Decomissioning: A new route to fiber returns?

By Michael Knott and Gary Taylor

Fiber deployment has underperformed, with promised growth failing to materialize and cleaning up the legacy copper network proving difficult. However, Roland Berger's report reveals that a holistic approach to copper and PSTN decommissioning can deliver significant financial returns, restoring fiber deployment's original promise. The report highlights the economic and carbon benefits of decommissioning, debunking common myths. With 30% IRR and a 30% reduction in carbon emissions, decommissioning is often the most profitable and environmentally impactful opportunity for executives.

Better still, decommission comes with a decarbonisation double act. The ensuing reductions in energy consumption are often the largest single step an operator can take to decarbonise. While the overall reductions in energy consumption can vary depending on the extent of legacy networks, and the mix of the fixed line business vs cloud lines of business, total energy savings of ~30% are common.

Let’s face it, fiber hasn’t exactly worked to plan; the rollout was more expensive than most though, rising interest rates didn’t help, take-up was slow and customers proved less willing to pay a premium (see Fig 1 below). Worse still, as adoption moves from enthusiasts to late majority, consumer appetite seems to be waning. In short, fiber returns are not what we hoped for.

Looking ahead though, in some markets the fiber rollout is coming to a conclusion, bringing with it a new challenge; in a post-copper world, up to 80% of local exchanges become surplus to requirements and suitable for decommissioning .

At many operators this is seen as something of a chore; it requires a multi-year effort, risks disrupting vulnerable customers and delivers no top line growth. For many operators then the temptation is to put decom on a ‘slow burn’. This is an error in our view. In Roland Berger’s work with fixed line operators, the economic returns to decom are so large they can return the fiber case back into positive territory as first promised.

Working with European fixed line operators, Roland Berger have developed several decommissioning business cases. While some variables differ, such as whether the operator owns or rents the exchange buildings, the through-line is clear: one-time decommissioning costs are mostly covered by the one-time gains from selling Copper and legacy PSTN/DSL equipment. This leaves clients free to enjoy the ongoing Opex benefits from reductions in maintenance contracts, property taxes and energy. Depending on details of property ownership, we typically see 30-40% IRRs, even on a 10 year basis with no Terminal Value. Those are rare returns in the telecom industry and are often sufficient to rescue most of the underperformance from the original fiber business cases.

Common myths

Conceptually, some operators already understand many of these points, although that knowledge often exists in pockets of the organisations and is not widely understood. What is more widely understood however are the risks.

In this paper, Roland Berger challenge some of the conventional thinking around fixed line telco decommissioning risks and opportunities. In our view, a more clear-headed view would see operators accelerate their decom programs and allow them to unlock what is often the single biggest opportunity to reduce energy consumption.

• Myth #1: “There’s no top line upside."

- Reality: Telco Service Providers rarely have an opportunity to bring good news to customers, but this is one of them. Consider Telia in Sweden, who used network decom as the catalyst to speak with customers about special incentives such as free trials for streaming TV. Offers such as this make for a positive customer interaction with ARPU upside.

- And streaming TV is just one example. We have seen many others in the B2C space such as cross-selling smart home technology and mesh Wi-Fi upgrades as well as B2B examples such as Microsoft 365 free trials.

- Lesson: Decom is a once-in-a-decade chance to engage with customers and learn more about them. You have a legitimate need to know about their circumstances (for example if they have a home care alarm) which provides an unparalleled opportunity to enter into a consultative selling process.

• Myth #2: “Disturbing customers is dumb – we don’t want churn.”

- Reality: Copper decom is in practice a flight to quality. Consumers who are caught unaware of the changes or weren’t engaged prior to switch-over are normally the ones to churn. But all this is under your control, and those who get ahead of the challenge stand to benefit from competitors who are less proactive.

- Lesson: negative churn is possible for those who are willing to invest in best-in-class customer communications.

• Myth #3: “The Regulator is lukewarm about all this.”

- Reality: In our experience, National Regulators are not lukewarm. They just have a legitimate need to understand the plan for vulnerable customers, but most Governments have signed up to the Paris Agreement, which commits 196 countries (incl. 46 European countries) to limit global warming to below 2 degrees Celsius above pre-industrial levels. Similarly, the European Green Deal sets ambitious targets for making the EU's economy sustainable and to achieve net-zero greenhouse gas emissions by 2050.

- National Regulators understand fixed line operators are key to achieving on these ambitions; IEA estimated that data transmission networks alone consumed ~300 TWh of electricity globally, which is equivalent to ~1.5-2% of electricity use in countries with ubiquitous fixed line networks.

- Fiber optic cables experiences much less resistance than the electrical signals used in copper cables - therefore require less power to transmit data over long distances and have lower carbon footprint in operation. For a 50 Mbps connection, the fibre-based system emits 1.7 tons of CO2-equivalent vs. 2.7 tones of CO2 equivalent from the copper network, representing c. 37% emission reduction.

- Lesson: Regulators are well-positioned to support the transition from copper to fibre networks, as this shift aligns with their environmental and sustainability commitments by significantly reducing direct and indirect energy consumption, carbon emissions and waste. However, there is a need for increased education and awareness among regulatory bodies about the specific benefits and impacts of this transition – which enables regulators to more effectively promote and implement supportive policies.

• Myth #4: "We don’t have any Capex for this.”

- Reality: Cash required to decommission long-lived assets such as Exchanges is covered under IAS 37. The Asset Retirement Obligation on the Balance Sheet means the cash requirement for decommissioning would not normally be considered an expense.

- Lesson: Check with Finance. Likely the costs of network decommission need not impact Capex or EBITDA budgets.

• Myth #5: “We can’t get other telcos to cooperate.”
  

- Reality: Wholesale operators regularly struggle to get LLU operators to cooperate. This can be rational – they are not obliged to help you become more efficient, and oftentimes this is because they mistakenly believe it will dilute their own EBITDA (see Myth 4 above).

- Regulators can be your friend here. They are normally keen to support Net Zero initiatives such as this one (see Myth 3 above) and agreeing a timeline with the Regulator provides comfort to them in terms of how you will support vulnerable customers and provide a foundation for expediting other telco’s cooperation.

- Lesson: LLU operators are not vulnerable customers – they are Capitalists looking after their own best interests, and it is rational for them to obstruct competitors’ efforts to make their business more efficient. Incumbents and wholesalers in other markets have succeeded by being firm but fair - give them notice and stick to it.

Conclusion

Fixed line decommissioning is one of the most complex undertakings an operator can commit to – the challenges across service migration, customer communication, property, equipment decom and process redesign can be intimidating enough.

But with 30% IRR and 30% carbon reductions on the table, decommissioning is often the most lucrative and environmentally important opportunity in front of the executive team. The juice is worth the squeeze.

Operators though sometimes over-index on the risks. By staying pragmatic and using it as an opportunity to get closer to customers, operators can actually see improvements in key metrics such as ARPU or Churn.