Year in Review 2012: AT&T's multibillion-dollar network bet

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AT&T rural networksThe news: With all of the attention that AT&T (NYSE: T) puts on advertising how great the coverage of its wireless network is, it's a wonder anyone who covers the telecom industry knows they are still a dominant wireline operator.

All that changed this past fall when the service provider announced it would spend $14 billion to make upgrades to move its wireline network to an IP-based infrastructure and migrate some of its harder-to-reach copper customers to 4G LTE wireless services under the Project VIP initiative. As expected, the larger $8 billion amount will be spent on wireless, and the remaining $6 billion will be spent on the wireline network. 

This project takes what the telco says is a four-pronged strategy that will enhance and expand its wireline network to reach 57 million customer (consumer and SMB) locations. The four prongs are U-verse expansion; U-verse IP DSLAM; upgraded broadband speeds; and increased on-net fiber connections into multi-tenant office buildings.

AT&T will expand its U-verse coverage to over one-third, or about 8.5 million, additional customer locations, enabling it to potentially serve a total of 33 million customer locations by the end of 2015. Part of this expansion will feature an IP DSLAM-based service, including broadband data and VoIP, to 2 million locations in the company's wireline service area by the end of 2013.

Sticking to its hybrid copper/fiber Fiber to the Node (FTTN) plan, AT&T will leverage a mix of VDSL2 with bonding and enable U-verse broadband speeds to up to 75 Mbps, while U-verse IP DSLAM customers will initially get up to 45 Mbps.

The upgrades to U-verse come at a time when the service is resonating with customers in areas where it's available and has become a big portion of the company's consumer revenue mix. In Q3 2012, AT&T added almost 200,000 new U-verse TV subscribers and 613,000 new broadband Internet subscribers, while ARPU rose almost 10 percent.

Project VIP also provided an answer for AT&T's rural copper wireline assets. Unlike its RBOC brother Verizon (NYSE: VZ), which sold off its rural assets to FairPoint (Nasdaq: FRP) and Frontier (Nasdaq: FTR), AT&T said that in the 25 percent of the wireline locations where it can't upgrade the wireline facilities to IP, the company will extend its 4G LTE wireless network to offer those customers broadband data and voice services. AT&T said ultimately the 4G LTE network will cover 99 percent of its in-region wireline customer locations.

Critics of AT&T's rural plan are quick to point out that even those customers who will be able to get the LTE service will be faced with onerous usage caps and higher prices. One of the concerns pointed out by various critics is that the telco is abandoning a large portion of its customer base that still relies on copper-based DSL and traditional phone service.

"I can't blame the company for taking these steps, and it's at least trying to engage the FCC on the regulatory front as opposed to selling off its DSL business as Verizon has done, but as it moves forward we need to look at who is left behind," opined Stacey Higginbotham at GigaOM.  

While U-verse has certainly been a big revenue driver on the consumer side, AT&T is seeing an equal uptick in the adoption of IP business services, particularly Ethernet and IP VPN. Since AT&T is the dominant U.S. Ethernet and VPN service player, it makes sense that Project VIP includes a Fiber to the Business (FTTB) element that proposes to reach 1 million business customer locations with a focus on serving the 50 percent of multi-tenant business buildings in its wireline serving area.

Increasing its on-net fiber building connections comes at a time when AT&T's IP services are continually offsetting losses in legacy Frame Relay and ATM data services. The telco reported that while overall business revenues declined 2.6 percent year-over-year and sequentially in the quarter to $9.1 billion, Q3 strategic business services revenues grew 11.4 percent year-over-year.

Why it matters: Project VIP is the biggest capital investment program the telco has proposed in recent years for its wireless and wireline networks. What's also interesting about the project is the timing. AT&T and fellow RBOCs Verizon and CenturyLink (NYSE: CTL) have been lobbying the FCC to relax its current special access rules because they are moving to IP-based networks. However, CLECs such as tw telecom (Nasdaq: TWTC) that have a sizeable fiber footprint of its own still have to use the ILEC's last mile facilities to serve customers that have locations outside of its footprint. Special access combined with the company's proposals to migrate rural customers off its copper networks will be up for continual debate in 2013 and beyond.