Stephenson

AT&T CEO Randall Stephenson on Tuesday told investors that AT&T will deploy a combination of fiber optics and 5G wireless and be able to sell a “true, high-speed internet network throughout the United States” within the next three to five years.

“In three to five years out, there will be a crossover point,” Stephenson told investors. “We go through this all the time in industry. 5G will cross over, performance wise, with what you’re seeing in home broadband. We’re seeing it in business now over our millimeter-wave spectrum. And there will be a place, it may be in five years, I think it could be as early as three, where 5G begins to actually have a crossover point in terms of performance with fiber. 5G can become the deployment mechanism for a lot of the broadband that we’re trying to hit today with fiber.”

Although the remarks sound like a broadband game changer, Stephenson has made this prediction before, most recently during an AT&T earnings call in January, 2019. Stephenson told investors he believed 5G will increasingly offer AT&T a choice of technology to deploy when offering broadband service to consumers and businesses. In high-cost scenarios, 5G could be that choice. In areas where fiber is already ubiquitous, fiber to the home service would be preferred.

Stephenson’s predictions about nationwide service will depend in part on the commercial success of millimeter wave 5G fixed home broadband, which will be required to satisfy broadband speed and capacity demands. Verizon Wireless has been offering fixed 5G in several markets with mixed results. The company’s early claims of robust coverage have been countered by Verizon’s own cautious customer qualification portal, which is more likely to deny availability of service to interested customers than offer it.

But Stephenson remains bullish about expanding broadband.

“So all things considered, over the next three to five years, [with a] continued push on fiber, 5G begins to scale in millimeter-wave, and my expectation is that we have a nationwide, true, high-speed internet network throughout the United States, [using] 5G or fiber,” Stephenson said.

Whether anything actually comes of this expansion project will depend entirely on how much money AT&T proposes to spend on it. Recently, AT&T has told investors to expect significant cuts in future investments as AT&T winds down its government-mandated fiber expansion to 14 million new locations as part of approval of the DirecTV merger-acquisition. In fact, AT&T’s biggest recent investments in home broadband are a result of those government mandates. AT&T has traditionally focused much of its spending on its wireless network, which is more profitable. For AT&T to deliver millimeter wave 5G, the company will need to spend billions on fiber optic expansion into neighborhoods where it will place many thousands of small cell antennas to deliver the service over the short distances millimeter waves propagate.

AT&T could sell a fixed 5G broadband service similar to Verizon Wireless, confine its network to mobile applications, or offer fixed wireless service to commercial and manufacturing users in selected areas. Or it could offer a combination of all the above. AT&T will also need to consider the implications of a fiber buildout outside of its current landline service area. Building fiber optic networks to provide backhaul connectivity to AT&T’s mobile network would not antagonize its competitors nearly as much as the introduction of residential fixed 5G wireless as a home broadband replacement. The competitive implications of that would be dramatic, especially in communities skipped by Verizon FiOS or stuck with DSL from under-investing independent telephone companies like CenturyLink, Frontier, and Windstream. Should AT&T start selling 300+ Mbps fixed 5G wireless in these territories, it would cause significant financial distress for the big three independent phone companies, and could trigger a competitive war with Verizon.

Wall Street is unlikely to be happy about AT&T proposing multi-billion dollar investments to launch a full-scale price war with other phone and cable companies. So do not be surprised if AT&T’s soaring rhetoric is replaced with limited, targeted deployments in urban areas, new housing developments, and business parks. It remains highly unlikely rural areas will benefit from AT&T’s definition of “nationwide,” because there is no Return on Investment formula that is likely to work deploying millimeter wave spectrum in rural areas without heavy government subsidies.

For now, AT&T may concentrate on its fiber buildout beyond the 14 million locations mandated by the DirecTV merger agreement. As Stephenson himself said, “When we put people on fiber, they do not churn.” AT&T has plenty of runway to grow its fiber to the home business because it attracts only about a 25 percent market share at present. Stephenson believes he can get that number closer to 50%. He can succeed by offering better service, at a lower price than what his cable competitors charge. Since 5G requires a massive fiber network to deploy small cells, there is nothing wrong with getting started early and then see where 5G shakes out in the months and years ahead.

Although continued traffic growth would seem to indicate companies like AT&T and Verizon will need to continue major spending initiatives to keep up with demand, technological advancements and upgrade programs have made networks more efficient than ever, allowing AT&T and Verizon to report cost declines as much as 40% annually.

Wireless One’s Dave Burstein spoke with Andre Fuetsch, AT&T’s chief technology officer about current telco cost trends. Feutsch said a lot has changed with AT&T’s networks over the last several years.

“We’ve gone from 10 gigabits to 100 gigabits to now 400 gigabits on our fiber,” Feutsch told Burstein. “MIMO and massive MIMO are extremely productive. Yes, I think 40% per year is a reasonable estimate of how our costs are going down. AT&T’s leadership in open white box and SDN will continue to drive that number higher, which is needed as network demand increases.”

Burstein notes Verizon similarly estimated their costs were also falling about 40% annually.

“I have been able to confirm that the 40% Verizon efficiency savings figure is on target if not exact,” Burstein said. “You can replicate my thinking. Traffic has been growing 40% per year. Sales have been roughly flat for the similar time period. If productivity growth hadn’t been a similar 40%, profits likely would have trended down. In fact, they have been flat or slightly increasing.”

While AT&T has been embarked on a costly major fiber network buildout in its local phone service territory, Verizon has been focused on rebuilding and modernizing its core network. The “One Verizon” project is retiring a large percentage of the 200,000 legacy routers, switches, and other hardware in use across Verizon’s network and installing about 20,000 very efficient network box replacements. Verizon estimates its first year cost savings are about 50%.

