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Following the Bouncing Capex Ball

Carol Wilson
9/29/2015

Telecom giants have taken some heat from consumer groups who would like to see them investing more heavily in faster broadband services at lower prices. More broadly, however, a recent Progressive Policy Institute report calls out AT&T and Verizon as the top two companies investing in the US for the fourth year in a row, and singles out the telecom/cable industry in general as the single biggest category of investors.

It's a wider view that, as someone involved in the day-to-day and quarter-to-quarter view of the industry, I don't often get.

The report, which you can read here, states that AT&T Inc. (NYSE: T) invested $21.2 billion in the US in 2014, and Verizon Communications Inc. (NYSE: VZ). invested $16 billion, putting those two at the top of what PPI calls its "Investment Heroes 2015" list.

Following those two are some notable US industry giants, namely Exxon Mobil, Google, Chevron and Walmart. The telecom/cable industry in general led all other segments in investing with $48.7 billion in investment in 2014.

US Investment by Industry
Source: Progressive Policy Institute, U.S. Investment Heroes of 2015: Why Innovation Drives Investment
Source: Progressive Policy Institute, U.S. Investment Heroes of 2015: Why Innovation Drives Investment

This is all happening against a backdrop in which investment in the US is declining, the report notes. It describes an "investment drought" with capital per worker-hour falling since 2010, "meaning that the average American worker has less equipment, buildings, and software to use, exactly the opposite of what we would want," says author Michael Mandel, chief economic strategist at PPI. "More worrisome, this is not simply a short-run trend. In fact, the 10-year growth rate of productive capital is only 2%, by far the lowest in the post-war era."

Interestingly, PPI noted a decline in investment by broadband companies in the first half of this year, particularly at AT&T. Writing in The Wall Street Journal, PPI economist Hal Singer notes that major ISPs have "reduced capital expenditure by an average of 12%, while the overall industry dropped 8%." AT&T's capital spending is off by 29%, he says. Overall declines in investment by ISPs is extremely rare, he notes, and then concludes this is in response to the Federal Communications Commission (FCC) 's decision to bring broadband services under Title II regulations earlier this year, giving them greater control. (See The Title II Ruling: A 'Wow' Moment.)

AT&T tells me, via email, that there was an earlier projection of declining capex, but the company has now revised its proposed capex figures upward. In the wake of the DirecTV acquisition and its expansion into Mexico, the company is now projecting full-year capital expenditures for 2015 will be in the same range as 2014, about $21 billion. The exact figure for 2014 is $21.4 billion. To hit that, they are promising a lift in capex by AT&T in the second half of the year, which isn't reflected in Singer's research.

But even AT&T admits its capital expenditures aren't as focused on US fiber access networks as they have been the past three years, as its Project VIP winds down. Speaking at the Goldman Sachs Communicopia 2015 conference earlier this month, CFO John Stephens said the buildout was done efficiently and ahead of schedule.

"We've built out 57 million broadband locations, we've built out 310 LTE PoPs [points of presence}, we have 900 million businesses passed with fiber," he said. "The VIP spend is completed, so there will be less investment in those because we've gotten it done efficiently and ahead of time."

It's not clear to me this has anything to do with the new Title II regulations, but maybe I'm being naïve. Stephens said AT&T will live up to the promises it made to the FCC to bring broadband service of at least 45 Mbit/s to 26 million homes, a number which includes the 12.5 million homes that will get direct fiber access. (See AT&T Goes Extra Broadband Mile .)


Read more about Gigabit Cities and the expansion of gig services in our Gigabit Cities section here on Light Reading.

One thing Stephens said also intrigued me, however, and that was a fairly off-the-cuff remark about capex savings from AT&T's SDN buildout. Stephens said AT&T is looking to maintain a capex to revenue ratio of about 15%, then added this: "We are seeing some trends from SDN, the Domain 2.0, from our efforts to be more efficient in our network. We think we can bring that 15% down and trend to lower numbers as we take advantage of the software capabilities that allow you to be much more efficient."

