AT&T's Donovan says telco will take a more incremental approach to fiber builds

AT&T Communications CEO John Donovan is rightfully proud of his company's fiber build-outs, but starting next month it will take a more incremental approach.

As part of its 2015 merger with DirecTV, the FCC required that AT&T expand its deployment of its high-speed, fiber-optic broadband internet service to 12.5 million customer locations, as well as to E-rate eligible schools and libraries, by July of this year.

Consider that done, Donovan said during a Wednesday interview at the Credit Suisse 21st Annual Communications Conference. Based on that merger commitment, Donovan said that AT&T now has a large inventory of fiber-based assets that it can sell to, and that the build-out actually reached 14.5 million customer locations.

"That's behind us now," Donovan said of the merger commitment. "We'll continue to invest in fiber but we'll do it based on the incremental, economic case. We're not running to any household target."

While it used to take AT&T 36 months to get fiber into roughly 30% of a market, AT&T can now reach 50% to 55% in 24 months time, Donovan said.

"So I really like the cadence and the momentum that we've got in our brand, which is AT&T Fiber," he said. "Where we have fiber we're doing exceedingly well. Where we have slower speeds, sub 40 megabits per second, that's where the majority of our churn is. But right now if you look at this year, we will add a million high-speed fiber broadband subs. And roughly two thirds of those come from cable. So we're doing extremely well."

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John Donovan, AT&T

For the first quarter, AT&T reported 297,000 AT&T fiber customer gains and 45,000 broadband net adds, with broadband revenue growing more than 8%.

AT&T's 5G deployments, which will be launched in 29 cities by the end of the year before going nationwide in the first half of next year, also benefit from the fiber build-out.

Going forward, AT&T will work on refining its service bundles to take advantage of the Time Warner video assets, according to Donovan.

"We're in the middle of a pretty big move in speeds and pricing and all that sort of stuff," Donovan said. "It sort of manifest as really competitive bundling with us and cable."

Three reasons not to fret about AT&T's capex

Donovan brought up AT&T's fiber after he was asked if investors should be aware of any capex concerns going forward for AT&T.

"There are three reasons you shouldn't worry, particularly in our case," Donovan said. "The first one is we have some big investment cycles that are falling off. We had the fiber build that was a merger condition that ends next month. We had the network build-out in Mexico. That's behind us now.

"The second thing you (investors) should feel good about is a lot of the early stage foundation of the 5G is tower climbs that are being done for FirstNet have a commercial opportunity for us, but the funding mechanism sits within the First Net contract. That's an extremely big benefit."

AT&T expects to complete 60% of its contracted FirstNet deployment for 700 MHz Band 14 spectrum by fall, and the FirstNet build is also helping AT&T with its 5G service on the sub-6 GHz spectrum.

Last month, AT&T said that FirstNet, which is a nationwide broadband network dedicated to public safety, had more than 600,000 device connections being used by more than 7,250 public safety agencies,

The third reason for investors not to be concerned about AT&T's capex is its use of software-defined networking and open source.

"I think we are the world leader in our industry in that," Donovan said. "As we get into the denser builds of 5G that will be heavily software (based.) I think we're uniquely positioned as the premier global wireless company as it relates to infrastructure software. So I think 5G is going to be on a decline curve of cost per megabyte, cost per subscriber, that drops much faster than previous technologies as a result of that."

AT&T first outlined its virtualization project back in 2013 as part of its Domain 2.0 initiative. AT&T came up with the stated goal of having 75% of its core network functions virtualized by 2020. AT&T finished up last year with 65.5% of its network virtualized, which hit last year's goal.

Donovan said the end of several big investment cycles, the FirstNet build and its use of software-defined networking bode well for AT&T's short, medium and long-term capex. Building out the FirstNet network has helped AT&T in the short term while the spectrum that is deployed using FirstNet work provides intermediate capex benefits. 

"In the long term, you're just cheaper because you're doing it in software," Donovan said.