Big Change for AT&T FTTH Payback Model?

The economics of fiber to the home infrastructure have never been easy, in the United States or anywhere else. But the business case is quite different now than two decades ago. Consider the metrics AT&T CEO John Stankey mentioned at the UBS Global TMT Conference. 

Talking about the pace of FTTH deployment in the consumer market, Stankey said “we've turned the corner in the consumer space on EBITDA growth,” elaborating that “we're watching those returns improve every quarter.”

And Stankey expects even better payback models as AT&T scales its FTTH deployment and revamps its operating cost structure. 

“When we can get into that space with customers that are paying us $50-plus a month and we're splitting share in that market, that's a good place for us to be over the long haul,” said Stankey. 

There are two key elements there: broadband market share very close to 50 percent and average revenue per location in the $50 a month range. The former would be a historic shift in market share and installed base. The latter is important because it shows the lower payback threshold. 

A couple of decades ago, the payback would have assumed something more on the level of $130 to $150 worth of monthly revenue from a consumer customer location, driven by the triple-play bundle of voice, internet access and linear video. 

The actual penetration rate was complicated, as there were a mix of single product, dual-play and triple-play accounts, each with different ARPUs. For AT&T, the road ahead remains a bit complex, but will be anchored in broadband. 

The FTTH payback decision would seem to be based on at least $50 a month for internet access as the base case, with a mix of customers buying voice, streaming or linear video products that will be non-consolidated items provided by Discovery Warner-Media, with AT&T receiving about 71 percent of the free cash flow. That might represent about $8 billion in annual free cash flow for AT&T, as its share of the proceeds from Discovery Warner-Media. 

The big change is the strategy. Essentially, the FTTH payback is anchored by internet access of perhaps $50 per location, with adoption close to 50 percent, and aided by voice and video entertainment contributions at lower levels. 

That is a huge assumption change from two decades ago, when revenues in the $130 to $150 per month range were assumed to be necessary. To be sure, AT&T also has get close to half the consumer broadband services market, in terms of installed base. 

But AT&T executives seem quite encouraged by trends they have seen in the latest rounds of FTTH builds.