At the J.P. Morgan analyst conference yesterday AT&T CEO John Stankey specified the main factors that AT&T considers for a fiber build.
For about three years, AT&T has been clearly communicating its two main focuses — 5G and fiber. In terms of fiber, it set a goal to pass 30 million locations with fiber by 2025. It closed 2022 with a total of 24 million passings.
Yesterday, Stankey said the fiber build and the consumer response to it have been going well. “If it was not performing well we wouldn't have had the conviction to start the Gigapower venture with BlackRock.”
Gigapower is the name of the fiber joint venture that AT&T is doing with the private equity firm BlackRock.
Stankey said that AT&T was so impressed by the response to its fiber build within its wired footprint that it decided to extend fiber outside of its footprint with the joint venture.
The business case
“The big sensitivities in the business case are the rate of penetration, how fast you get customers on the network after you build it, the ARPU, and in particular what the terminal ARPU is on the customer and its steady state and then third is the build costs,” said Stankey. “Those are your biggest impact on the financial return characteristics of it.”
He said that AT&T’s rate of penetration in the first year after a fiber build “is twice as much as what we expected when we did the original business case on this stuff to get to the 30 million customer passes….twice is a lot. And I'll just leave it at that.”
He also said that average revenue per user (ARPU) was better than expected. “We're operating right now at what we assumed to be the terminal ARPU. Where we stand in the business right now, we're actually at what would have been the terminal ARPU out at year 10.”
Stankey also talked a bit about the cost of its fiber builds. He said the cost of the electronics and the fiber were governed by long-term supply relationships, and AT&T has that under control. “We have scale,” he said. “This is something, by the way, that we've imparted to the JV. Our procurement supply contracts are availed to the JV to be able to buy fiber and electronics under that.”
He said the labor aspect of the fiber builds is more volatile.
“That part has been more prone to inflation dynamics because it's a wage intensive dynamic of hiring people to dig trenches and do work. But in the aggregate, you're talking about 5% and 10% increases in cost to build on something that is amortized over 30 years.”
But he said even with the inflation on labor costs the business is still providing better returns than expected because of the faster penetration and higher ARPU.
The cable operators Comcast and Charter have been bragging about how well their converged offerings of broadband and mobile virtual network operator (MVNO) wireless have been doing.
J.P. Morgan analyst Phil Cusick asked Stankey about selling a converged offering of broadband and wireless together.
He said AT&T is starting to leverage the high customer satisfaction it’s seeing from new fiber customers to also try and sell them AT&T wireless. “So that gives you a pool of customers to go after, but it's not as impactful as you know, mass market advertising to the national U.S."
He said the inverse of that scenario — where AT&T tries to sell its wireless customers on fiber broadband — has been less effective, to date.