AT&T Business’ SDN-based services could provide flexible bandwidth options, upsell opportunities, says analyst

AT&T’s moves to reduce costs in the business operations are bearing fruit, according to Barclays.

AT&T has an opportunity to revamp business services revenues by implementing a host of cost-cutting measures amid the ongoing migration to a virtualized services delivery environment.

The service provider said it will continue to focus on cost-management initiatives and process automation service delivery efficiencies as well as SDN and virtualization.

Barclays said in a research report that AT&T’s moves to reduce costs in the business operations are bearing fruit.

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“Despite the segment's subdued top line progression, management's ability to drive out costs has enabled segment margin stability,” Barclays said in a research note. “Further options for cost reductions include optimizing costs in legacy voice / data, driving higher utilization of its fiber infrastructure, and ramping software centric applications.”

Out of the largest telcos, AT&T has been the most aggressive on the virtualization side. AT&T set a goal to equip 55% of its network with software by the end of 2017. In 2016, the service provider set a goal to convert 30% of its network to SDN, but AT&T surpassed that goal and met 34% of its network and is on its way to 75% by 2020.

By implementing process automation and service efficiencies, AT&T can continue to roll out next-gen services such as on-demand Ethernet and SD-WAN.

Near-term challenges

While AT&T’s plans to improve business service revenues are certainly sound, the telco still faces near-term challenges to make that a reality.   

During the second quarter, AT&T’s business wireline segment saw pressure from legacy services and equipment sales. Business Solutions segment revenues were $17.1 billion, down 2.7% year-over-year due to continued declines in legacy services and fewer wireless equipment upgrades, partially offset by growth in strategic business.

Being a traditional telco, declines in legacy voice and data will “remain a standing headwind AT&T's Wireline Business Solutions,” Barclays said.

“While the revenue contribution from legacy services continues to shrink (~48% of 2Q17's Wireline Business Solutions revenues vs. 53% a year ago), its low-to-mid double-digit year-over-year declines remain a drag on the overall business' growth profile,” Barclays said. “Thus, the prospects for a return to overall segment growth seem low for the near term.”

Ramping Ethernet, virtual services

Despite the near-term revenue pull from legacy declines, the company sees several attractive opportunities within wireline strategic services.

AT&T continues to garner customers for Ethernet, cloud and security services. The service provider has maintained the top spot on Vertical Systems Group’s mid-year domestic Ethernet Leaderboard.

“In the near term, these include healthy demand for Ethernet, cloud / security services,” Barclays said. “Over the mid to longer term, the carrier believes the proliferation of more SDN-based services provide it with a means to meet enterprise needs for more flexible bandwidth management and opportunities to upsell additional applications.”

By implementing open-source technologies and white box hardware, AT&T will gain cost savings by enabling the carrier to become less dependent on more costly, proprietary infrastructure. On the virtual services end, AT&T has been enhancing services such as NetBond, which allows customers to their service on AT&T’s private network. Businesses will get a more predictable network experience that is free from the latency issues of the public internet.

AT&T is also offering SD-WAN with a focus on small businesses.  

While AT&T’s entry into SD-WAN provides more validation for the segment, the telco is going to face a group of not only fellow incumbent providers such as Verizon and CenturyLink that previously released an SD-WAN service, but also Comcast Business, which is just launched its SD-WAN service.