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.
