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Is AT&T's fiber investment a good idea?

AT&T plans to double the number of locations where it offers fiber Internet, from around 15 million to around 30 million, by 2025. To do that, the carrier is planning to increase its annual capital expenses from around $21 billion to around $24 billion.

All that spending will make AT&T the single largest infrastructure investor in the US, according to the Financial Times.

"We are building MORE fiber to MORE homes and businesses. And we're talking A LOT of fiber – MILLIONS of new locations every year," AT&T's Mo Katibeh wrote on LinkedIn recently. Katibeh is the executive in charge of AT&T's fiber and 5G buildout. "And you know what comes with all that investment in America? JOBS."

In his post, Katibeh pointed to AT&T's job postings for positions including fiber managers, splicers and techs.

AT&T's newfound interest in fiber is a direct result of the company's exit from the content business via its offloading of WarnerMedia to Discovery. Further, AT&T's overall capex spending will be doled out between its fiber and 5G networks, and the company won't disclose exactly how much it plans to spend on each.

Nonetheless, company executives continue to tout the importance of fiber in AT&T's new focus on connectivity over content.

"Where we have fiber, we win. We're improving share in our fiber footprint with penetration rates only accelerating," explained Thaddeus Arroyo, head of AT&T's consumer business, at a recent investor event.

The only problem is that AT&T's big, five-year fiber buildout program is not happening in a vacuum. Specifically, cable companies are positioned to significantly increase the speeds they can provide over their DOCSIS networks over that same time period. Meanwhile, T-Mobile, Verizon and others are preparing to dramatically expand their own competing fixed wireless Internet services, and many are specifically targeting AT&T's existing broadband customers.

Such developments may blunt the success that AT&T is looking for as it works to upgrade some of its existing non-fiber customers to fiber connections as well as expand its fiber network into some new markets.

A history of underinvestment

According to Leichtman Research Group, cable companies accounted for fully 97% of all broadband Internet customer additions during the 2010s.

AT&T executives have acknowledged the company's inability to match cable's might. "Looking back and being a little critical, we probably allowed the cable companies to execute and to take share in that market in a significant way," AT&T CFO Pascal Desroches said at a recent investor event.

In 2021, the situation isn't terribly different. "Based on the currently available information, cable stole wired broadband market share in Verizon and AT&T markets as well. Oy vey!" wrote Jim Patterson of Patterson Advisory Group in his weekly newsletter. Patterson noted that top cable companies Comcast, Charter and Altice managed to capture 86% of broadband customer growth in the US in the first quarter of this year.

Indeed, AT&T added just 51,000 total broadband customers in the first quarter. But that's because the company lost a substantial number of non-fiber customers. In its fiber operation, AT&T added 235,000 connections in the first quarter, ending the period with nearly 5.2 million total fiber customers. AT&T counts a total of around 15 million fiber and non-fiber customers.

Thus, AT&T's real problem is that it hasn't been building enough new fiber connections to stem the loss of DSL and other non-fiber customers. "Fiber connections simply aren't growing fast enough to keep up," wrote the financial analysts at MoffettNathanson in a recent note to investors on AT&T.

And therein lies the heart of AT&T's fiber argument: If it builds fiber faster, it can retain more of its existing non-fiber customers and gain more new fiber customers. After all, according to AT&T, fiber is the only technology that will be able to keep pace with home broadband users' demands for speedy Internet connections.

"In instances where we have fiber and a cable incumbent in the market, we feel really comfortable about our ability to perform, and we have outperformed and gained shares in those markets," AT&T's CFO Desroches said.

Moreover, AT&T can also connect its 5G cell towers to its fiber network, thereby reducing its backhaul expenses.

"Fiber is the foundation that fuels our network. Expanding our fiber reach serves multiple services hanging off at each strand of fiber. It includes macro cell sites, small cell sites, wholesale services, enterprise, small business, and fiber that's extended directly into our customers' homes and into businesses," explained AT&T's Arroyo.

The cable fightback

A big part of AT&T's fiber argument centers on the notion that the technology can support today's Internet users as well as those of tomorrow. AT&T has said that usage among mid-level home broadband users is expected to rise to 1.5TB per month by 2025 – that's far more than the roughly 500GB per month average US households consume today, according to OpenVault. At the same time, AT&T expects the amount of upstream traffic to also increase, which could put pressure on cable infrastructure designed to handle mostly downstream traffic.

