TNO Playbook: AT&T

This report is the first in MTN Consulting’s TNO Playbook series. This report was prepared as part of MTN Consulting’s Global Network Infrastructure tracker. Our GNI tracker covers three primary types of network operators: telecommunications, carrier-neutral, and webscale. This report considers AT&T, a telecom network operator (TNO). The quantitative analysis in this report is based upon our recently published “Telecom Network Operators: 4Q18 Market Review.”

AT&T has come a long way from being a telco company to a media giant. Its first major move into media was when it acquired pay-TV  provider DirecTV for $48.5 billion nearly four years ago. The Time Warner acquisition last year gives further impetus to AT&T’s growth as a media company. However, AT&T’s growth story is not one without challenges.

AT&T’s entertainment segment has been a huge let down as it continues to lose subs from its DirecTV Now and satellite service. Despite these setbacks, AT&T remains bullish about its streaming and entertainment business. It is pinning its hopes on its ‘to be launched’ standalone streaming service, which will be competing with other streaming providers such as Netflix, Disney and Apple.

AT&T is also aiming to position itself as a 5G leader – even before the network capabilities and services are there. While AT&T wants brand leadership, it prefers spending as little as needed towards 5G. There are reasons for this. Top-line revenue growth has been weak, and operating margins flat. AT&T also has gone big on acquisitions and is now focused on debt repayment. Actual capex outlays on 5G-capable networks will be incurred gradually, as they can be justified. Marketing is much easier and faster to scale than network construction.

AT&T has so far deployed white box networking in Toronto and London, and aims to roll out white boxes in 76 countries by 2019. AT&T is moving away from proprietary routers to new hardware that is built using open standards and that can be upgraded via software. The telco plans to install over 60,000 white boxes across its network for 5G. AT&T says this helps it launch 5G service early to the market.

AT&T has launched 5G in 19 cities via mmWave – but nationwide coverage of 5G is a tad difficult without having enough mid-band spectrum. Though the mmWave band has the advantage of speed, it has a more limited range than lower-band airwaves. Technical issues apart, 5G will not take off at least until 2020. It may even take longer depending on the handset upgrade cycle. AT&T’s handset upgrade rate in 1Q19 was its lowest ever at 3.5%.

Below are a few highlights from the report:

• By global standards, capital intensity of AT&T is low. The company recorded its lowest ever annualized capex/sales ratio of 11.2% in 1Q19, as it increased its focus on debt repayment
• AT&T spends much more on their staff than on capex, and the gap has remained wide for several years. In order to fund a 5G uptick in capex, AT&T will continue to slim their workforce.
• AT&T has a 2019 target of $26B in free cash flow, to be used to pay down debt. AT&T’s year-end 2019 goal is a net debt of $150B, from $169B currently – that requires selling assets, including office properties and a Hulu investment.