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Utilities and BPL: Betting Against the Odds

Why broadband over power line (BPL) can't stand alone as a high-speed Internet offering.

Fortnightly Magazine - April 2005

add the question of whether or not the BPL opportunity is big enough to make a difference to utilities.

By Enterprise Value: How Attractive Is BPL?

To answer the question of financial attractiveness, we compare the enterprise value per customer of a hypothetical BPL player with a panel of telecommunications and cable television companies. 8

We include the BPL player operating in Area B, the scenario which had the highest IRR per customer, for this comparison. (Below we discuss the BPL players operating in Areas A and C.) As shown in Figure 2, the BPL provider depicted here has an estimated enterprise value per line that is well below that of the panel of telecommunications and cable television companies. Cox and Comcast have the highest enterprise value per customer. These cable television companies offer cable television, high-speed Internet access over cable modem, and digital cable telephony over their hybrid coaxial cable and fiber-optic networks. The major telephone companies (SBC, Verizon, BellSouth, and Qwest) have lower enterprise values per customer than Cox and Comcast. They have been losing access lines but gaining DSL subscribers, and they plan on offering video services by improving capacity on their networks (through the deployment of fiber optics). Telephone companies CenturyTel, Citizens, and AllTel operate primarily in rural areas and face lower levels of competition than the regional Bells.

Three primary factors contribute to the comparatively low enterprise values for BPL. First and foremost is the difference in ARPU realized by the BPL provider compared with others in the panel. The other companies provide multiple services to customers over a common infrastructure. Cable television companies provide a "triple play" of voice, data, and video, and telephone companies hope to soon. The monthly bill for a residential customer subscribing to the entire triple play might be as high as $120 to $150. 9 Since all customers will not take the triple play, ARPU will not rise to this level. It may increase to about $70 per month, though. If the ARPU for BPL could rise to this level, enterprise value would increase by up to $1,000 per customer.

Second, churn, or the degree to which customers switch to other providers, has a pronounced impact on value. Incumbents typically enjoy lower levels of churn than newer entrants. We assumed a relatively low churn level of 1.5 percent for the BPL provider shown here. If the BPL provider could lower this assumed churn level as a result of brand recognition, consumer recognition of high-quality service, or bundling options, churn could be driven down to levels closer to the incumbents. This could boost value another $300 or $400 per customer.

Third, a portion of the difference in value may be attributed to the capital expenditures that are included in the calculation of enterprise value. The telephone companies and cable companies in our panel have deployed their networks over decades. Much of their investment already has been recouped. Utilities currently have a network in place but will have to incur cap-ex to realize BPL functionality. If the BPL provider could recoup its investment,