When I spoke about the Law of Infrastructure Returns, while I was in Capacity Middle East 2012, last month, I was not sure if the telecom industry decision makers were aware of the the not so talked about underlying principles around telecom infrastructure investments.
Telecom Infrastructure is a very complex case for business modeling, as unlike a typical business, where there is a fairly direct relationships of returns to the investments made and to the value created, In in Telecom world, as we are will agree, it is extremely fragmented. Fragmented by regulations, infrastructure availability, seamlessness of policies, governmental and corporate participation, mono-dua-trio polys , entry barriers, level playing field, discrimination, lobbying et al
Because of these elements and forces, over the years some very distinct trends have emerged in telecom infrastructure investments and returns.
Broadly , telecom infrastructure can be divided into 3 distinct categories:
a) Wet Segment or Subsea/Submarine,
b) Backhaul or Land Segment
c) Last Mile or Access Segment
If the investments per megabit of bandwidth is compared over the 3 categories, one would see a magic ration of 1:3:10, a STM1 kilometer costs $1 in wetsegment , it would cost $3-$5 on the Backhaul segment and around $10-$15 on the Last Mile segment.
Surprisingly, on the returns side, a similar magic ratio holds true.
If there is a standalone , unbundled price for each of the segments a) b) c) then the returns ( market price) will be in similar or more stretched ratio. Have seen in some markets 1:5:15
There is a methods to this madness:
1. Why are Wet segments costs/sells at a fraction of the other 3 ? Simple logic, since Wet Segments are more often then other are in not governed by any country or state, hence
a. no regulatory shelter for telecom operators to lobby behind
b. no regulatory restrictions for restricting partnerships
2. Why are Backhaul Segments costlier then Wet Segments?
a. If a Wet Segment has to land, it has to land on a beach. Beach properties are expensive , even if designated by government , like in Hongkong, . So general cost and barriers for landing points escalates costs.
b. Municipalities & Government charges for RoW ( Right of Way) can very opportunistic. Places like Mumbai & Singapore can be as high as $240,000 per km just for RoW.
c. Then the same reason why Wet Segments are at a fraction: lack of partnership within a country or state, blessed by regulatory policies and local nuances.
3. Why are Last Mile costliest?
a. Last Mile is the interface, where the value of telecommunication is delivered, so it deserves to be costly.
b. And again, lack of ducts, clear governmental policies, regulatory policies, stealth monopoly practices by existing players
c. But to be fair, it costs a lot more to do a STM1 Km of last mile then any other piece of telecom infrastructure.
As long as telecom leadership, keep themselves in harmony with this Law, they can avoid heartaches, when they find that the actual vs projection is off because they are off by miles, as they had not applied this law in their business case. And then to hide this, builds a business case to put some fiber on the ground ( backhaul) to capture some of the ‘escaping revenue’ , only to find that still 70% of the returns is in the Access Segment. And I don’t see much of partnership happening there in the medium term to enable the efficiencies to go up and costs down.