In this episode, we're joined by Andrej Danis, Partner and Managing Director at AlixPartners, live from the Broadband Nation Expo. As a top-tier consultancy, AlixPartners excels in navigating market disruptions, especially in the rapidly evolving fiber industry. With over 93% of executives anticipating significant consolidation in the next 12 to 24 months, the stakes have never been higher. Andrej shares insights from their latest survey on fiber subscribers, revealing critical trends that could reshape the market.
We'll explore the factors driving this consolidation, including rising capital costs that have left many business models in flux. What does this mean for current players in the industry? Andrej emphasizes the importance of strategic planning—companies must decide whether they want to be buyers or sellers in this shifting landscape. We also discuss the operational challenges ISPs face, from permitting issues to workforce deployment, and how these factors could impact private equity's entry into the market.
Don’t miss this engaging conversation that highlights the need for preparation and adaptability in the broadband sector. Tune in to learn how to navigate these turbulent waters!
Alejandro Piñero:
All right. Welcome, everyone here from Broadband Nation Expo. My name is Alejandro Piñero, and we're here with yet another great voice that joins us at the event, Andrej Danis. You are partner and managing director AlixPartners. Welcome, and thanks so much for joining us to talk a little bit about what you guys are seeing in the industry.
Andrej Danis:
Thank you. And really, AlixPartners is a top tier consultancy, which thrives in the area of disruption and market changes. And that's what we see really today in the fiber business. And that's why we come even here. And I saw even the interesting commentary where it was Fierce Wireless before, now it becomes Fierce Broadband because we are talking more about broadband. And that's what we'll be also speaking today, because we just completed a survey across fiber cost subscribers and really shaped a playbook based on the work we have been seeing from our clients, which are asking us more and more to help navigate the new normal.
Alejandro Piñero:
And so I want to ask a little bit about what you're seeing because you mentioned there about the work that you do. You were kind enough to share your recently published report on the state of fiber, if you will. So I wanted to start top level. What are some of the key trends? What's the outlook we're seeing as an industry? It's a pivotal time, a lot of funding coming in, but also a lot of work to be done. So I'm sure there's some interesting outtakes from that.
Andrej Danis:
Absolutely. And the key element, what we see is that 93% of executives that we surveyed agree that the consolidation is incoming or now. So literally, we see that all the next 12 to 24 months, we'll see a huge consolidation in this industry because there are almost 400 fiber companies, which are already today privately owned. So this is a highly interesting segregated industry which needs to be consolidated. And why is it happening now? You would ask what is so different? Well, the situation changed when the cost of capital suddenly started going up because suddenly all of the business cases which were developed, stopped making sense and are starting to see that a challenge in the business. So what needs to happen is really all of these companies need to decide what they want to do, because today you don't know who the winners or losers will be. The one is clear. You will see a lot of buyers and sellers.
Alejandro Piñero:
So what's driving this then? And what are the timelines you're seeing? Obviously with BEAD, we'll start seeing some build-outs over the next year or two. Will that be then the point where you'll see greater M&A activity or do you already see a more imminent process already underway?
Andrej Danis:
Just looking at the news that I read on your news, we already see a way more active market, but there will be even more incoming. And you see a lot of rumbling in the market where companies are trying to sell, but they don't get the multiples anymore because the sellers... because the buyers are starting to think about it. So that's what is kind of becoming a new normal of, I want to start... I want to sell, but I'm not finding the success. And that will come to a realignment where the multiples at some point start to get down. And I would say the buying becomes more attractive. And that kind of drives what a company needs to do today. And the success of the company will be to decide today if they want to be a buyer in this space or a seller, because not having a strategy will just lead immediately to a disaster a few years down the road because you need to have your midterm plan.
So what does a seller need to do to be successful? Well, step number one, they need to understand their cash runway. Because the worst thing, what can happen is if one or two years down the line they become distressed or need of cash. So the focus needs to be, what is my cash runway? How do I drive profitability? Because to enable it, I need to be profitable. I cannot be just spending money on rollouts. How do I maximize the value out of the money I have left? And last one, think of if I want to be bought that my network, which is the biggest integration issue, is set up to be able to be bought. So sometimes saving on network may be the exactly wrong topic where you want to save on, but that transforms into the challenges for the seller because what does a seller need to do?
