Fiber Optic Infrastructure: A Connection Is Made

Key Takeaways:

• High-speed internet connections are essential to modern life. Fiber optic cable provides the fastest, most reliable connection.   
• The installation of fiber is increasing as consumers demand faster service and governments aim to bridge the digital divide.
• Fiber investments are complex, and we think it is important to manage both construction risk and customer acquisition risk with an approach tailored specifically for each individual geography.
• In a recent deal with Telecom Italia, we accessed an incumbent broadband asset through a complex corporate carveout. The investment comes with a large existing customer base that currently accesses internet through copper wires. We think these attributes, as well as a first-mover advantage in the region, exemplify several things we look for in fiber investments. 

High-speed internet connections are a modern-day utility that help people access education, health care, job opportunities, entertainment and run digital-first businesses. U.S. consumers averaged 21 connected devices per household, according to Deloitte.¹ As a greater amount of data moves over networks, the strength and reliability of these connections is increasingly important. Yet, the infrastructure that supports connectivity is largely out of sight and out of mind. 

The fastest and most reliable internet connection is through fiber optic cable, which moves data at the speed of light through a unique, dedicated line to each customer. When interest in fiber connections first started to build in the 2010s, it wasn’t immediately clear to the investment community that the assets were truly “infrastructure”. However, we saw a hard asset providing an essential service, plus a superior technology protected by the laws of physics and supported by a structural shift in user demand. We were early investors and to date the infrastructure assets we have invested in have “passed” over some 25 million homes and businesses, meaning that these users can connect to fiber if they choose.

Fiber assets require large amounts of capex and are hard to replicate once built. Building such networks requires significant construction and regulatory expertise, and operators must ensure that enough customers sign up for the service to recoup capital and earn an appropriate return. While every investment is different, we think it is critical to carefully consider risks and structure investments to include multiple ways to win.

What’s Driving the Growth in Fiber?

Two existing ways that many people access the internet—copper telephone wires repurposed for the internet and coaxial cables that provide both cable television and internet— are pushing up against constraints related to capacity (the amount of data they can send and receive), latency (the delay in transferring information), and resiliency (the ability to maintain service over long periods of time). While satellites and cell towers can also provide high-speed internet, they are not as fast or consistent as fiber and have lower capacity.

We think the long-term growth potential for fiber is significant (Exhibit 1), given the technological limitations of all other wireless and wireline technologies. In the United States, fiber infrastructure has grown rapidly over the past several years as household data usage continues to surge, displacing both legacy copper and cable technologies deployed widely across the country. In Western Europe, the transition to fiber has been uneven, starting years ago in places like Spain but just beginning in places like Italy. Unlike the United States, however, fiber is usually replacing copper lines directly, given Italy has no cable infrastructure. Latin America has the fastest trajectory, as national governments have been working to close the digital divide with the help of private capital. We have been substantial contributors to this trend, having invested significantly in a partnership with Spanish telecom company Telefonica to build out fiber-to-the-home networks in Colombia and Chile, for example.

EXHIBIT 1: Fiber Expected to Grow Significantly

Government support for extending high-speed internet, particularly in rural and underserved areas is common across all three regions. A study in the United States by the U.S. Federal Reserve Bank of Richmond suggested that higher rates of broadband access in rural areas led to increased job and population growth, higher rates of new business formation and home values, and lower unemployment rates.² Children often need internet access to complete their schoolwork or access educational resources, while adults who don’t have high-speed internet access may be at a disadvantage both in finding jobs and having the tools to do those jobs. Access to high-speed internet also enables telehealth visits that may be particularly important in rural areas. 

One of our most recently announced investments tackles the “last mile” digital gap in the United States. KKR initially invested in Metronet, the fastest growing pure play fiber company in the country, in 2021 in a minority position.  Metronet has since more than doubled its infrastructure footprint, passing 2 million homes and businesses across 17 states. Earlier this year, we announced our full acquisition of the company in an innovative corporate partnership with T-Mobile USA, one of the leading wireless carriers in the United States.  With T-Mobile’s partnership and support, we are very excited to help Metronet accelerate its mission to bring fiber broadband access to several million more households across the United States by the end of the decade. 

