platforms, I think that would go quite a long way to helping educate people as to the benefits of fiber.

There's also an issue in terms of being able to get people to swap out, if you like, existing connections. I mean if you generally look at fiber within the digital infrastructure space or just within the infrastructure space, it's one of those areas where there's a lot of competition for fiber, right? You have cable, you have DSL, you have fixed wireless, you have satellite. You have kind of existing connectivity that people have. You don't get that necessarily with other infrastructures. The migration is much smoother, and it's much more clear. And I think fiber has to contend with all of that on top of the issues that we've already talked about.

Eric Hanselman

I guess it's one of those things where in the commercial markets, fiber, of course, is the one, the only, the high-performance interconnect, but it's in the consumer markets where there's been that much greater challenge in terms of managing what that transition is in terms of broadband infrastructure.

Do you feel -- I'm just wondering whether or not there are commercial aspects that start to help drive this. I mean, of course, core backbones, commercial business drives investment in the backbone. But, yes, I think as you're both pointing out, it's building that last mile and the actual access networks that are the hard part.

Natalie Colakides

I mean I can tell you my big benefit, and that's that you have a symmetric upload and download that you don't have with DSL and you don't get those speeds. So with video calls and stuff like that, it's helped a lot.

Eric Hanselman

Well, and I guess in the age of video, as there's more and more -- as you look at that consumer demand depending much more on upload, there's significant benefit there. I guess, is that something where there's enough consumer understanding about what that benefit is?

Natalie Colakides

I think the demand will create itself, like you're kind of future-proofing at the same time because each home has more and more devices connected to the home, which means you're going to need more bandwidth eventually. It's just that consumers don't realize that today. Like today, you will have your phone, laptop and TV, so to speak, whereas you're increasing that. You have smart homes. You have your smart meters, your like more TV sets, all of that increases your need for bandwidth.

Eric Hanselman

So my fridge is starting to really consume...

Natalie Colakides

My mom bought a smart washing machine. I don't know what she's going to do with it. She bought it.

Eric Hanselman

Actually, your mother gets back to my thought about the -- maybe there's not a killer app, but in fact, it is that there are enough connected things and that they have enough benefit. And oh, by the way, why does my TikTok video take so long to upload? Those kinds of things that start to creep into the consumer consciousness.

And, Natalie, I think to your point, it's bridging that gap between consumer understanding of, oh, this is what I could get from that. I'm going to be translating that. And again, it seems like it gets back to the operator's ability to communicate that. And in as many cases, you got to establish value to move those markets.

Mohammed Hamza

Yes. And I think -- I mean, many of the operators are kind of most of the way there in terms of today's societies are relatively well educated on kind of Internet services, if you like. But I do agree, it's down to kind of the -- what fiber enables rather than one specific thing. It's a whole host of things. It's everything that we do. You look at the growth in kind of work from home, that becomes a critical factor as well.

So yes, absolutely, there's always something that's going to justify fiber more than something else. But ultimately, it's all of the devices and all of the services that we're using from kind of streaming TV these days, which is even with the current technologies that we have behind streaming, everything from kind of the streaming protocols to the CDNs and -- those things are now enabled at much lower speeds. You can get HD and 4K at 20 meg and lower in most cases. So I think it is about kind of shouting out on the comprehensiveness of fiber and supporting multiple devices with multiple tenants in a home.

Eric Hanselman

And it's just a matter of that increasing digital density on the home environment that starts to push us forward. I keep thinking, hey, maybe generative AI is going to get us there because that's the answer to everything, right?

Mohammed Hamza

Yes. And then the GenAI thing is -- could be as much of a bubble as what we've seen with digital infrastructure in the past.

Eric Hanselman

Bubble. Bubble, Moh, GenAI, how could you possibly say that about GenAI?

Mohammed Hamza

Well, it's one bubble after the next, right? 5G and fiber and AI and everything is overhyped ultimately, right? And then I think that doesn't help kind of learning to walk before running is kind of the important thing. But there's always a massive clamor in these markets to get investing, if you like, and be first to market.

