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The Industry

AT&T’s Fiber Play

AT&T has quietly become a major player in the fiber-to-the-home market. It’s reported that AT&T added 1.1 million customers on fiber in 2019, bringing its base of homes on fiber to 3.1 million. This puts the company in clear second place for residential fiber behind Verizon’s FiOS deployment.

AT&T got prompted to build fiber due to an agreement with the government as part of the approval for the merger with DirecTV. The company agreed in the summer of 2015 to build fiber to pass 12.5 million homes within four years.

AT&T has been in the fiber business for many years. Like all of the big telcos, AT&T built fiber to large businesses over the last couple of decades. AT&T got dragged into the FTTH business in a few markets when it reacted to the Google Fiber overbuild in markets like Atlanta and the North Carolina research triangle. AT&T has been selectively bringing fiber to large apartment complexes for much of the last decade.

In the first few years of the mandated buildout, AT&T seemed to be only halfheartedly going along with the mandated expansion. They claimed to have passed millions of homes with fiber builds, but there was no press or chatter from customers having received AT&T fiber service. For the first few years after the mandate, AT&T was meeting its mandate by counting passed apartment complexes – many which were likely already within range of AT&T fiber.

But it looks like everything changed at AT&T a few years ago and fiber suddenly appeared in pockets of the many cities where AT&T is the incumbent telephone provider. There were several changes in the industry that likely prompted this turnaround at AT&T. First, they won the FirstNet contract to provide modern connectivity to all first responders nationwide. In many cases this requires building new fiber – financed by the federal government. Second, AT&T needs to connect to huge numbers of small cell sites – something that was not predicted in 2015.

It seems that AT&T management looked at those two opportunities and decided that they could best capitalize on the new fiber by adding residential and small businesses to the fiber network. That was a big change at AT&T. They had long refused to follow in the wake of Verizon and their FiOS network. They instead took the path of beefing up urban DSL with their U-verse business where they paired two copper wires to offer DSL speeds as fast as 48 Mbps. I think the company was likely surprised about how quickly that offering became obsolete as cable companies now routinely offer two to four times that speed.

For the past several years AT&T has been losing DSL customers in droves to the cable companies. For example, in the year ending in the third quarter of 2019, AT&T had lost a net of 123,000 broadband customers, even with the big gains during that period for fiber. The company will likely continue to lose DSL customers as copper networks age and the speeds fall further behind cable company offerings. AT&T has been petitioning the FCC to tear down copper wires, particularly in rural areas, further killing the DSL business.

AT&T’s new strategy for building fiber is interesting. They are only building FTTH in small pockets where they already have fiber. That fiber might be there to serve a large business, a school, or a cell tower. AT&T extends fiber for two to four blocks around these fiber hubs, only where construction costs look reasonable. AT&T has a big cost advantage of building fiber cheaply in areas where the company already has copper wires on poles – the new fiber is overlashed to the existing copper wires.

Late last year, AT&T announced they had met their government mandate and were taking a pause in building new fiber in neighborhoods. The company is instead focused in selling where it has fiber and has a goal of a 50% market share in those areas. That’s an aggressive goal when considering that Comcast and Charter are likely their most common competitor.

AT&T fiber must be considered by anybody building a new fiber network. If AT&T is already in the market, they will likely have sewn up small pockets of the community. It also wouldn’t be hard for AT&T to expand these small pockets to become larger, making them a real competitor to a fiber overbuilder. This will be an odd kind of competition where AT&T is on some blocks and not others – almost making an overbuilder have two marketing plans, for the neighborhoods with and without fiber.

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The Industry

Some Unexpected News

In an attempt to stop the massive bleeding of traditional cable TV customers AT&T has cut the prices for cable on both the DirecTV and U-verse platforms. The company lost almost 400,000 linear TV customers in the recent third quarter.

As an example, DirecTV’s ‘Select’ bundle of 150 channels will now be priced for a two-year contract at $35 for the first year and $76 for the second year, compared to the recent prices of $50 for the first and $90 for the second. All of the other packages have similar drops of $10 to $15 in the first year and lower second year prices.

I call this unexpected news because it goes against every trend in the rest of the industry. The average monthly revenue for the 2-year Select contract just fell from $70 per month to $55.50 per month – more than a 20% discount. From what I know about programming prices it’s hard to think that AT&T has any margin at the new prices and they are clearly under water for the first year, spending more for programming than what they will collect in revenue.

This price reduction brings a couple of different ideas to mind. First, it’s clear that AT&T still wants to have traditional linear cable TV customers. Even at little or no margin they see value in that, although I honestly can’t see what that benefit might be. Certainly, one benefit might be to prop up DirecTV through sheer volumes of customers. I think AT&T envisions the future of cable TV to be more in line with the smaller on-line packages being sold as DirecTV Now. But the general public largely is not yet ready to make the shirt to totally online and so perhaps AT&T wants to keep people using its products until that is a more likely shift.

But this price drop also talks about the market elasticity of cable TV. We’ve known for years that customers that cut the cord almost all say they are leaving traditional cable TV because of the cost. That was already happening before the plethora of new on-line alternatives like Sling TV and Playstation Vue. These new alternatives products have created what is called in economic terms as a substitute. Over 900,000 households changed to one of these online cable products in the most recent third quarter, and so it’s obvious that many people now view a skinny bundle like Sling TV to be a reasonable substitute for the big cable packages.

And this makes sense. We know that most households don’t watch many different channels even on a 200-channel cable offering, and so as long as a smaller lineup has channels a household is comfortable with then skinny bundles become economic substitutes for the traditional big cable bundle.

And of course, all of this is compounded by OTT providers like Netflix, Hulu and Amazon prime that provide a huge array of online content that is another competitor to cable TV. I can tell you personally that I am far happier with having one skinny bundle (currently Playstation Vue) and access to OTT content than I ever was with the big cable bundle. I remember channel surfing through the big cable packages at 3:00 in the morning (a time I am often awake) and finding nothing but bad programming and infomercials. The choice from online programming are far better for my tastes and style of watching TV.

This change makes me wonder if we aren’t seeing the end of the tolerance of the public towards costly cable TV products. If the idea that traditional cable TV packages are no longer worth the price we could be seeing a watershed moment in the industry – one where a huge cable provider makes a last stab to keep customers.

It will be interesting to see if any of the other cable providers react the same way. This is a bold move by AT&T and one would think that those seeking a cheaper alternative might be attracted to these new bundles. But of course, every customer that takes one of these packages will probably be bailing on a traditional package from one of the cable companies. This is going to be an interesting battle to watch.