We're different. Their story is about how do I drive value fast and how can I create an engine to acquire more or more of these companies without myself getting distressed? That's why we call it almost like you need to move from integration into assimilation because assimilation is about doing it fast and aggressive, but there is some homework before. So what do you need to do as a homework? Set up your systems right. That means that you can incept data from other systems relatively fast. So you need systems that can incept it fast so you can really shed off all the old ERP, CRMs as much as you can so that you are not burdened by it. Second, you need to have processes set up that you can scale because you are building it for the future. So if you don't, you will end up with end up just extending your SGNA beyond normal.
And the third one, which is critical, and we see it now in multiple projects, build a solid monetization engine. Why? Because what you buy is not just customers. You buy access to households and many of those fibercos will have a 15, 20, 25% penetration. If you have a superior monetization engine built of customized messaging that you can really play the channels as a fiddle and not just throw everywhere door knockers who cost you arm and leg. If you can personalize the messages at scale, you will drive adoption on those new households and that feeds your engine to be able to acquire more because those customers generate your additional funding via ABS.
Alejandro Piñero:
Yeah. Well, it's certainly a lot of homework, Andrej, for these folks. Let me also... So you mentioned there's the network being in a position where it is built to be integrated. I wanted to also touch on more of that operational side, which you do cover in the report. And some things are frankly out of the control of these ISPs. It can be issues with permitting or issues with access, or even the workforce element being able to deploy quickly enough. Do you see those as an impediment to private equity entering? Is that a concern? And also as we look ahead towards that, all what you've been talking about here in terms of M&A and investment, is there a concern? Do we need to address these issues? And if so, how can we do that?
Andrej Danis:
Absolutely. It's almost like a whole new can of worms. And let's say we had already... some companies have the [inaudible 00:08:05] topic, they have been awarded subsidies, haven't billed out. What happens now? Will they be penalized? Will they get a relief? Now think about the next level we get BEAD. BEAD is almost like a hedge where you are getting money to build out cheaper, but if you underestimate your calculations or you don't get already by design offer very discounted rates, just win it. Will you really be profitable or will you get distressed? I see actually a lot of these as an accelerator for consolidation on one side that overzealous companies will go for them and will not deliver. And second of all, we'll get into challenge that companies will... the lenders will start questioning anything what is related to these subsidies that what is your runway if I don't get it? What is my interim financing? Because I need to start building and then I will get the money and do I have really a structure that I can deal with it?
And the last one is, will I have even audited systems and setup that I can apply for some of these fundings? So will I be almost, I would call it industry-grade enough to get it? So those will for me act as accelerators of this consolidation, but in a very different sense, not necessarily as just increasing the value, but very much pushing everyone to create a stronger infrastructure companies that can really service the customers. Because after all, the one element, we shouldn't forget, all of this is designed to connect the people because it is all about connecting the people you don't want that someone spends money just to put in that fiber into the ground without being lit up, which cannot be sold and has a huge integration issues. So these are the things that even the regulators should start looking at of how to award and how to ensure that I deliver the connectivity to the people I need.
Alejandro Piñero:
Yeah, no, that's great. And I think that makes a lot of sense and very important considerations there as we move into these critical deployment stages because as you said, we have that history there of not being able to deliver on the promise of some of this funding. So certainly something to think about as we move into deployment.
Andrej Danis:
Absolutely. And really the comment is, it is really about being prepared. That's what we see from all of the stakeholders that we need to get ready, get prepared, and set up yourself today for your future. And that includes all of the constituents we just mentioned. It's the buyers, the sellers, the private equities, the lenders, and the regulators, because that's the ecosystem that really drives the success.
Alejandro Piñero:
Excellent. Well, Andrej, we're just about out of time, but want to thank you for sitting down with us and talking us through some of your thoughts on the outlook for our broadband industry and something that folks can learn more about with AlixPartners and all the work you do. Thank you so much.