I probably watch AT&T more closely than I do any telco, any network operator. Not only have I chatted with literally hundreds of AT&T people over the years, I’m convinced that they are a poster child for “telco-tries-to-be-realistic”, and I certainly think they need to do that. I also think this quarter’s earnings prove that point, and maybe offer some insights to operators overall.
The first thing that jumps out from the transcript of AT&T’s call this quarter is the comment “we’re continuing our progress, improving our infrastructure and expanding our customer base across our twin engines of growth, 5G, and fiber.” They also said they had more quarterly postpay adds than ever before. In fiber, AT&T reported over 300,000 fiber adds, and the tenth straight quarter with over 200,000. While AT&T might not agree, I think that 5G success can be linked to smartphone promotions to facilitate a switch to 5G or even a switch to AT&T from a competitor. I think that fiber wireline Internet emphasis is defensive; they need to fend off players like Comcast who are MVNO partners with a competitor. DSL won’t do the job.
On the business side, AT&T has issues, but it’s hardly alone. They commented that “We’re seeing more pressure on business wireline than expected.” If you read (or listen) further, you find that AT&T is seeing businesses gradually shift away from what they call “legacy voice and data services”. There is no question that businesses have been far more resistant to VoIP and Internet-based connectivity than consumers; consumers of course never really had any data service but the Internet.
The most interesting comment on business services is “On the data front, VPN and legacy transport services are being impacted by technology transitions to software-based solutions. Today, approximately half of our segment revenue comes from these types of services.” What this is saying is that SD-WAN and virtual networking in general, using Internet connectivity as a “dialtone”, are starting to displace IP VPNs and business-specific broadband access.
Let’s stop here and parse this stuff a bit. Businesses, as I’ve pointed out in past blogs, link incremental spending to incremental benefits. Absent some justification, they want to see costs go down, not up. The fact that network connectivity hasn’t been linked to any transformational changes in productivity puts price pressure on even current network spending, and makes any increase hard to justify. That shows that “business connectivity” is commoditizing.
Viewed in this light, the 5G and fiber move has another level of justification. AT&T notes that business customers are replacing legacy voice with mobile services. The flight from legacy business data services combines with this to put business revenues under immediate pressure, so one solution is to try to beef up residential revenues, and another is to deploy 5G assets to capture any flight from legacy voice, and beef up fiber to extend quality Internet access to more places, including places where there are branch offices of their valued (and fleeing) enterprise customers.
Government spending is also under pressure, which AT&T says accounts for 20% of business service declines. Here, where it’s policies and not market conditions that establish the purchase justification framework, the company really can’t offer any affirmative options beyond the same 5G/fiber-broadband focus that they’ve adopted to support consumer and enterprise. I think it is very possible that targeted software-defined data services and mobile/VoIP OTT-like services that would appeal to businesses on cost could also improve AT&T’s ability to win government deals.
The reason I noted “OTT-like services” as appealing is that AT&T also said that out-of-area service extension contributed about 20% to business service revenue declines. They said “This pressure will be managed through opportunities to operate more efficiently, movement of traffic to alternate providers, symmetrical wholesale pricing adjustments and natural product migration trends.” While they didn’t say this explicitly, a migration to a software-defined business VPN strategy for out-of-region branch connectivity would surely help manage these “wholesale” costs.
This sort of service shift also raises the issue of 5G dependence. 5G is seen by many (apparently including AT&T) as a platform for the creation of wireless features that would earn more revenue, which simple 5G migration does not create. The problem is that, like business services, 5G value-add features like network slicing would have to be “federated”, wholesaled from a provider who actually had facilities in a given geography that AT&T didn’t cover directly.
A shift to business services based on mobile and software-defined capabilities is an OTT strategy. AT&T has in the past commented on the idea of building “facilitating services”. According to what AT&T said in March, 2022, “On what I refer to as Act Two, we are doing a lot of work today that is enabling us to open up aspects of the network for others to come in and start at offering value-added services associated with it.” It’s very possible, even likely, that AT&T intends to use these opened-up assets to enhance OTT services, making them differentiable on AT&T networks where they’d simply be riding on top of other networks.
One thing that seems pretty clear is that you can’t admit to commoditization of transport and a growing dependence on OTT without having any revenue strategy to offset the inevitable declines at the lower level. This may be another example of what Ericsson could be hoping to exploit with the Vonage deal, since it was Ericsson that was picked by AT&T for its 5G expansion. That would mean that AT&T and Ericsson/Vonage would have to codify how the Vonage OTT stuff could exploit APIs that AT&T exposes below. Does AT&T use the Vonage platform developer program to do some of the linkage?
Another thing that seems clear is that it’s likely that most, if not all, telcos will have to face these same issues at some point. AT&T has the lowest demand density of the Tier One telcos, which means that its natural return on infrastructure investment is under the most pressure. However, rival Verizon had an objectively bad quarter while AT&T had at least some bright spots. Verizon has the advantage of high demand density, but that may have lulled the company into complacency, particularly with respect to how to deal with the commoditization of connection services and pressure on return on infrastructure investment. And, of course, Verizon’s territory is dense enough to encourage competition.
A final point, perhaps the most critical point, is that business service infrastructure and residential broadband infrastructure have to converge. When you have a problem with return on infrastructure you need to take advantage of common facilities wherever possible. The fact is that there are no branch office “business access” technologies in common use that can measure up to the performance of residential broadband. Branch locations, at the least, need to connect through the same facilities as consumers. I think AT&T’s fiber and 5G plans, which are focusing on areas of high demand density within their territory, are a step toward “common-ization”, and here again I think AT&T is taking a lead over other telcos.
Not as much as they should, though. AT&T has tried harder than any other Tier One to confront the future, but they’re still entombed in telco amber, limited in their ability to address the future by the blinders of the industry. The issues they saw first, and have tried to address aggressively, are being felt by others now. Has AT&T done enough to gain the running room they need to do the rest? I suspect we’ll get the answer to that in 2023.