As AT&T (NYSE: T) continues to transition away from its stable TDM legacy base, consumer and business continue to adopt IP-based services.
Speaking at the UBS Global Media and Communications Conference, Rick Lindner, CFO of AT&T, said that growth on the wireline side is, not surprisingly, centers on emerging services. For consumers the emerging service drivers continue to be broadband data and video, while in the business side it the continual migration to managed services.
Of course, making the shift from the safe TDM-based voice service revenue base to emerging IP services is one that AT&T understands is a gradual, not a flash cut, process.
"When you look at where the company was only 5-10 years ago, revenues in wireline were primarily driven by basic TDM voice (local and long distance)," Lindner said. "Today, the majority of the revenues in our business are driven by data and more and more by IP-based data services and video."
Broadband, video drive consumer growth
At the heart of AT&T's consumer growth strategy are both broadband data access and of course its U-verse IPTV offering.
In Q3 2010, AT&T saw year-over-year growth in wireline consumer revenues in more than two years. A big contributor to its wireline growth was 30 percent growth in consumer IP data revenues including strong U-verse IPTV service expansion.
AT&T added 236,000 new U-verse subscribers, bringing its total to 2.7 million subscribers.
"As U-verse scales, profitability is improving," Lindner said. "In fact, we expect to exit the year with U-Verse making a positive contribution to wireline margins on an annualized revenue stream of almost $5 billion."
Lindner added that it U-verse penetration will reach 30 percent.
Of course, the question is can AT&T sustain U-verse growth? At the end of 2011, AT&T believes it will hit the initial 30 million homes passed buildout target with U-verse. Believing that they will continue to double penetration over time, Lindner said that they will strategically build out U-verse as new housing developments pop up.
"We won't stop there because the fact is that in any individual market the demographics are always changing and new housing is being built so we'll continue to modify our build out plan and extend into adjoining areas, but it won't be at the pace after 2011 that we had these past few years," he said.
Unlike its RBOC brother Verizon with its ambitious Fiber to the Premises (FTTP)-based last mile strategy, AT&T continues to stick to a Fiber to the Node (FTTN) strategy with VDSL2.
This year, AT&T finally made good on its promise to expand U-verse into new markets and increase bandwidth speeds by adding pair bonding to its last mile delivery mix.
"Pair bonding provides us with a good opportunity for us in the future as more bandwidth is required at individual homes to provide that bandwidth," Lindner said. "More importantly, it allows us to extend the reach of U-verse further from the fiber so we can reach more homes and more homes in the footprint become marketable using pair bonding."
While the growth of U-verse has continued, AT&T doesn't want seen as just another me too video service service.
AT&T actually plans to continually evolve the service. To overcome that perception, AT&T continues to advance U-verse with features enabling customers to manage their service via a smart phone and continued rollout of DVR functions.
"What we're seeing is people want to watch content on a time shifted basis and want access to more content and there's lot of discussion about over the top video," Lindner said. "As the video market evolves, we're limited only in terms of the amount of content that we want to buy and put on the servers."
Although AT&T's business services growth continues to be impacted by the recent recession, the service provider said it has been seeing decent growth.
Interestingly, Lindner said that AT&T saw five consecutive quarters of improved business revenue trends.
As its traditional legacy Frame Relay service continues to see expected declines, AT&T saw 15.4 percent growth in revenues in strategic business services such as Ethernet, Virtual Private Networks (VPNs), hosting and application services in Q3.
Not only has AT&T been selling services to existing customers, but it has been seeing growth in new business accounts in both the U.S. and in Europe.
In Europe alone, AT&T reported it had $1 billion in new business sales during the third quarter. Proof of growing European business service momentum was seen this week with two new deals with the Linde Group AG and Smiths Group.
"Throughout the economic downturn, one of the things that have been a positive from my point of view is that our profit margins in business have continued to be stable," Lindner said. "In fact, we actually grew our business margins last quarter, and I think that positions us well as the economy continues to recover."
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