AT&T Somewhat Skeptical about Fixed Wireless, But it Might be a Choice for 70% of U.S. Buyers

AT&T does not believe that customers consuming between one and five terabytes of home broadband data will be best served by a mid-band fixed wireless home broadband product.

“Well, the large consumption that we are anticipating over the next five years will be hard to meet with a wireless-only solution,” said Scott McElfresh, AT&T Communications CEO. There will be places where fixed wireless does make sense, he added. 

“There will be portions of the footprint that will not be economical to serve with fiber,” said McElfresh. “And we would intend to put at the edge of our fiber network this wireless C-band asset, along with our other mid-band spectrum to serve some of the limited use cases that we think are available for a fixed wireless solution.”

“But that's not our primary focus for that band, and that's not our primary focus to serve that heavy demand with broadband,” he noted.

At least in part, the issue is upstream bandwidth, where the difference between downstream data and upstream data has traditionally shown a 10:1 ratio. But AT&T CEO John Stankey argues that the ratio is heading to “something more like 5:1.”

As significant a change as that might be for a fixed network, the challenge is harder for a spectrum-constrained platform such as mobility, which never has the bandwidth provided by a cabled network. 

As always, firm strategy hinges on supplier assessment of their own strengths and weaknesses. T-Mobile and Verizon have much more to gain from taking home broadband share than does AT&T, and fixed wireless is the fastest, most affordable way to do so. 

T-Mobile has had zero market share in home broadband, as it has no retail fixed network business. Verizon has a retail fixed network business, but covers a small percentage of U.S. homes. 

Both firms stand to gain millions of accounts--especially where they do not presently offer any service--using mobile or fixed wireless. 

Comcast has (can actually sell service to) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 18.6 to 20 million. To be generous, use the 20 million figure. 

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

T-Mobile and Verizon have the most market share to gain by deploying fixed wireless.  

“We choose to serve our customers that demand high-speed bandwidth with fiber, and we will utilize our wireless networks to serve those other niche use cases in areas where fiber economics do not make sense,” said Jason Kilar, AT&T WarnerMedia CEO. 

“We think that mid-band spectrum has its role,” said Stankey. “It has its role in being a premium mobility product.” But mid-band spectrum has issues supporting indoor coverage, he argued. “And we think there's better ways to kind of deal with what's going on inside most of the walls of society,” namely fiber to the premises. 

All that can be reasonably argued. But McElfresh also said “our vision would be to have over half of our portfolio or 50 percent of our network covered by that fiber asset” by about 2025, building at about a three million to four million annual rate. 

Proponents of fixed wireless might make exactly the same point: half of U.S. households buy broadband services running between 100 Mbps and 200 Mbps, with perhaps 20 percent of demand requiring lower speeds than that. 

So even if fixed wireless offers lower speeds than cable hybrid fiber coax or telco FTTH, it might arguably still address 70 percent of the U.S. market.

Why Some Service Providers are More Positive on Fixed Wireless Than Others

Connectivity provider strategy choices virtually always are a combination of necessity and opportunity; constraints and advantages. Consider the view T=Mobile, Verizon and AT&T have about upside from 5G fixed wireless. T-Mobile is arguably the most bullish; Verizon is hopeful but AT&T is a skeptic. 

Sometimes choices are dictated by political choices. In any effort to win approval of its merger with Sprint, T-Mobile promised to supply fixed wireless home broadband service to 10 million homes by 2024. AT&T likewise uses fixed wireless (generally using its 4G platform) as part of a commitment to rural broadband--and receipt of government support funds--it made in 2015.

Neither of those moves is necessarily driven by a strict profit-and-loss or revenue growth motivation. For T-Mobile, the fixed wireless commitment was essentially a bargaining chip to win government merger approval; for AT&T a way to honor a commitment made to get rural broadband funding. 

In other cases, though, market positioning dictates relative financial opportunity and therefore different strategies. T-Mobile, for example, has zero share of the roughly $115 billion annual revenues fixed network broadband access market. 