Fiber Investments: What We Look For

Building a fiber business has two key components. The first is constructing the underground network. The second is marketing fiber to residents and businesses. When investing in this space, we seek to mitigate both building risks and customer uptake risks to preserve investors’ capital. Our first European fiber investment, Deutsche Glasfaser, focused on building and operating fiber in rural areas of Germany. We did not begin construction of the fiber network in a particular municipality until 40% of households and businesses committed to receiving fiber service as soon as it was available and commercialized.

Another factor we consider before investing is how the fiber operator provides services. Vertically integrated companies handle everything from deploying and maintaining the fiber network to sales and customer service. Some operators manage their own retail customers, but also sell access to other providers. In wholesale models, the operator builds and maintains the network, but leases access to providers who handle customer service. In an open access network, wholesalers offer services to multiple providers. 

We see wholesale, open access networks as an attractive business model and have pursued it in Open Dutch Fiber, a fiber-to-the-home investment we made in the Netherlands, and ONNET Chile, a wholesale fiber optic network we operate in Chile that has all major carriers in the market, including Telefonica, Entel, Claro and VTR. Shared infrastructure typically translates into higher take-up rates, higher capacity utilization, and a faster ramp-up in revenues to recoup construction costs. Subscribers also typically benefit from lower prices and more options when telecom operators compete without the need to duplicate infrastructure, which tends to drive up prices as the duplicator also needs to recoup capital outlays. 

Telecom Italia: Leaning into Complexity

One of our most recent and most complex investments, the acquisition of Telecom Italia’s fixed-line network – a term for all the existing lines in the ground that provide internet service – exhibits many of the characteristics we look for in a fiber investment, as well as some of the challenges. 

Italy has a critical need for better internet connectivity. Existing residences and businesses rely almost entirely on copper DSL for internet. Italy is Europe’s third-largest economy and a G7 member, but it ranked 18th in the European Commission’s 2022 Digital Economy and Society Index, which measures connectivity, the population’s digital skills, and other metrics. However, the amount of capital needed for an overhaul of the fixed-line network is enormous, even for a large economy.

From an investment perspective, Italy offers the opportunity to create a national wholesale fiber player, which we find attractive because it allows for the national infrastructure that is typically locked in an incumbent to be open to all telecom operators on the same terms. 

In 2021, we completed a partial carveout of the fixed-line network of Telecom Italia, the national incumbent, into a company called FiberCop. Since that time, we have invested €2.5 billion and FiberCop offered 4 million additional homes the option to connect to fiber. This progress, as well as our global track record investing in the buildout of fiber networks in Germany, Norway, Spain, Netherlands, and the United Kingdom, helped us build trust with our partners and gain confidence in the potential to ramp up construction and network operations. As a result, we entered an exclusive discussion with Telecom Italia to divest the rest of the fixed-line assets into a company called NetCo. Along with our investment partners, which included the Italian government as a minority shareholder, we completed that carveout and then merged it with FiberCop. 

It is perhaps an understatement to say this multi-year investment, which is the first of its kind in Europe, is complex. Ultimately, Telecom Italia and the Italian government trusted our prior experience in European and Italian fiber investments and operational capabilities. We completed the deal in June 2024. The business now includes the most extensive Italian broadband network, serving some 16 million households and including 24 million kilometers of fiber optic cable, plus a large workforce of engineers and other specialists. As NetCo completes the transformation to a wholesale fiber network, we expect the existing copper DSL connections to provide strong, stable cash flows. 

Conclusion

Fiber is an increasingly critical, almost utility-like asset, and investing in the space requires derisking. By leaning carefully into complexity and looking for solid business models that have a demonstrated ability to scale, a first-mover advantage, a competitive product, or some combination of those and other factors, we think it is possible to build businesses that bridge the digital divide, generate strong and predictable cash flows, and tap into a powerful structural growth trend. 

^1. Deloitte. “2023 Connected Consumer Survey.” September 5, 2023. https://www2.deloitte.com/us/en/insights/industry/telecommunications/connectivity-mobile-trends-survey.html Data is based on a survey of more than 2,000 U.S. consumers.

^2. Marre, Alexander. “Bringing Broadband to Rural America.” U.S. Federal Reserve Bank of Richmond, December 2020. 
https://www.richmondfed.org/publications/community_development/community_scope/2020/comm_scope_vol8_no1