AT&T's Stephenson: Microsoft, IBM cloud deals will drive down network, IT costs

AT&T looks to lower its network and IT costs with its recent cloud deals with Microsoft and IBM. (Pixabay)

AT&T sees many benefits to its recently announced cloud deals with IBM and Microsoft, but one of the biggest is driving down its network and IT costs.

AT&T Chairman and CEO Randall Stephenson delved into the importance of the recent cloud deals with IBM and Microsoft during Wednesday morning's earnings conference call.

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The carrier has aggressively reduced its network costs by embracing software-defined networking and virtualization in both its network and with its 5G build. AT&T is on track to meet its stated goal of having 75% of its network virtualized by next year.

During the conference call, Stephenson said the biggest cost items on AT&T's profit and loss statement were network and IT. Stephenson said AT&T has been able to drive down its "the factory cost" or "big iron" cost by 8%, 9% and 10% year-over-year, but it has just about maximized those efforts.

"We're kind of getting to a place where its hard to continue getting those kinds of productivity increases," Stephenson said. "What were doing with both IBM and Microsoft is leveraging capabilities in large-scale cloud deployments and they are taking over a lot of applications for AT&T, (and) moving those to the cloud. What it's going to do is allow us to continue this type of cost reduction curve on the network and IT side of the house and continue that momentum there."

One of the key elements of the Microsoft deal, which is reportedly worth $2 billion, is moving most of AT&T's non-network workloads to the public cloud by 2024. The two companies' multi-year alliance includes Microsoft being named as AT&T's preferred cloud provider for non-network applications as part of the telco's broader "public cloud first" strategy.

Stephenson also touted the revenue-generating opportunities that AT&T stands to gain from its cloud deals with IBM and Microsoft.

"In addition, we're securing revenue opportunities with each of those companies and we actually have go to market strategies that will allow us to continue the momentum you're seeing on the wireline revenue side," Stephenson said.

Stephenson said he was bullish on the business-to-business side of AT&T. Second quarter wireline revenues came in at $6.6 billion, which was slightly down from $6.7 billion a year ago. With wireless added to the mix, Business Solutions revenues increased 2.3%. Stephenson said AT&T made about $125 million in the quarter on IP licensing.

"Even without those licensing proceeds, business wireline trends were the best we've seen in years," Stephenson said.  "U.S. business is doing very, very strong. We're now into, since tax reform, our sixth quarter of really healthy fixed investments for business, and that tracks really, really, well with what we do. It's been a little soft in the last quarter or two with the China trade discussions. The (Trump) administration doesn't like us to talk about that.

"Second, pricing has been pretty rationale in this industry, especially as we worked off a lot of those old legacy products where you had this incredible pricing pressure. What is growing is the new IP type services. The pricing there and in market place has been pretty reasonable and stable and the new product sets are doing well. Special services, as we called them, were up 6% plus for the quarter, which is a nice healthy growth."

Stephenson said he is "hopeful that we continue to have economic growth, and the trade situation doesn’t become a distraction for businesses."

AT&T Fiber growth

AT&T Fiber added 318,000 new subscribers in the quarter, while posting IP broadband revenue growth of 6.5%. In its recent first quarter, AT&T reported 297,000 AT&T Fiber customer additions, with broadband revenue growing more than 8%.

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, which AT&T actually exceeded. 

"We passed an important milestone, our fiber deployment reaching 14 million customer locations and satisfying our fiber build commitments," Stephenson said. "This will be an important driver of growth going forward. We expect AT&T Fiber penetration to grow as the service matures."

Counting business locations, AT&T Fiber now reaches 22 million customer locations.