Eric Hanselman

Well, it's -- but I think Natalie gets back to your point, it is that incremental increase in digital utilization. And maybe we get a bump every so often from our next digital assistants or what have you. But if I start to get to the point where it takes me a lot longer to order milk from my fridge, maybe I'll [indiscernible] capacity that I've got. Who knows? Well, I guess, are there thoughts that either you have about where the markets are headed? I guess, continued build-out? Or what's your take on what we should be looking for?

Natalie Colakides

I think we're seeing a little bit of a slowdown in build-out in Europe specifically just because you had a massive influx of money between '21 and '22, and then, they weren't seeing that take-up in that profit that they wanted. So now they're pushing more in terms of subscribers, like telcos actually taking up clients rather than connecting the homes because, otherwise, they're just not giving the investors the return that they were expecting initially.

Eric Hanselman

So a little retrenching as they look to at least sweat the assets that they have currently.

Natalie Colakides

Yes. But in mature markets like Greece, for example, you'll see that they're promising like 3x the amount of households like in terms of connections. And you'll see -- still see like a massive amount of money going in. And we're just waiting to see how much of that is actually going to materialize.

Eric Hanselman

That's often the way.

Mohammed Hamza

I would add. I mean, I think there's a big kind of cloud hanging over the economy at the moment. I mean you saw what happened just yesterday in the U.S. and the effect that had on global markets. And we've had a kind of sustained period of interest rate increases and inflation, and that has an impact across the whole ecosystem. So you're looking at the cost of borrowing, the cost of those fiber investments and being able to manage those costs when you're not getting the take-up that you need. It's a real, real struggle here. Bear fiber prices, and silicon prices have gone up by 50% to 70% just in the last 2, 3 years.

So the cost of deployment has an impact, especially on the smaller providers. Vendors start to prioritize the bigger operators, and the smaller ones suffer. So we've seen quite a lot of M&A take place in the U.K., where we had a huge amount of overbuild and promised investments, if you like. So I think that should help to kind of equalize the market a little bit, but cost remains, I think, the biggest kind of barrier to deployment.

And again, we go back to kind of how regulation can have an impact on that and ease that environment. But it also takes some sense from the companies that are borrowing and investing in fiber to look beyond that 10-year marker for a return. If you're looking for short-term returns on fiber, then you're highly unlikely to get it. And so I think that perspective is important in terms of being able to feasibly drive fiber in the right way and continue pushing the rate that we've seen recently.

The last few kind of unfibered markets like Greece and Germany to an extent are starting to pick up in terms of investments, but you still see that crazy clamor of too many investors, too many plans and maybe those plans aren't always fully appreciative of the risks in the market.

Eric Hanselman

Well, so I'll go for the easy pun on this, which is that the market could see a little retrenchment.

Mohammed Hamza

Yes.

Eric Hanselman

Well, interesting. Again, so many things that we see across tech markets in general. We get through that hype cycle. We -- people get a little bit ahead of themselves, and then, reality settles in. And it sounds like maybe we're back in that stage right now of both managing consumer sentiment piece, managing the operator investment portfolios, and seeing where that starts to shake out. But I guess we'll have to keep an eye on things as we go forward.

Well, thank you both for all your perspectives. This has been great.

Mohammed Hamza

Pleasure. Thank you, Eric. It was great to be here.

Natalie Colakides

Thanks, Eric, for having us.

Eric Hanselman

Great to have you both on. And I will point our listeners to a set of webinars actually at the point at which this podcast happens to come out, you will have just completed one. You got another one that's coming up. Can you give our listeners a little bit of perspective about what they should be looking for there?

Natalie Colakides

Yes, sure. So we have one webinar coming out, I think it's on August 7, that is focused on digital infrastructure in Latin America. And then we have another one in the beginning of September focusing on Western Europe.

Eric Hanselman

That's great. All right. Well, make sure that there are links in the show notes for those, and we'll let our listeners know about those as well.

But that is it for this episode of Next in Tech. Thanks to our audience for staying with us. And thanks to our production team, including Sophie Carr and Feranmi Adeoshun on the Marketing and Events team and our agency partner, the 199.

I hope you'll join us for our next episode where we're going to be talking about the evaluation of total available markets, how do you look at market sizing, whether or not that happens to be something like fiber, various other tech aspects. I hope you'll join us then because there is always something next in tech.