Every network operator worldwide faces profit challenges. Some face challenges more acute than others, of course, and we need to watch those operators to get an advance look at what may be coming for the industry overall. AT&T is such an operator. They have a challenging demand density, they made some mistakes in their early planning, and they face a hostile/activist shareholder. No wonder what they’re thinking is important, but what is it?
Light Reading covered the latest from AT&T here, but it was announced by AT&T in its October earnings call. What it boils down to is that AT&T is accepting that it needs to radically reduce costs because it can’t radically increase revenues in the current climate. It’s worthwhile to look quickly at how AT&T got to where it is, and then at the direction it’s taking. Maybe we can even answer the critical question, which is “Will this work?”
The critical determinant in the intrinsic profitability of a given operator’s service geography is what I’ve called demand density, which is a measure of the potential revenue to be earned from service activity within a square mile of territory. I’ve collected demand density numbers for all the major countries, and in the US for all the states. Thus, I’ve had the data for the old Regional Bell Operating Companies, and for companies like AT&T that have been built by combining some of those old RBOCs. AT&T has relatively low demand density—a fraction of competitor Verizon’s, and that’s its big problem.
Demand density relates mostly to what would be called “pass cost”, the cost of providing service to a customer’s area, to the point where if the customer ordered something from you, you could connect them to your access infrastructure. Low demand density means that the cost of passing, say, a thousand customers is too high for the customers’ associated revenue to deliver acceptable returns on investment.
You need to raise revenue or lower pass cost to counter low demand density, and AT&T tried to pioneer in the video business to do that. It was one of the few operators to attempt DSL-delivered U-verse video, and it bought a satellite company to launch its DirecTV service. Satellite video and broadband has always been a good solution in thin-demand areas because it has no local infrastructure, but DSL video hasn’t proved successful overall because of limitations in the outside plant.
In a sense, cost, in the form of pass cost, is actually a barrier to new revenue, at least new broadband Internet and TV revenue. The problem is that conditioning old infrastructure for new service is expensive, particularly when some market players (cable companies notably) have infrastructure better suited to video and broadband delivery. Even though AT&T may have customers within its territory who have revenue potential, their distribution doesn’t lend itself to a high return. If a new service requires new access infrastructure investment, that new investment isn’t likely to pay off for a low-demand-density operator like AT&T.
The financial industry uses something called “return on capital employed” or ROCE as a measure of how effectively a company uses its investments in infrastructure. I’ve been calculating demand density for operators for over a decade, and in that time, I’ve found that demand density is highly correlated with an operator’s ROCE, meaning that having a low demand density tends to create a proportionally low RCOE, and that discourages access infrastructure investment. A lot of AT&T’s problems are baked into its territory.
That pretty much leaves broader-targeted cost-cutting, which traditionally means cutting opex. A typical network operator spends about 19 cents of every revenue dollar on capital projects and about 33 cents on what could be called “process opex”, meaning the operations costs associated with service/network lifecycle. AT&T has attempted to address both of these through technology, the former with an increased reliance on open-model networks (white boxes and open-source service features to run on them), and the latter through a series of point-strategies and also via its broader ONAP open-source lifecycle management initiative. Neither of these have delivered as AT&T has hoped.
Capital cost reduction through open-model networking is limited in its impact by the useful life expectations of the technology already in place. If you presume that your assets have a five-year useful life, then you can only impact 20% of those assets in a given year, and you’ll save only on the cost difference between legacy/proprietary devices and open-model solutions. AT&T can get more from relying on open-model stuff for new deployments like 5G, which is why its DANOS open-source-and white-box 5G access strategy is important to them. But it only reduces future costs, not current ones, so it’s also limited.
