Following the Bouncing Capex Ball
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.
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 .)
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