AT&T cut to fiber build out is teaser to allow DirecTV merger

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The FCC may be seething about comments made by AT&T CEO Randall Stephenson, at the Well Fargo Technology, Media and Telecom conference last week, but this is pretty much in line with how AT&T has been run for as long as we can remember.

The entire thrust of the comments Stephenson made was that for the past four or five years AT&T has been flat out in capital expenditure, and that it seems to him time to take a break, a rest, or to pause, as he put it. What everyone reported that that the reason for this was given as being unable to invest at a time when Network Neutrality rules were uncertain, pointing at the surprise change of direction implied with President Obama’s comments a week earlier in respect of Network Neutrality (NN).It is one thing for everyone to acknowledge that President Obama is a lame duck president, at a time when he issued his over the top aims for NN, but it is quite another to blame the office of the presidency for a change of plan and a reduction in investment. AT&T seems to have crossed a line when it responded to Obama’s NN discussion with a threat to halt fiber rollouts.The FCC followed up with demands to know what it meant precisely, but the implied threat is one that AT&T has delivered and acted on previous to Randall being at the helm. Randall’s predecessor Edward Whitacre Jr called for similar clarity in 2004 prior to undertaking Project LightSpeed, the necessary build out to bring fiber close enough to US homes to make U-Verse possible. AT&T refused to commit to this until it had “clarity” of the regulatory environment, which translated to an undertaking from the FCC that fiber would not have to be unbundled or wholesaled at a pre-ordained price to rivals, once it got within 500 feet of any given home.

Today, despite many promises to create universal broadband, AT&T remains a few thousand feet from most homes and not much closer to universal broadband – a fact that led to the National Broadband Plan under Obama to spend $billions to bribe it to get the job done. And yet today AT&T continues to pick and choose the most profitable broadband lanes and continually irritate the nation’s leader by statements like the one Stephenson made last week – to stop fiber to the Home build outs once again.

In 2004 as SBC Communications the company said it would dramatically accelerate its plan to build a new fiber-optics network into neighborhoods, and will fiber up 18 million households in the next two to three years, rather than the five years as previously announced.“The shovel is in the ground, and we are ready to go,” said SBC Chairman and CEO Edward E. Whitacre Jr. “Rational rules promote innovation and investment in new networks and services for consumers.” What is really happening here is that AT&T is threatening to slow down its fiber build out, and although it will go ahead with the 2 million fiber homes that it promised the FCC, in order to make it sympathetic to allowing its acquisition of DirecTV, it will go no further. Stephenson, pretending to be naïve made it clear that he assumed Obama would get his way and the FCC chairman Tom Wheeler, would bow to Obama’s vision. His prognosis is 2 to 3 years of litigation until things are clear. He suggested he was happier with Wheeler’s hybrid approach, but warned there’s going to be litigation whatever happens.“There has been a record established for 20 years on what rules apply to the internet, and now the President says he wants the opposite. Twenty years, multiple administrations, multiple chairmen and FCCs have supported the ruling that the internet is an information service, and this has been actually upheld by the Supreme Court.”“So if you want to go down this path and allow the FCC to make this determination that these are in fact regulated services, there is a mechanism at the FCC to do that. And by the way the FCC has to do this under full knowledge and full expectation that what they do will be litigated.But what Stephenson is really talking about is an end to the massive Capex investment that was required to get rid of the perception which the iPhone gave his company, that AT&T had a rubbish network. He has authorized about $3 billion extra expenditure a year for five years to get rid of that, and here he is conveniently suggesting that the spending is stopping because the President is out of touch.

The truth is that it was stopping because otherwise the AT&T share price may go down.“We made some comments in the DirecTV announcement that we would build fiber to 2 million additional homes. We will obviously commit to that once the DIRECTV deal is done. “For the last three, four years, actually, we have been running at a torrid pace in terms of investment. And we announced our Project VIP which had several piece parts to it. And we have literally been investing for four years now at a, I would consider, historic space.”Stephenson suggested in the speech that the natural level of investment was to multiply service revenues by 15%. Which comes to $15 billion a year, not the $21 billion he has been spending. In his recent call he said this would drop this year to $18 billion. If it had not been for the extra 2 million fiber homes that might have been $15 billion.And then he went on to just why AT&T wants to own DirecTV and we get to the heart of what this is really all about. Stephenson said that with just 16 million broadband subs and 6 million TV subs he was still scaling subscribers and was losing money on TV. He said this was mostly because of constant increases in content costs, rising too rapidly to pass on to customers. The TV base would not be profitable in his working lifetime. But by buying DirecTV and bringing their content cost structure onto the AT&T base, the TV business would be profitable overnight. What this might mean for the content industry is anybody’s business.He also wants to negotiate TV rights for the 100 million mobile subscribers base, but doesn’t want to do it from a 6 million base. After he has bought DirecTV he would be the “largest pay TV base in the world” and then mobile video rights would be cheaper.“Seeking those mobile rights becomes a very different conversation. And so we are very excited about that,” he said. On the one hand AT&T will freeze broadband investment in fiber for three years. On the other, if the FCC lets him buy DirecTV, then he would be so grateful that he would build out as much fiber as the FCC asked, though he clearly did not say that out loud.So the two-page letter sent last week to Robert Quinn, AT&T’s federal regulatory and chief privacy officer from the FCC, which asked for more information about AT&Ts fiber roll-out plans and its current profitability may show the FCC annoyance, but for AT&T there is too much at stake to be put off by such a request. He is due to answer the FCC by tomorrow, and chances are that reply will not be made public.

What is on hold is a promise AT&T made back in April when it said it would expand fiber to 100 cities nationwide. Of course this was as much to put Google off declaring any further fiber operations such as the one in Kansas, and was always a paper announcement and Stephenson was just looking for a scapegoat to blame for cancelling it.Earlier this year, AT&T had begun offering its high-speed U-verse with GigaPower (fiber) to customers around Austin, Texas which was one of three areas where Google Fiber is on offer.We keep saying it, if the US wants Net Neutrality, make it a condition of the AT&T DirecTV merger, and the Comcast Time Warner Cable merger. Throw in fiber/broadband speed and build out targets into the equation too, and it
will solve all of US broadband competition problems.