The formula that turns a fibre build cost into the capital behind each paying customer, and the penetration a target yield on cost requires.
Cost per home connected is cost per home passed divided by penetration, plus the cost of connecting each subscriber. A fibre network built at an illustrative $850 per home passed, with 40 per cent of homes taking service and $650 to connect each one, costs $2,775 per home connected, 3.26 times the headline build cost. Penetration, not the build cost, decides which of the two numbers the investor is really paying.
Worked in full in The Digital Infrastructure Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A fibre-to-the-home platform is raising capital for a new footprint of 50,000 homes. The investment memo quotes cost per home passed, which is the number contractors bid and the industry benchmarks. Revenue, however, comes only from homes that subscribe. The two measures answer different questions: the first is about construction efficiency, the second about how much capital each revenue line carries. The investor wants the capital behind each paying customer and the penetration at which it earns a 12 per cent yield on cost. All figures are illustrative.
| Input | Value |
|---|---|
| Homes passed | 50,000 |
| Cost per home passed (CPHP) | $850 |
| Connection cost per subscriber (drop, terminal, install) | $650 |
| Penetration at maturity | 40% |
| Revenue per subscriber (ARPU) | $65.00 a month |
| EBITDA margin | 55% |
| Target yield on cost | 12% |
The build. 50,000 homes at $850 is $42,500,000, spent whether anyone subscribes or not.
The connections. At 40 per cent, 20,000 homes subscribe. Connecting them costs $13,000,000. Total capital is $55,500,000.
Cost per home connected = CPHP / penetration + connection cost
= 850 / 0.40 + 650 = 2,125 + 650 = $2,775
Excel: =CPHP/Penetration+Connect
What a subscriber earns. $65.00 a month at a 55 per cent margin is $429 of EBITDA a year. On $2,775 of capital that is a 15.5 per cent EBITDA yield on cost, a payback of 6.5 years. The network as a whole earns $8,580,000 of EBITDA on $55,500,000.
Adding CPHP and the connection cost without dividing by penetration, $1,500, gives a 28.6 per cent yield and assumes every home in the footprint pays. It is the single most common way a fibre memo flatters itself.
Invert the formula. A 12 per cent yield on $429 allows at most $3,575 of capital per connected home. Less the $650 connection, $2,925 remains for the share of the build each subscriber carries, so penetration must be at least 850 / 2,925 = 29.1 per cent. The required penetration rises in proportion to the build cost:
| Cost per home passed | Penetration needed |
|---|---|
| $600 | 20.5% |
| $850 | 29.1% |
| $1,100 | 37.6% |
| CPHP | 25% | 35% | 45% | 55% |
|---|---|---|---|---|
| $600 | 3,050 (14.1%) | 2,364 (18.1%) | 1,983 (21.6%) | 1,741 (24.6%) |
| $850 | 4,050 (10.6%) | 3,079 (13.9%) | 2,539 (16.9%) | 2,195 (19.5%) |
| $1,100 | 5,050 (8.5%) | 3,793 (11.3%) | 3,094 (13.9%) | 2,650 (16.2%) |
Read the table diagonally. A cheap build at $600 with 25 per cent take-up earns 14.1 per cent; an expensive one at $1,100 with 55 per cent earns 16.2. The dearer network is the better investment. Construction savings matter, but a network that wins ten more points of penetration in the same footprint has saved more than any contractor negotiation can.
The reason is the marginal economics. Once the street is built, an extra subscriber costs only the $650 connection and brings $429 a year, a 66.0 per cent yield on the incremental capital. Every point of penetration after the first converts sunk build cost into earning capital, which is why fibre valuations are so sensitive to the take-up curve and why an overbuilder arriving in the same streets is the risk that matters most.
Two errors recur. The first is comparing networks on cost per home passed alone, which rewards cheap builds in places nobody subscribes. The second is treating the connection as a one-off. Customers churn, and the next occupant often needs a new install or terminal: at 12 per cent annual churn with a full reconnection each time, that is about $78 of capital per subscriber per year, which takes the yield from 15.5 to 12.6 per cent. Yield on cost here is also an EBITDA yield before maintenance capital and tax, a screening measure rather than a return; the IRR version of the same question is worked in what penetration an FTTH network needs to earn 10 per cent.
The book models a half-built network by penetration cohort, with ARPU, churn and an open access variant, and the free workbook for this case includes the grid of penetration against cost per home passed.
Cost per home passed is the cost of building fibre past every premises in the footprint, whether or not it subscribes. Cost per home connected adds the drop, the terminal and the installation for each subscriber and spreads the build over subscribers only. At $850 passed, 40 per cent penetration and a $650 connection, the figures are $850 and $2,775.
Enough that cost per connected home falls below what a subscriber's EBITDA can support at the target return. With $429 of annual EBITDA per subscriber and a 12 per cent target yield on cost, the all-in cost can be at most $3,575, which at $850 passed and $650 to connect needs 29.1 per cent penetration. At $1,100 passed it needs 37.6 per cent.
Because once the street is built, each extra subscriber costs only the connection. Here a new customer costs $650 and brings $429 of EBITDA a year, a 66.0 per cent yield on the marginal capital, against 15.5 per cent on the network's average connected home at 40 per cent penetration.
This article is one calculation from The Digital Infrastructure Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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