Although network traffic growth, expansion, and upgrades come at a cost to carriers, technological improvements are covering much of those costs by making networks more efficient and capable of carrying much more data than ever before. When companies talk about their network investments in terms of justifying rate increases, that clearly does not tell the full story.

FCC Chairman Ajit Pai drinking from his oversized mug.

Last fall, FCC Chairman Ajit Pai trumpeted claims that as a result of his successful efforts to rid the United States of net neutrality, the days of reduced investment from the nation’s cable and phone companies were over.

“Since my first day on the job, this agency has been focused on cutting through the regulatory red tape and increasing broadband investment, most importantly in rural America where the digital divide remains all too real,” Pai said in October 2018. “Today’s report confirms that the FCC’s policies to promote broadband deployment are working. After internet service providers reduced new investments in 2015 and 2016 under the prior Administration’s regulatory approach [ie. net neutrality], broadband investment increased in 2017 by $1.5 billion over the previous year. That’s real progress for American consumers, and another step toward better, faster, and cheaper broadband for all Americans.”

Of course, his claims were false last fall. Top executives at the nation’s largest telecom companies have repeatedly admitted that net neutrality had little, if any bearing on their spending plans. Much of the increased spending was, in fact, attributable to:

• AT&T’s required expansion of its fiber to the home network to meet its obligations from the acquisition of DirecTV.
• Charter Communications’ committed upgrades as part of its acquisition of Time Warner Cable and Bright House Networks, including switching off analog video and deploying DOCSIS 3.1.
• Comcast’s increased spending on DOCSIS 3.1 and pushing fiber optics deeper into its hybrid fiber-coax network.
• Wireless carrier investment in further 4G LTE deployments and network densification.

In the past six months, many of these companies have signaled investors the days of big spending are over, despite the fact the so-called regulatory shackles of net neutrality and other reform measures have been abolished under the Republican-led FCC.

Today, Comcast delivered the ultimate truth blow to Pai’s worthless promises, showing the lowest investment intensity in years. In fact, Comcast reported a huge 19.4% drop in capital expenditures, while achieving a 40.1% EBITDA margin — a signal the company is earning even bigger profits than ever, while at the same time literally slashing investment. One thing that did not decrease was Comcast’s total free cash flow, which rose to $4.592 billion dollars in the last quarter.

Verizon Communications has indefinitely suspended plans to charge customers an extra $10 a month for access to Verizon’s extremely spotty and uneven 5G service, which launched earlier this month in Chicago and Minneapolis.

Early adopters were told Verizon would waive the extra $10 fee for the first three months of service. But after receiving mixed reviews about Verizon’s 5G performance and very limited coverage area after launch, Verizon decided to withdraw the charge until further notice.

“This is some of the blowback you get from being first” in offering smartphone 5G service, John Hodulik, an analyst at UBS Group AG, told the Wall Street Journal. “It didn’t make sense to charge people extra money for a service that they’re rarely going to use.”

AT&T’s CEO Randall Stephenson sent signals to shareholders AT&T was also considering charging a premium rate for customers upgrading to 5G technology in the next two or three years.

Justice Department staffers have told T-Mobile and Sprint that their $26 billion merger is unlikely to win approval as presently structured, according to a report in the Wall Street Journal.

Unnamed sources familiar with the deal told the newspaper the Justice Department’s Antitrust Division is among the most skeptical of those reviewing the deal, questioning claims from the companies that the merger will create synergy and increased efficiency that could free up resources to dramatically expand the combined company’s wireless business.

At the core of the concern is the impact of combining the nation’s third and fourth largest wireless carriers, reducing competition to just three national postpaid companies — AT&T, Verizon Wireless, and T-Mobile. That could present an unacceptable threat to competition.

The Justice Department is not alone expressing concern over the merger deal. Multiple state attorneys general are still reviewing the deal and several have announced they are prepared to sue the companies involved to stop the merger if it manages to win approval on the federal level. The Federal Communications Commission is also said to be questioning some of the claims of the company about the merits of its promised 5G home broadband service and exactly how much consumers could save should they subscribe.

The Financial Times also published a story this afternoon essentially confirming the Journal story.

John Legere, CEO of T-Mobile USA, denied the premise of the Journal’s story in a tweet late this afternoon, calling it “simply untrue,” but refused further comment.

The premise of this story, as summarized in the first paragraph, is simply untrue. Out of respect for the process, we have no further comment. This continues to be our policy since we announced our merger last year. https://t.co/3q9CVgkRfv key info: https://t.co/N5YvuuJtPZ

— John Legere (@JohnLegere) April 16, 2019

Any decision about the merger is not expected for several weeks, and any recommendations from the staff report on the deal can be overruled by the political appointees that run the Justice Department. The Times reports that the final decision will likely rest with Makan Delrahim, President Trump’s pick as chief of the antitrust division. With staff objections now leaked to the press, Delrahim could be in a politically difficult situation overruling his staff’s recommendations. In the meantime, company officials can offer concessions, such as selling off certain assets to overcome regulator objections.

Many Wall Street analysts feel the chances of the merger winning approval are reduced the longer the merger review remains underway in Washington. Many have placed the odds at less than 50% that the deal will ultimately be approved. If it is rejected, T-Mobile is expected to continue its business without any significant financial hurdles. Sprint may be a different matter, as its Japanese backer SoftBank has soured on the merits of pouring additional money into Sprint’s wireless business.