It's likely I'm more interested in that comment because I'm more involved in covering SDN than in tracking broadband investment in the post-Title II era, which may just show that capex numbers can be seen and interpreted in many different ways. That's why I think the original report conclusions bear repeating: However you interpret the numbers, AT&T and Verizon have been leaders in US investments for four years running, and that's worth noting.

— Carol Wilson, Editor-at-Large, Light Reading

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kq4ym
kq4ym
10/9/2015 | 9:55:39 AM
Re: Our envelope
Interesting how Google and Walmart appear in the rankings. Consumers would mostly say those two are consumer friendly with low (or free) pricing but serve customers well. Although employees at Walmart might disagree with the low prices because they are in turn low paid. I wonder if there's any underlying wisdom in the business model to be found comparing those two with the other business sectors thought not to be so consumer friendly.
mendyk
mendyk
9/30/2015 | 3:37:38 PM
Re: Our envelope
Agree -- and I would say that our current projections for the economic impact of virtualization are based on a moderate amount of optimism. Also, ours is a decidedly macro view -- some CSPs will fare better than others, with the positive results skewing to those with less legacy baggage. I think it's overstating things to say (as some vendors are saying) that CSPs who either delay their transformation programs or decide not to virtualize are doomed. But it's clear that staying the course will ensure long-term revenue and margin erosion.
brooks7
brooks7
9/30/2015 | 3:20:39 PM
Re: Our envelope
You have factored.  Most vendors have not.

The question about virtualization for me has to do with how licenses will be managed.  I think that is going to be the fascinating bit.

seven

 

 
mendyk
mendyk
9/30/2015 | 12:13:59 PM
Re: Our envelope
Right -- we have factored many of those points into our projections, and labor costs are a big part of the long-term savings. As you say, the impact on opex (as on capex) will be marginally negative (meaning costs could actually increase slightly) during the transformation process. The savings start to kick in at the tail end of the process and then ramp up once work reaches completion. The operators that either figure out or have less exposure to issues like obsolescent work forces will see the biggest benefits from the changeover. I wouldn't argue that failure to move to a virtualization model guarantees extinction, but it will be increasingly difficult to turn a profit.
brooks7
brooks7
9/30/2015 | 12:03:40 PM
Re: Our envelope
Opex savings come in two bundles.

1 - Electromechanical oriented:  Things like Power and Cooling.

2 - People Oriented:  Eliminating positions.

In general, Electromechanical opex savings are part of a business case for something that will be done anyway.  It rolls into the cost savings, but there is generally not enough cost savings to justify changing things based on power (etc.) alone.

The people side is even worse.  Changing technologies for existing ones generally means a headcount increase.  In fact what people mean normally is that it is a lowered headcount increase than doing something new some other way.

All of which boils back to how much upward revenue tick people can get from investment in savings and how much of that upward revenue is cannibalizes other revenue.  

I am not saying that opex savings are not real and big.  It is that people take them greatly out of context from an entire business plan.  On top of that, they tend to forget things like training, unions, etc. that interfere as well.

seven

 
mendyk
mendyk
9/29/2015 | 3:47:06 PM
Re: Our envelope
Yes, this the the classic short-term vs. long-term thing. In the short term, it's easier to just rein in capital spending for some margin relief. In the long run, the bigger savings will be on the opex side. But you need to have a 10-year view for that, which is a huge challenge for any business. This puts established operators at a distinct disadvantage compared with newer competitors.
cnwedit
cnwedit
9/29/2015 | 3:41:47 PM
Re: Our envelope
Dennis, I would agree that operators are prioritizing capex savings right now. That's one of the reasons I was surprised to hear that comment.  What I hear from them most is the need to make it easier to offer new services more quickly, to discover new revenue opportunities, and to find a way to more efficiently scale. 
mendyk
mendyk
9/29/2015 | 3:03:59 PM
Our envelope
Heavy Reading's back-of-the-envelope estimates (i.e., guesses) on capex actually show a slight increase over the next 10 years as operators begin and complete their virtualization projects. But we do expect to see significantly lower opex kicking in around 2020. That actually is a more important number for operators in our view.
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