AT&T has about 14.6 percent of the U.S. installed base of broadband customers. Verizon has less than seven percent of the installed base. 

Compare that to Comcast, which has nearly 29 percent of the installed base, and Charter, which has 27 percent of the installed base. 

AT&T in the third quarter of 2020 had about 11 percent share of the new customers, while Verizon got seven percent of the new accounts. 

In large part, those  fixed network broadband figures are based on relative opportunity, as well as customer preferences. 

Comcast has (can actually sell service to ) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 18.6 to 20 million. To be generous, use the 20 million figure. 

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

T-Mobile has not historically been in the fixed network home broadband business and has passed zero homes. 

So what percentage of total homes does each provider pass? According to the U.S. Census Bureau there are about 137.9 million U.S. housing units.

Roughly 8.8 percent of units are not occupied, typically. Vacant year round units represented 8.8 percent of total housing units, while 2.6 percent were vacant for seasonal use. 

Add it all up and 88.6 percent of the housing units in the United States in the first quarter of 2020 were occupied and 11.4 percent were vacant, according to the U.S. Census Bureau. 

Still, the addressable market therefore is about 138 million locations. Comcast passes perhaps 41 percent of U.S. homes; Charter passes perhaps 36 percent; AT&T passes possibly 45 percent of home locations while Verizon passes perhaps 14 percent, best case, and many of those locations are high-rise buildings where fixed wireless might not be the best access medium. 

So one way to look at 5G fixed wireless is the ability to take market share away from other providers. T-Mobile can win the most, in the sense that it can grow from zero share to some share. 

Charter and Comcast have market share that is outsized in comparison to their homes passed totals, getting roughly 70 percent of the potential market as customers. 

Verizon’s opportunity is dictated by geography. It has the smallest geographic footprint of any of the other tier-one suppliers. That means the use of its nationwide 5G network to supply home broadband gives it reach to most of the country it cannot presently serve. 

Aside from T-Mobile--which has zero fixed network share or network--Verizon has the greatest potential account upside from providing services outside its fixed network footprint. 

AT&T, on the other hand, already covers the greatest percentage of U.S. homes, and therefore has the most to lose from competitors, followed by Comcast and Charter. Verizon and AT&T earn relatively little from their fixed network customers and therefore are most interested in their mobile customer bases, which provide virtually all the incremental revenue growth for each firm. 

Still, the ability to use the 5G mobile network to attack the home broadband market is interesting to T-Mobile and Verizon for reasons related to geography. 

T-Mobile is solely a wireless provider, has no retail fixed network and therefore stands to gain by taking share in the former fixed network broadband business. Verizon has the most-limited geographic footprint of any of the other providers, and therefore has the most to gain from out-of-market share gains in the fixed wireless space. 

Comcast and Charter remain focused--even for mobility services--on customers in their own regions and areas of service. Operations out of existing markets continue to hold little--if any--appeal. 

Some cable companies who operate in rural areas have said they will use fixed wireless rather than hybrid fiber coax or fiber to the home as an access technology in lower-density areas they might be able to reach using wireless. 

The point is that tier-one service provider interest in 5G fixed wireless depends on their assessment of relative financial upside; in some cases regulatory postures; to a great extent existing and possible market share in home broadband and relative expectations about revenue contributions from fixed network services generally.

AT&T, Comcast and Verizon Collectively Generate about $212 Per Home Passed, Annually

It is not easy to run a big fixed network business these days. As Verizon CEO Hans Vestberg said on Verizon’s fourth quarter earnings call, Verizon faces a “secular decline in wireline business that is continuing.” 

Secular means a trend that is not seasonal, not cyclical, not short term in nature. For multi-product companies such as AT&T, Verizon and Comcast, it can be argued that "everything other than the core business is doing a lot worse than the core business, both at Comcast and at AT&T and at Verizon.