"Fiber is a superior product. It is a product today met for the moment in time that we're in and beyond," said AT&T's Arroyo. "This foundation of what we've built is capable of scaling to multiple gigabits in the near future."

But some financial analysts don't think it's that simple.

"Cable can upgrade its plant quickly and at low cost to offer at least 4.6Gbit/s down and 1.5Gbit/s up, well beyond current fiber offerings. They can do this before the move to DOCSIS 4.0, which is still years off," wrote the financial analysts at New Street Research in a recent note to investors.

In fact, Comcast and others have already been testing DOCSIS network improvements reaching 4 Gbit/s.

The result, according to the New Street analysts, is that fiber providers like AT&T won't necessarily be able to waltz into a market with speedy 1Gbit/s fiber connections and simply grab share from slower cable incumbents.

"Cable will face new fiber competition in more of its markets over the next few years; however, there is little to no prospect of fiber delivering a service in those markets that cable can't easily match or beat," they concluded.

The fixed wireless factor

As AT&T prepares to replace some of its aging broadband lines with fiber, the company may encounter some familiar faces among a new batch of competitors. Specifically, T-Mobile and Verizon are among a growing number of fixed wireless Internet providers hoping to capture the kind of non-fiber customers AT&T is working to retain.

For its part, T-Mobile has made no secret of its desire to chase AT&T's customers. The operator made its strategy clear last year after AT&T said it would no longer accept any new DSL connections. "We can't stand idly by while AT&T leaves potentially millions with fewer home Internet options at a time when our connection to the Internet is so vital – for work, remote school, connection with family and friends. That's why we're undertaking this massive expansion," Mike Sievert, CEO of T-Mobile, said in a release at the height of the COVID-19 pandemic, touting T-Mobile's fixed wireless service.

Verizon too is in the midst of a major expansion of its own fixed wireless Internet service in locations around the country.

While there's some question as to whether fixed wireless can compete with cable operators, it can almost certainly compete with slower technologies like DSL. Further, T-Mobile and Verizon are poised to begin picking off AT&T's customers relatively quickly considering their respective fixed wireless services ought to be widely available in the coming months. AT&T, meantime, is still working to hire the technicians necessary for its own big fiber buildout.

Perhaps in response to this situation, AT&T executives have acknowledged that the operator will deploy its own fixed wireless services in locations where it might not make sense for the company to deploy fiber.

"We believe [fixed wireless] is a nice replacement for some percentage of the data customers that are out there," AT&T CEO John Stankey said at a recent investor event.

But that puts AT&T officials in the awkward position of defending fixed wireless at a time when the company is trying to convince investors of the wisdom of building out fiber.

The fiber ROI

"This work-from-home shift during the pandemic highlighted fiber's symmetrical differentiation. And we expect, in a post-pandemic hybrid workforce and a home-based learning model, that even as students go back to school, we'll move into new models of tutoring at home using these video capabilities that we're going to see continued demand. And demand where now, the uplink is growing faster than the downlink. This strengthens that potential for fiber-based services," explained AT&T's Arroyo. "Investing in fiber yields a fantastic return."

AT&T executives have said that the company's fiber investment ultimately will generate internal returns of around 15%. And AT&T's CFO said that return on investment will be due to a variety of factors. Fiber "supports not only consumer needs, it supports needs for our enterprise businesses as well as needs for potentially our reseller business. So being able to look across and integrate the planning for fiber deployment such that it not only serves consumer needs, but it serves these other market adjacencies as well is something that we haven't been very good at historically," Desroches said. "That's why we're really bullish and we believe we're going to be able to execute really well here."

It's also worth noting that AT&T isn't the only company investing heavily in fiber in the US. Other companies making similar investments include Charter, Altice, Windstream, Frontier and Verizon.

Importantly, AT&T's investments into fiber also coincide with a major push by the Biden administration to finance the construction of fiber networks across the country. That funding could ultimately allocate hundreds of billions of dollars to providers like AT&T that are willing to construct telecom services in rural areas. Whether AT&T will be able to tap into that funding though remains to be seen.

"With the right policy ... we think that we can participate in these growth areas," Arroyo said.

Related posts:

Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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