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.

Some Customers Need More Fiber, Some None

Sometimes the truth emerges even when not intended; at times even when the opposite argument is being made. Consider the argument for gradual introduction of more optical fiber into hybrid fiber coax networks, which is sound thinking.

Though making that case, one optical supplier executive has said that “connectivity is increasingly transforming from static wireline to mobile or wireless delivery,” said Cate McNaught, Corning Optical Communications emerging applications market development manager.

That is not to say fixed network access is going away, or will not underpin wireless or mobile network backhaul (fronthaul, anyhaul). It is to acknowledge that content and video consumption on mobile and untethered devices seems to be the main trend right now, with mobile over the top video services proliferating, and more content supplied by all OTT services being consumed on mobile devices.

The issue then is not the need for more optical fiber in access networks, but the business models and rationale for doing so. The problem is stranded assets Today, fiber to the home networks in the U.S. market strands as much as 60 percent of the deployed FTTH capital. That creates a bigger return on investment problem.  

Consumer spending on communications and entertainment services has not changed all that much, in most countries, although the specific products purchased have changed.  

At the same time, the profit margin from many services also has compressed. Prices per gigabyte for consumers using internet access services have declined by about an order of magnitude since 2012, in the U.K. market, for example.

source: Department for Digital, Culture, Media & Sport

The stranded assets problem simply is that when a ubiquitous network is built, not every single home or business buys every service. Not every consumer buys fixed network voice, entertainment video or internet access. Not every business buys the same mix of voice and data services, or mobility.

The problem really is compounded, however, as multiple suppliers compete. If the demand for any single product is 95 percent, and there are three competent suppliers, on average, any supplier can only expect to get revenue from 32 percent of locations passed by the network.

In other words, 68 percent of locations passed earn no revenue.

Such problems can intensify when the demand curve changes, as when consumers abandon use of fixed network voice in favor of mobile voice. The remedy, up to this point, has been product bundles.

One set of numbers from the Comcast third quarter 2017 results is instructive: Comcast details the number of customers taking single, dual-product and three-product or four-product packages.

About 30 percent of consumer customers buy just one product, a third buy two products, while 37 percent buy three or four products as a bundle. Looking at each buy as a “unit sold,” those figures help service providers deal with stranded assets.

If 37 percent of Comcast customers buy an average 3.5 products, that equates to an average of 1.3 products per home passed. If 33 percent buy two products, that equates to one unit sold across 66 percent of the homes passed. The 30 percent of homes that buy only a single product, when added to the dual-product homes, equate to one product sold to 96 percent of homes passed. Altogether, those figures mean Comcast sells an average of two products per home passed.

And that is how the economics work, even when stranded assets range from 40 percent to 60 percent.

The business model will come under more stress if and when mobile alternatives emerge more strongly. So two apparently contradictory claims can be made: there will be a growing need for more access optical fiber, and there also will be less need for some of it.

The remaining customers will need optical fiber advantages more; but fewer customers will buy.  

Can ISPs Keep Increasing Internet Access Speed at Moore's Law Rates?

Perhaps improbably, at least some internet service providers--Comcast in particular--have been doubling the top speeds on their networks at rates consistent with Moore’s Law . “Comcast has increased speeds 17 times in 17 years and has doubled the capacity of its broadband network every 18 to 24 months,” Comcast says.

Comcast says gigabit speeds now are available to nearly all of the company’s 58 million homes and businesses passed in 39 states and the District of Columbia.

Of course, not every platform, or every ISP, has been able or willing to boost average speeds that much. The general rule is that a hybrid fiber coax network mostly can boost speeds by swapping out customer premises equipment, where a telco has to replace copper access networks with optical fiber. The former simply costs less than the latter.

source: youreeeka.com

That explains why cable TV operators tend to supply a disproportionate share of the fastest connections in the United States and United Kingdom, for example.

source: FCC

If  want to know why mobile service providers see upside in 5G , the ability to upgrade speeds to gigabit ranges without having to rip up copper access networks explains much of the interest.

Some have argued that fixed and mobile 5G is an existential threat to cable operators for that reason. Some us might argue that danger likely is overblown, but other existential problems arguably exist, among them declining revenue growth rates, profit pressures, lower average revenue per account and shrinking of revenue for virtually every legacy revenue stream.

Mobile substitution for fixed network voice services is one problem. But mobile messaging and voice revenues now are declining in most countries, while internet access prices also are dropping in most countries.

Sometimes, in some markets, actual price declines are disguised. That can happen when posted retail rates are not the prices most consumers pay; when customers actually buy more-costly packages over time; as prices per gigabyte fall or when prices are not indexed for inflation or compared to household income levels. In most developed countries, internet access costs less than one percent of household income, for example.

It also is common for ISPs to increase speeds on given tiers without price increases. That is an effective price cut, even if the nominal or posted retail price remains unchanged.

source: FCC

source: PCmag.com

Today, 75 percent of Xfinity Internet customers choose plans with speeds of 100 Mbps or more, double the speed those customers took just three years ago, Comcast says.

One can see the shift in consumer demand to faster-speed tiers in data from 2011 to 2015. Over that four-year period, speeds more than doubled, for some telcos, and increased by 300 percent to 400 percent for many cable operators.

source: FCC