(Bloomberg) -- Higher costs and a slowing economy are hobbling efforts to deliver lightning fast fiber-optic internet service across the US, leading AT&T Inc., Lumen Technologies Inc. and Verizon Communications Inc. to scale back their expansion plans.

Verizon expects to extend fiber past about 50,000 fewer homes this year than last, executives said in recent days. Lumen has hit the “stop button” to find a more profitable strategy, and even AT&T, which realigned itself around fiber and 5G wireless, has slashed the number of homes it plans to reach by 39% this year.

The largest US fiber network builders are hitting the brakes as signs of an economic slowdown mount, including rising interest rates and fewer home purchases. The shrinking aspirations follow years of optimism around the potentially life-changing capacity of fiber and billions of dollars in federal infrastructure money for broadband expansion. 

The trigger may have been “hawkish commentary” from the Federal Reserve,” said Gregory Williams a telecom analyst with TD Cowen. “This sent the entire market reeling and reassessing capital allocation plans.” 

Deploying fiber isn’t cheap and it usually takes years to see a return on that spending. Running a fiber-optic line through a typical residential neighborhood costs about $1,000 per home. Connecting a home is at least another $1,000 on average.

Higher interest rates, inflation and economic worries have made that a risker proposition.

“Times have definitely changed, said Tammy Parker, an analyst with GlobalData. “When carriers were flush with cash and interest rates were low, it was easy to adopt a strategy of ‘build it and the customers will come.’”  

What Bloomberg Intelligence Says:

High costs for labor and capital, along with slowing home sales, are denting the pace of telecoms’ fiber rollouts.

— Geetha Ranganathan, senior analyst

Click here to read the research

Lumen, a regional landline operator previously named CenturyLink, went through a major restructuring last year, selling assets, eliminating its dividend and replacing top management. When Kate Johnson, a former senior executive with Microsoft Corp., took over as chief executive officer in November, one of her first major moves was to pause its Quantum fiber-to-the-home efforts.

The team needed a “more focused build target” to get “proper returns,” Johnson told investors in January. 

Like other telecom companies, Monroe, Louisiana-based Lumen wants to emphasize deeper penetration of existing territories instead of a land grab for new markets.

There was “a little bit of a gold-rush mentality,” Chief Financial Officer Chris Stansbury told investors this month. “People are pulling back on their build plans,” reassessing costs and revenue potential.

Market Bandwidth

A big question the companies are confronting is whether consumers are really clamoring for more broadband. Aside from low-income and rural areas, the market is pretty well served. 

“Broadband growth has been slowing since the pandemic lockdown peak,” analyst Williams said. “Some of that is due to lower rates of home buying and some is due to market maturation. The thinking is if you didn’t get broadband during the pandemic, you likely never will.”

Last year, nearly all of the industry’s broadband subscriber growth was captured by T-Mobile US Inc. and Verizon through a less expensive, easy-to-install wireless service beamed into homes. The competition hurt Comcast Corp. and Charter Communications Inc., which added their fewest internet customers in more than a decade.

Fiber and cable companies responded by beefing up their services, promising multigigabit speeds versus the 100 megabits per second or more offered by the invading wireless providers.

“To attract customers without having to lower prices, carriers are supplying more capacity and higher speeds,” said Jean-Pascal Crametz, a broadband pricing analyst with Oncept Consulting Group and Ph.D from Stanford University.

But, he notes, even if everyone in your house is watching HD video or playing games, “there’s only so much capacity that a home can consume. Nobody really needs more than 100 megabits of speed.”

Ultimately, the competition between existing broadband providers and the new contenders supplying wireless home internet service will mean lower prices for consumers.

Still, carriers need new customers who are willing to pay for more expensive plans to help justify the growing costs of building broadband networks. 

There’s going to be a bit of a chill in the broadband market if customers start tightening their belts, GlobalData’s Parker said. 

“Many fiber projects that would have gotten the green light just a year ago may not see the light of day for several more years, if ever,” she said.

(Corrects Stanford ties of Jean-Pascal Crametz six paragraphs from bottom.)

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