AT&T’s CFO John Stephens described AT&T’s fiber philosophy on a recent investor call. He described fiber as a “three-for-one opportunity” for AT&T. The first opportunity is for cellular backhaul. AT&T has been busy in recent years building fiber to reach traditional cell sites and is now building fiber to reach small cell sites. The company made a deliberate decision to reduce the amount spent on leasing fiber transport from others.
The second is building to businesses. AT&T often builds fiber to reach a large business which alone justifies the cost of building fiber. But he says the company now also looks at nearby small businesses. All business customers on fiber are high-margin, and generally steady customers. I’m sure AT&T understands what most fiber overbuilders understand – business customers on fiber are not likely to switch back to cable company broadband as long as they believe they are paying a fair price.
Finally, Stephens says the third opportunity is residential. In 2015, AT&T agreed to build fiber to pass 12.5 million homes and businesses. For a few years it didn’t look like the company was working to meet that goal (not untypical for merger conditions that never get fulfilled by big carriers). But in recent years AT&T has been doing exactly what Stephens describes. They have leveraged existing or newly built fiber to add small pockets of residential customers to fiber. All over the country, AT&T has small pockets of 50 or 100 homes that are near to fiber pops that can buy now buy fiber.
This strategy seems to be paying off for the company. In the recently ended third quarter, AT&T added 357,000 customers to fiber to bring total subscribers on fiber to 4.7 million. Stephens says the company now has a 33% penetration in neighborhoods where it has built fiber. A year ago, he said that the company’s goal is to reach 50% penetration after a few years.
AT&T is still bleeding DSL customers and announced on October 1 that it was going to stop connecting new DSL customers. AT&T lost 217,000 DSL customers in the third quarter but still has 10.5 million in service. That number should drop faster now that the company is not connecting new DSL customers. AT&T will converts a few DSL customers to fiber, but the large majority will eventually switch to cable company broadband.
It took AT&T many years to see the light, but the relatively new AT&T philosophy is what I’ve been preaching to clients for years. If you’re going to absorb the big cost of building a fiber route, then you ought to take advantage of every revenue opportunities along that route. I believe every fiber route ought to be looked at as a profit center.
Building a fiber route is a major investment for any company from small CLEC to AT&T. Every new fiber route has at least one justifiable financial reason. A fiber might reach to a school or a cell tower or provide transport to connect two markets. A ISP feels justified in building the fiber for that primary purpose. However, there are few fiber routes that don’t pass additional revenue opportunities.
There are many fiber owners that have not yet figured this out. I know of a bunch of municipal and CLEC networks that are built to reach big anchor tenants that ignore other opportunities along fiber routes.
One of my favorite examples of an ISP that has done this right is Jaguar Communications in Minnesota. In addition to being a local ISP, the company built an extensive backbone fiber network through a number of rural counties. These rural routes were built to reach cell towers, to sell transport to other carriers, or to connect Jaguar markets. Jaguar decided years ago to sell fiber-to-the-home along every transport route. Throughout the state is a Jaguar fiber backbone network that also sells fiber to farms along the fiber routes. I don’t know the number of customers Jaguar reaches this was, but it’s likely to be at least a few thousand. The revenues that can be made from a few thousand fiber customers is no small thing. Jaguar was recently acquired by Metronet, and I don’t know if the new company will continue the practice – but they should because it maximizes profit on every fiber investment.