by Waltter Kulvik, Partner at Eversheds Sutherland
Spurred by surging interest in AI, recent financial paper headlines have primarily focused on the exponential growth in demand for data centre capacity and investment. In turn, data users, telcos, and infrastructure investors have increasingly been turning their attention to the fibre backbones through which all the data will need to travel.
The numbers go a long way to explain the emerging interest – for subsea fibre alone, the market is expected to grow from $20 billion of revenues in 2023 to over $67 billion by 2033. While the numbers are certainly attractive, they only tell part of the story, with many challenges facing any new market entrant. The fibre industry has not been immune to the wider economics shocks, with supply chain, inflation, and increasing interest rates raising the cost of virtually every facet of the industry. With the higher cost of construction and financing, traditional ‘simple’ fibre investments in the fibre-to-the-home (FTTH) space have become less attractive to investors. Instead, the market for chasing the “selective” attractive deals has an ever-increasing pool of suitors.
While the European Union’s liberalised views on telecoms M&A is likely to bring some further consolidation opportunities in the FTTH space, an increasing number of investors are being drawn towards opportunities in development of larger and longer scale fibre infrastructure, in particular with a view to grabbing a piece of the international and emerging markets connectivity boom.
Barriers to entry
The struggle facing new entrants is that the barriers to entry are as high as they are complex. Much of the flurry of activity over recent years in this space has been dominated by hyperscalers and telcos. While highly capable in executing large new projects (and often doing so off balance sheet), they themselves admit they are far from immune from the problems facing the industry. Designing routs that will manage geopolitical risk and arranging landing parties in the right locations is just the tip of the iceberg.
One of the most interesting challenges starting to form is the rise of cables and consortiums with infrastructure investors who both need to finance the construction and to tightly control capex. Unlike more traditional fibre players, they have no wider business (cloud computing, data centres, traditional telco, etc.) to help support and offset the financial risk if things do not go to plan, as such there is far less uncertainty and change that can be accommodated to ensure a new cable is financially viable. Added to this is the shift in the balance of power between customer and cable suppliers/manufacturers, where the severe constraints on availability (in particular, for vessels in the subsea space) is resulting in suppliers pushing more of the construction risk to be shared by the customer.
Engineering the right teams
The key to facing many of the challenges will be building teams with a depth of understanding and expertise in the space, ranging from technical to contracting. As with anything in the fibre development space, this will be fraught with its own challenges in an industry where there is already a dearth of manpower to meet current demand.
For new entrants who are willing to invest into building their understanding of the market and opportunity while accepting this takes time and that there are no real shortcuts, the rewards at the crest of the wave remain viable even through a harder economy. For others the dream of simple, safe, long-term returns is likely to be a washout.
If you want to learn more from Waltter and Eversheds Sutherland, he will be speaking on a panel focussed on ‘Strategic Mergers & Acquisitions, Private Capital, and Innovation’ at this year’s Total Telecom Congress – Get your tickets today