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This is the second of two entries on dark fiber arrangements.  Dark fiber is a realistic option for high-bandwidth requirements of businesses, medical and educational institutions, and state and local governments (collectively “enterprises”).  This entry focuses on the two principal types of dark fiber arrangements: indefeasible rights of use (“IRUs”) and leases.  The IRU agreement is different from a telecommunications services agreement, but the dark fiber lease resembles a services agreement.

Under an IRU or a lease, the customer is obtaining a “facility,” not a service such as broadband or VoIP.  The term of an IRU often tracks the useful life of the fiber—at least 20 years.  A dark fiber lease extends up to 5 years, often with renewal options.  Under generally accepted accounting principles, an IRU is typically treated as an asset and a dark fiber lease is treated as an expense.  In addition to different accounting treatment, state property and transactional tax implications may be different.

Indefeasible Rights of Use

Pricing.  IRU customers (“grantees”) typically make two payments to IRU network operators:  the one-time charge for access to and use of the fibers for the duration of the IRU and an annual maintenance charge.  The latter covers “routine” maintenance that is typically scheduled during off-hours and emergency restoration of a fiber cut or other damage to the dark fiber cable or strands. The IRU fee is often paid in two installments:  50% at contract signing and 50% upon acceptance.  The “cost per fiber per mile” is the principal metric for comparing IRU pricing.

In major metro areas, dark fiber network operators (that may also offer telecommunications services) extend their network to customer locations.  This network extension is typically expressed as an agreed-upon, one-time charge that includes the splicing of customer’s fibers at agreed upon demarcation points.

Outside of major metro markets, the network operator may construct all or a portion of a fiber route for a customer (retail services provider, another dark fiber network operator or a technology company).  Network design and construction costs typically are built into the IRU fee.  A newly constructed fiber route invariably includes more fiber strands than a given customer requires.  Network operators often view the initial IRU customer as its “anchor tenant” from which it looks to recover most of the construction costs for a given fiber route.  The total fiber count for a route is a major decision for a network operator; however, other costs of dark fiber network construction (see initial entry) typically exceed significantly the incremental cost of additional fibers along a route.

Business Risks in IRUs.  Customers bear three principal risks in IRU agreements: the fiber network operator’s bankruptcy; loss of underlying rights; and fiber cuts.  The network operator’s bankruptcy poses the most significant risk.  This is due to the term of IRU agreements being 20+ years, the IRU fee typically being paid in full during the initial year, and the relative modest capitalization of dark fiber network providers (as compared to the major telecom and cable service providers).

Continue Reading Enterprise Customers and Dark Fiber: An Important Connection (Part 2)