Will AT&T Capex Decline in 2019 or 2020?

Though many had feared runaway capex spending for 5G, more recent evidence suggests some mobile operators might not see a material increase in capex, even as 5G gets built. In fact, AT&T now says it could have lower capex in 2019 or 2020, in part because network virtualization now allows the firm to operate its network more efficiently.

But there are lots of other interesting ways AT&T might operate its platforms more efficiently. Consider the classic argument for upgrading all-copper telco networks to fiber to the home, fiber to the node or very high speed digital subscriber line networks: video entertainment.

At the risk of losing additional internet access market share, AT&T could hold or increase its linear video share by selling an OTT streaming service that can be bought by any household, bringing its own broadband.

To be sure, that risks the loss of, or inability to regain, millions of internet access accounts from cable and other competitors. But that might be a calculated risk AT&T is willing to take.

Consider that AT&T now gets 49 percent of its earnings from the mobile network; 18 percent from its content ownership interests; about 17 percent from enterprise services using the fixed network and about 15 percent from all consumer voice, internet and video subscription sources.

source: AT&T

Looking at the 15 percent of revenue AT&T earns from its consumer fixed network operations, AT&T earns 72 percent of revenue from entertainment video (largely from out of region), 17 percent from internet access and six percent from voice.

The point is that AT&T actually earns relatively little revenue from fixed network consumer internet and voice accounts. Likewise, AT&T earns relatively little linear video subscription revenue in region, on its own network.

Perhaps 3.7 million of AT&T’s total 24.5 million video connections are supplied using the U-verse fiber to node network, while nearly 21 million use the DirecTV satellite constellation.

FTTN or FTTH represent perhaps 17 million internet access connections out of 17.5 million total broadband accounts, and possibly 29 million passings, by about mid-year 2019.

Keep in mind that AT&T is going to transition its DirecTV satellite video service to an over-the-top streaming service that runs over any broadband network. So, in principle, AT&T does not “need” to upgrade its own fixed network access lines to sell linear video.

It could, in fact, sell the service to competitors operating in its own fixed network territories. So one way of quantifying the upside from new FTTH facilities is that if AT&T could boost its internet access share 20 percent to 30 percent in areas where it adds FTTH.

Whether that is sufficient to justify an FTTH build is the question, since voice is almost negligible and shrinking, while video arguably can be delivered OTT. That is how AT&T makes most of its linear video revenue already.

The other issue is whether alternative means would provide a better financial case, such as using fixed wireless or even mobile 5G to gain internet access account share.

The big takeaway is that AT&T’s business case for new FTTH is fairly narrow, given the potential upside from incremental revenue based mostly as gaining broadband share.