The ONAP initiative of AT&T had, in my view, great promise. In a nutshell, ONAP was designed by AT&T as an open-source solution to lifecycle management. When it was conceived, it could have framed a vision of operations automation that could have saved AT&T as much as 30% of its process opex. The problem was that, IMHO, ONAP was stuck in OSS/BSS-think. It imposes a monolithic model of management, has no solid framework to accommodate virtualization, and supports other initiatives (like SDN and NFV) by “plug-ins” or APIs rather than actual integration. It also had, like virtually all projects and network operator standards initiatives, an interminable development cycle, so as a result AT&T (and other operators looking for a lifecycle automation strategy) have nibbled at the problem with one-offs. That’s resulted in approximately a 15% reduction in process opex, which clearly wasn’t enough.
What does this leave for AT&T, strategy-wise? Their open-model network strategy will yield benefits down the line, perhaps enough to satisfy shareholders. Their ONAP opex reduction strategy is unlikely to help them much, in my view, unless they redo it somehow, and I don’t think they understand what’s wrong with it, much less how to fix it. They have two options, both of which have been suggested. One is to recognize that wireline is perhaps the biggest problem for them, and so “rationalizing” that strategy could help. The other is to simply put a squeeze on labor costs and benefits.
There are few telcos I’ve worked with that weren’t bloated in head-count terms. That’s a kind of public-utility legacy. However, there are also few telcos I know that are adequately staffed in the areas on which their future depends. That’s a result of the same legacy, a past where flexibility and market-responsiveness didn’t mean much. Build it and they will come. In any event, the risk here is that any measures taken to reduce staff layoffs will be complicated, in part because of the union labor percentage in the company and in part because as soon as layoffs are announced, all the workers you really need will, because of their greater mobility in the job market, likely put out resumes. You lose those you can’t afford to lose.
Selling off wireline customers and assets to others, as Verizon and other telcos have done, is a smarter play. You shed revenue opportunity you know you can’t realize and shed labor costs at the same time, which is a decent trade. However, cable companies like Comcast are under some of the same pressures as AT&T, but hardly shedding their cable business. Comcast has also made a go of buying media/content companies, a move that with AT&T set off the activist-investor thing to start with.
What I think AT&T has to do at this point is to first identify those people within their organization who are capable of OTT-and-cloud-think. Wherever these people are, they need to be harnessed rather than threatened. This is going to be problematic if they follow their usual “who’s valuable” approach. If the effort becomes “bell-heads-save-each-other”, they’re in trouble. It may involve using outside resources to assess the people objectively, at least to get the initiative started. It’s not as big a job as it might seem to AT&T; all you need is a small cadre of really good technology-thinkers; they’d recognize others almost on sight.
Second, AT&T should focus on 5G/FTTN hybrid technology to deploy in the areas where demand density justifies it and video and high-speed broadband is a viable offering. There’s great promise in using 5G millimeter-wave technology for last-mile connectivity, and if you could drop the access cost, you could harness opportunity at an acceptable rate of return. They also need to use this technology for business services, meaning don’t just think of it as a residential strategy but also as a branch office and SMB strategy. If they do this, they can keep the customers who could be targets for additional revenue-generating service and sell off the wireline customers and infrastructure. This would also accelerate the adoption of the open-model 5G deployment, which accelerates their savings on capex.
The third thing they need to do is to clean up their ONAP act. ONAP as a whole is a mess, but it’s a mess that could be saved by creating a kind of cloud-native nucleus that would then pull together the monolithic tasks within ONAP, and also serve to integrate external initiatives. I’ll blog more on this point next week.
The final thing that AT&T needs to do is recognize that a cost management focus promises little more than vanishing to a point. Revenue growth is the only survival strategy that works in the long term, and like all operators, AT&T has been stuck in neutral on that issue. No, new connection services won’t work. No, video opportunity is, at this point, compromised by the growth of streaming services and the inevitability of content providers going it alone. Can AT&T make its own content successful? Sure, but can it carry the rest of the company? There are a lot of service opportunities waiting for AT&T and other operators above the connection layer, and an insightful set of cloud-thinkers can surely help them find at least a few of them.
It takes a long time to change direction in an inertia-centric player like AT&T, but the corollary is that it also takes a long time for it to die. That’s true with most telcos. As much as their near-term pressure has created alarm, particularly in the Street, there’s still time for them to not only save themselves, but to prosper.