Why AT&T Should Not Invest Too Heavily in FTTH

A telco executive once told me, nearly two decades ago, that the investment in fiber to the home was not intended to boost revenues or necessarily to gain market share on other key competitors, but instead simply to allow the firm to remain in business.

In other words, the rationale for FTTH was strategic, and not necessarily motivated by classic return on investment criteria. That arguably remains the case: it is not that FTTH upgrades are unnecessary, but that the return is thin enough that deployment cases have to be looked at quite carefully.

AT&T and Verizon, for example, now are flat in terms of net additions, with nearly all the telco segment losses coming from other telcos still heavily reliant on copper connections. In other words, at current levels of investment, AT&T and Verizon are holding their subscriber bases, but not gaining on cable competitors.

The big unknown is what happens if either firm were to dramatically increase investment. Verizon is largely FTTH already, so the issue is what happens if investments to boost consumer internet access speeds were to be made.

AT&T has added perhaps four million new FTTH lines over the past few years. AT&T says it will have connected 14 million U.S. homes with fiber-to-home facilities by the end of 2019.  If AT&T passes a total of 62 million homes, that implies FTTH will be about 23 percent of total passings.

Keep in mind that the entertainment group (consumer services including all internet access services) represents about 15 percent of the company’s adjusted EBITDA. In other words, earnings from 62 million homes generates just 15 percent of AT&T total. There is limited upside, one might argue.

At a high level, and for immediate purposes, AT&T has passed less than a quarter of consumer locations with FTTH. Still, while not growing its internet access market share, it is holding steady, overall. A rational executive might conclude that scarce capital is best deployed elsewhere, to reduce debt and build the 5G network.

Still, you might wonder why AT&T apparently has been so slow to upgrade, given recent evidence that, where it chooses to build optical fiber access facilities, it can get 50-percent take rates, as well as higher dual-play revenues (video entertainment plus internet access). The key is that those areas tend to be the areas of highest household income. So spot builds make more sense than full-town or full-city upgrades, given other demands for investment or debt repayment.

And AT&T has to prioritize mobility. Recall that mobility represents half of AT&T's revenue.

WarnerMedia represents about 17 percent of the company’s revenue and adjusted EBITDA. That’s more revenue and profit than AT&T makes from consumer fixed network operations.

And recall that WarnerMedia earns money from lots of customers and content and service providers not on AT&T’s network. It is an “app,” not a network service confined just to AT&T.

Business wireline represents about 17 percent of the company’s adjusted EBITDA.

In terms of revenues, mobility represents 40 percent, entertainment group 26 percent and business wireline about 15 percent of total quarterly revenue of $45.7 billion.

The business issue is whether any massive expansion of FTTH would produce revenue gains great enough to justify the move, and what the opportunity costs might be.

In fact, opportunity cost probably is the bigger issue. With capital limited, does it make more sense to invest in 5G and the mobile platform, or put lots more capital into the fixed networks business that drives a minority of revenue for both AT&T and Verizon.

Verizon earns 87 percent of its profits from its mobile network.  

But it is not clear how much upside exists for AT&T, in terms of fixed network internet access revenue. You might argue that the best case for AT&T, for a massive upgrade of its consumer access network, is about 10 percent upside in terms of consumer market share.

That is by no means insignificant, depending on the assumptions one makes about the cost of the upgrades. Still, given that as important as it is, fixed network internet access now is a mature business, there are limits to how much capital a telco “ought” to invest, compared to deploying capital elsewhere.

Realistically, a major telco has to expect it will, under the best of circumstances, and in a two-provider market, split share with a competent and motivated cable TV provider. If cable now has about 60 percent share, and AT&T about 40 percent share, that implies a sort of share ceiling of 50 percent. That is one driver of revenue. The other is revenue per account.

But typical account revenues have not risen as much as one might expect, given consumer shifts to higher-speed services that tend to cost more.

Basically, internet access prices in the developed world have tended to move roughly in line with growth in gross domestic product, and are flat to declining in terms of spending as a percentage of gross national income per person, according to the International Telecommunications Union.  

So there are important reasons why scarce capital has to be put places other than massive consumer FTTH upgrades. Consumer fixed network operations produce relatively little revenue or profit for AT&T.

So a rational executive would invest just enough to hang on to most of the revenue, as long as possible, while investing for revenue growth elsewhere. Just saying.