One supposes the “core business” for AT&T and Verizon is mobility, while the core business for Comcast is fixed network broadband. The conclusion analyst Craig Moffett of MoffettNathanson reaches is that AT&T, for example, will have to be broken up. 

The suggestion to focus on the “core business” often produces financial returns when conglomerates are broken up. 

What might not be so clear is how breaking up triple play assets, or separating mobile from fixed assets necessarily helps the surviving connectivity assets to generate greater revenue and profits. 

Is it logical to assume that the AT&T and Verizon businesses would all do better if the fixed network assets, mobile assets and media assets were separated? Would Comcast’s financial returns be better if the content assets were separated from the fixed network, or the video entertainment business separated from the network connectivity business?

Given the “secular decline” of the fixed network business, could a fixed services only approach (internet access, voice and perhaps video entertainment) actually work, at the scale the separated Comcast, AT&T or Verizon assets would represent?

The issue is not whether a small firm, with a light cost structure, might be able to sustain itself in some markets selling internet access alone, or internet plus voice. The issue is whether an independent AT&T fixed network or an independent Verizon fixed network business could sustain itself. 

The answers arguably are tougher than they were twenty years ago, when a telco and a cable company faced each other with a suite of services including internet access, voice and entertainment video. Basically, they traded market, at best. Telcos ceded voice share, but cable lost some video share, and both competed for internet access accounts. 

At a high level, the strategy was that both firms would trade share, but by selling three services on one network, instead of one service on each network, the numbers would still be workable.

But the math gets harder when every one of those three services faces sustained declining demand and falling prices. 

That being the case, it is hard to see how a sustainable business can be built on connectivity services alone, especially for either AT&T or Verizon. Perhaps Comcast could survive with a strong position in internet access and smaller contributions from voice and possibly video entertainment. 

In the fourth quarter of 2019, Comcast Cable generated $14.8 billion in revenue.  Total revenue that quarter was $28.4 billion. 

Verizon’s fixed network business, on the other hand, generated about $7 billion, out of total revenue of nearly $35 billion. 

AT&T had fourth quarter 2019 total revenue of nearly $47 billion. AT&T’s fixed network, plus satellite TV, generated about $18 billion in revenue.  AT&T’s “fixed network plus satellite” operations generate 38 percent of revenue. Perhaps $8 billion or so of that revenue comes from the satellite operations. So the fixed network business might generate $10 billion in revenue. 

Comcast Cable passes 58 million consumer and business locations. Comcast has 26.4 million residential high-speed internet customers, 20.3 million residential video customers and 9.9 million voice accounts, generating average cash flow (EBITDA) of $63 per unit. 

At a high level, the problem is that Verizon’s entire fixed network operation generates about 20 percent of total revenue. AT&T’s fixed network generates perhaps 21 percent of revenue. Comcast, which has a small mobile operation, generates close to $15 billion from the fixed network. 

And that, it seems to me, illustrates the problem. Comcast, AT&T and Verizon all put together generate about $32 billion in fixed network revenue, and revenue is likely to remain flat to negative. 

Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. 

CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

Looking only at Comcast, AT&T and Verizon, $32 billion in annual fixed network revenue is generated by networks passing about 146 million U.S. homes. That works out to about $212 per home passed, per year. 

How that is sustainable is a clear challenge.

Could AT&T FTTH Footprint Reach 44 Percent by End of 2019?

What does it mean that AT&T will have 14 million fiber to the home passings by about the end of 2019? In a broad sense, FTTH means a chance for AT&T to retake market share from cable TV operators, which have about 65 percent of the installed base of total U.S. consumer internet access connections.

“Whenever we go into a neighborhood and turn up fiber, 25 percent (take rate) comes fast and 50 percent is eminently achievable,” said Randall Stephenson, AT&T CEO. “And we actually think we can hopefully get beyond 50 percent as we continue to get this build completed.”

AT&T’s fixed network could represent--on the high side--perhaps 62 million consumer locations passed. That figure has to be interpreted. It could mean physical locations passed. It could mean dwelling units reached.

