By some estimates, AT&T passes 55 percent of U.S. homes. Assume total U.S. housing units number 139 million.
Assume a rental vacancy rate of seven percent and a homeowner vacancy rate of 1.4 percent. Assume the percentage of owned housing is 64.2 percent, implying there are 89.2 million owned homes.
In that case, there also are some 35.8 million rental units. That further implies 33.3 million occupied rental units, and some 88 million occupied owned housing units.
Altogether, that implies a total universe of about 121.3 million occupied U.S. housing units. In principle, that means 121.3 milion potential locations a communications service provider might sell services to.
Assume AT&T, passing 55 percent of those locations, therefore could sell fixed service to about 66.7 million locations. That would still be on the high side, as there are some locations--boats, trailers, rented rooms, very-rural locations--that probably are not “sellable” locations. Assume such locations represent one percent of locations, or about 670,000 locations.
So round the addressable base of locations to 66 million.
In its first quarter of 2019, AT&T reported $2.8 billion of internet access revenue, representing about 25 percent of entertainment group revenue of $11.3 billion. AT&T reported 13.8 million broadband accounts in total.
That implies a penetration rate of about 21 percent (so call that the installed base).
AT&T claims 3.1 million “fiber” customers (fiber to the home), with 12.4 million locations passed by FTTH. That implies a take rate of 25 percent, where FTTH is available. Granted, sales should increase over time.
AT&T believes it can boost that take rate to 50 percent over time. Verizon has been able to get a bit more than 40 percent take rates over time, so a 40-percent share target seems reasonable enough.
The issue is what percentage of total passed homes could profitably be upgraded to FTTH. If AT&T by the end of 2019 has 14 million FTTH homes, that leaves 52 million homes remaining for potential FTTH upgrades.
It is difficult to determine what percentage of those 52 million homes might be amenable for FTTH upgrades. For the sake of argument, assume half those homes actually are in areas dense enough that FTTH is feasible at a cost of about $1,000 per location.
So assume a potential universe of 26 million potential FTTH homes. Assume an actual customer then requires $600 additional cost to activate.
That implies capex of about $26 billion to build the network. Assume AT&T could get 25 percent take rates for the new FTTH services. Here is where it gets tricky. We must assume AT&T already has about 21 percent take rates for internet access already. So what percentage of the new FTTH accounts are incremental, and what percentage are simply upgrades by current customers?
It seems unlikely that AT&T loses many customers by upgrading to FTTH. But that also means a new FTTH network with 25 percent adoption actually represents a net gain of perhaps four percent new accounts.
Even if all the gains at 40-percent adoption are new accounts, AT&T stands to gain about 19 percent new accounts by making the FTTH upgrades. That might represent 4.9 million new accounts.
That implies an investment of nearly $5 billion for customer premises capex. Ignoring time value of money and interest expense, assume capex is at least $31 billion.
Assume “average” internet access revenue of about $130 per quarter, per account, or $43 a month. Assume FTTH boosts average revenue per customer to about $53 a month.
That implies recurring revenue, at 40 percent take rates of about $636 per year, per account. Annual incremental revenue then is about $3.2 billion.
Assume gross margin is about 40 percent. That implies incremental free cash flow of about $1.3 billion annually. So the big question is whether it makes sense to invest $31 billion to earn an additional $1.3 billion in free cash flow.
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