Dark Fiber, Loss of Control or Significant Revenue Opportunity?July 22, 2015
Michael C. Young, CPA, MBA, ABV
The continual competition among the country's technology giants has been moving into a new arena as companies try to position themselves to profit from burgeoning demand for telecommunication services.
Google Inc., Facebook, Inc., Microsoft Corp. and Amazon.com, Inc. are all jostling with corporate giants of the telecommunications sector for control of the nation's fiber optic capacity. More particularly, they aim to utilize “dark fiber,” cabling that has been installed but has not yet been "lit" or activated to enable the fiber to transmit signals. Recently, “dark fiber” has increased in popularity among businesses due to its ability to meet a wide range of communication needs as compared to other fiber optic choices available.
Much of that fiber optic cabling and equipment was installed in the boom years of the dot.com era. Companies such as Global Crossing Ltd. and Tyco International Ltd. spent billions of dollars installing fiber optic cabling and equipment in the late 1990s. To date, the supply has far outrun the demand, a situation worsened by the bursting of the dot.com bubble.
However, the introduction of smart phones and smart devices has since begun to soak up that excess capacity. People both here and abroad require more from their smart phones as they use an increasing number of applications. That demand will only increase as the "Internet of Things" becomes embedded in the function of global society. “The Internet of Things revolves around increased machine-to-machine communication; it is built on cloud computing and networks of data-gathering sensors; it is a mobile, virtual, and instantaneous connection; and they say it is going to make everything in our lives from streetlights to seaports “smart.” 
In 2014, the combined value of the global telecommunications sector (representing traditional phone service, wireless communications, Internet, fiber optics and satellites) was determined to be $5.4 trillion, up from $5 trillion the previous year. The attraction of “dark fiber” is as plain as daylight - potential profits.
While control of the dark fiber capacity was a concern in the past, corporations and investors should no longer ignore the potential revenue opportunities presented by dark fiber. There is room in the dark-fiber market for numerous operators smaller than the telecom and technology behemoths.
Furthermore, non-cancelable leases can be set up for dark fiber with business customers to take advantage of the increased demand for bandwidth over the life of the lease. One example of this is a lease with annual fixed escalations. Generally accepted accounting principles (GAAP) require rental income from leases with fixed escalations in rental amounts to be recognized on a straight-line base. Therefore, for the difference between straight line and escalating rents as of a given date, companies have to show an unbilled rental income receivable on their financial statements (non-cash activity.) In recording an unbilled rental income receivable, the other side of the entry is either an increase or decrease to revenue depending on the timing of lease activity during the year. Overall, the impact on a company’s reporting requirements is not that significant regarding leases with fixed escalations in rent. In addition, if more equipment is added to the system, amendments to the leases can be rewritten or added to reflect those changes over time. Finally, by using non-cancelable dark fiber leases, the provider is entitled to potential cash out payments if the lessee requests to get out of the lease prior to the lease- end date.
So, as the world continues to get “smarter and smarter,” the communication needs for businesses and the general public will be satisfied by one provider or another, through utilization of dark fiber. If the only matter preventing you from this new revenue opportunity is a signed lease agreement, shouldn’t that provider be you?
1. “The Internet of Things Is Far Bigger Than Anyone Realizes.” Wired. Retrieved July 2, 2015.
Michael Young is a manager in BlumShapiro’s Accounting and Auditing Department, in the Providence, RI office. Mike has nearly 11 years of accounting experience and has developed a strong background in audits of employee pension plans. He is accredited in business valuation and performs them for the firm. He attends national conferences and often spearheads in-house training on the latest developments and changes in this highly regulated area of accounting.
BlumShapiro is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with nearly 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.