My own understanding is that this figure refers to dwelling units, not buildings. Here’s the difference: the U.S. housing stock is divided between detached houses and multiple dwelling units and other types of housing.

In 2000, detached housing represented about 60 percent of all U.S. housing units, according to the U.S. Census Bureau. In 2017, detached homes represented nearly 62 percent of housing.

So if AT&T’s fixed network is the same as the national average, AT&T’s network might pass 37.2 million single family homes. The rest of the housing units are apartments, condominiums, other forms of attached housing, mobile homes, boats and trailers.

So assume there are 24.6 million attached dwelling units in AT&T’s fixed network footprint. One has to estimate “locations” to be served from the dwelling unit counts. We will exclude boats, trailers or mobile homes as feasible FTTH locations. Assume that “locations” (buildings) represent about 28 percent of dwellings (by definition, an MDU is one location with multiple dwellings).

In that case, there might be some 6.9 million MDU locations in the AT&T fixed network service territory. That blends MDUs of all sizes into a composite average of 3.5 units per building. So make the universe of residential locations 31.5 million.

AT&T says it will have 14 million FTTH locations in service by the end of 2019. Assuming 100 percent of those locations are single-family homes, AT&T FTTH locations would be about 44 percent, with most of the rest served by fiber to the neighborhood. It is unclear how many all-copper lines remain in service, but it is possible there are as few as a million.

Still, AT&T’s interest in high-capacity access that costs less than FTTH remains. For even if it were able to boost its market share (installed base) of consumer internet access to as much as 50 percent, half the assets would still be stranded, producing no revenue.

For AT&T no less than Comcast, lower-cost infrastructure provides two benefits: fewer stranded assets and a lower-cost base, which provides more room to either lower retail prices or boost profit margins.

Keep in mind that 25 percent take rates also imply 75 percent stranded assets. Fixed wireless built on the 5G mobile network has clear potential advantages, including lower incremental cost to supply the equivalent of fixed access and lower total capex, with lower stranded asset risk.

U.S. Fixed Network Homes Passed Now Increasingly is Guesswork

With the caveat that there are wide areas of the United States where population density is exceedingly low, no single fixed network service provider has a geographic footprint that covers “most” of the landmass.

Here is Comcast:

source: Comcast

Here is AT&T:

source: AT&T

Here is Verizon:

source: Verizon

Here is CenturyLink:

source: Wikimedia

Here is Charter Communications:

source: Value Ventures

Of course, many will note that what really matters is not landmass but potential customer locations, such as homes and businesses. The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to.

FTTH or Time Warner? It Is Not a Close Call

Would AT&T have generated more incremental revenue if it had not bought Time Warner, and instead had plowed that capital into a massive fiber to home upgrade?

The numbers suggest AT&T made a better choice buying Time Warner.

AT&T spent $85 billion to acquire Time Warner, with an immediate quarterly revenue boost of $8.2 billion. Were AT&T able to invest in fiber to home and then take an incremental five percent share of market everywhere it operates, is perhaps $2.2 billion in annual revenues, assuming $50 a month in gross revenue, or about $180 million a month in incremental revenue.

It is not clear how much upside exists for AT&T, in terms of fixed network internet access revenue, even if it were to dramatically extend its FTTH footprint, but 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, facing cable operators already leading the market in accounts and speed, with a clear road map for additional speed increases that easily match anything AT&T might propose, and arguably at less cost.

So here’s one take on the alternatives of buying Time Warner or using that capital instead to expand the AT&T FTTH profile. Consider the incremental revenue generated from each alternative.

Assume first that U.S. telcos could take 10 percent more market share from cable TV suppliers. Incremental revenue might then be less than $4.4 billion annually. Consider that AT&T has footprint covering perhaps 69 percent of U.S. homes. So make the incremental revenue for AT&T $3 billion, or $250 million per month.

Also, it would take some years before that degree of new FTTH assets could be put into place. Over any three-month period, AT&T might expect incremental revenue ranging from $540 million to $750 million per quarter, the former figure representing five percent share gain, the latter representing 10 percent share gain.

Neither comes close to the $8.2 billion per quarter AT&T picked up from the Time Warner acquisition.

Verizon has different strategic issues, compared to its main fixed network competitors.

Significantly, Verizon has a small geographic footprint, compared to any of its main fixed network competitors. Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed. Charter Communications has some 50 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed.

Assume there are 138.6 million U.S. housing units, of which perhap 92 percent are occupied (including roughly seven to eight percent of rental units and two percent of homes). That suggests a potential base of 128 million housing units, including rooms rented in homes or apartments, that could buy services from a fixed network supplier.

That implies Verizon has the ability to sell to about 21 percent of homes; Comcast can sell to 45 percent; AT&T can market to 48 percent of occupied homes; while Charter can sell to 39 percent of U.S. occupied homes.

The point is that Verizon has more to gain than AT&T, Comcast or Charter from investing in internet access outside its traditional geography.

In principle, Verizon faces the same issue as does AT&T when weighing alternative uses of scarce capital.

As it deploys 5G fixed wireless, there are two key issues: how much market share and revenue can Verizon gain, and what else might Verizon have done with its investment capital? It all depends on one’s assumptions.

Some argue that, over seven years, Verizon might gain only 11 percent to 18 percent share in markets where it can sell 5G fixed wireless. Verizon believes it will do better, and some believe a 20-percent share is feasible. Verizon itself predicts it can get about 23 percent share, as a minimum, over seven years, representing about 6.3 million accounts.

Assume Verizon fixed wireless gross revenue is about $60 per account (a blend of the $50 from Verizon mobile customers and $70 from non-customers). Assume annual revenue of perhaps $720.

Assume Verizon spends about $800 per location on 5G fixed wireless infrastructure (radios, backhaul, spectrum costs), even if those same assets can be used to support other users and applications.

At 20 percent take rates, that implies a per-subscriber network cost of perhaps $4000.

Assume a cost of perhaps $300, over time,  to turn up service to accounts. That implies a rough break even in months. Assume total capex investment of perhaps $4300 per account. At $720 annual revenue, that implies breakeven on invested capital in six years.

But assume half the cost of the capital investment also supports revenue generation from other users and use cases (mobility, business users, internet of things). In that case the fixed wireless capex is perhaps $$2150 per customer, and breakeven on capex is a bit more than three years, assuming the only revenue upside is internet access revenue.

Logically, one would have to add churn reduction in some cases, and so the lifetime value of a customer; incremental advertising opportunities; some possible upside from voice services or wholesale revenue. None of that is easy to quantify with precision.

The point is that potential return might fall well within a framework of payback in three years.

Whether that is a “good” investment or not depends on what else might have been generated from other capital deployments.

Over a seven-year period, Verizon might have committed $13 billion in capex to generate revenue from six million fixed wireless accounts (about $1.85 billion per year). It is hard to image any alternative use of capital at that level that would result in annual revenues of $4.3 billion in internet access revenues alone.

It is in fact quite hard to create a brand new business generating as much as $1 billion a year in incremental revenues, under the best of conditions.

source: ITU

So, back to the importance of video revenues, as difficult as the Time Warner debt burden might be, the renamed Warner Media already generates $32 billion in annual incremental new revenue for AT&T. Virtually nobody other than its competitors is likely happy about the new $55 billion worth of new debt AT&T has acquired.

Still, the issue is what else AT&T could have done with $55 billion that would immediately create $32 billion in new revenues. Personally, I cannot think of another transaction that would have produced that much new revenue, immediately.

AT&T could have spent that money on fiber to home upgrades, to perhaps gain five percent to 10 percent additional market share in the consumer internet access market, in region, over perhaps five to seven years. The upside, even at 10 percent share gain, does not approach the Warner Media contribution.