AT&T: The “Inside Out” Dilemma

January 30, 2023 | This past week we heard from the “big guys” (AT&T, Verizon, Comcast, Charter) on Q4 2022 earnings. Many big themes came out but fiber was the clear topic of interest for AT&T investors. The quick elevator summary was AT&T is slowing the roll out a bit in terms of its fiber footprint INSIDE its landline franchise footprint vs. 2022 levels (although still guiding to 30MM homes by 2025), yet turning on the gas OUTSIDE its wireline footprint through its new partnership with BlackRock. The shape of this partnership was a large focus of the Q&A on the conference call as the Street tries to better understand how this is structured. In another somewhat surprise, AT&T announced it will be coming to the market later this year with a new FWA (Fixed Wireless Access) system.

To put some numbers around it, while AT&T did not change its goal of 30MM fiber fed locations by 2025, Wells Fargo estimates T is slowing its fiber build pace to +2-2.5MM locations/year (from +3MM), as it has reached +24MM locations (22MM open-for-sale).

This is important to flag as it does shine the light on a bigger issue. It seems the market has fully agreed that the natural bundle is wireless and broadband. The days of the quad bundle (wireless, broadband, voice and video) is a thing of the past! Within this bundle, wireless has now taken on a two pronged approach – both “traditional” wireless (with that device in our pocket) and Fixed Wireless Access (FWA).

Working off the assumption that broadband and wireless is THE bundle – then the question becomes one of the chicken and egg debate. Which one is the chicken? Which one is the egg?

A recent note by NewStreet team summarized it well noting:

“Convergence is here. …..it will add pressure for everyone to field a converged broadband + mobile offer. Verizon and T-Mobile have a converged offer in 50-60MM homes with FWB, but they are capacity limited. Without big capex increases, they are limited to 12-15MM subs. Perhaps 10% of the market. In addition, we would contend that the product won’t work for most households. Real broadband is either fiber or Cable.”

Going back to how we started, AT&T clearly believes this “real broadband” comment as well and is putting its capital (and that of BlackRock’s) where its mouth is. While wireless is still very much part of AT&T’s core focus and strategy, what they have found is that where they have fiber, wireless subs are easier to capture. CEO John Stankey himself may have said it best on last week’s earnings call when he noted:

“…our North Star remains solely focused on becoming the best connectivity provider with 5G and fiber.”

Through its partnership with BlackRock (“Gigapower”) AT&T seemed to show its cards. In AT&T’s mind, broadband is the chicken and wireless is the egg.

They want to go fast and wide with fiber…but herein lies its “inside out” dilemma.

INSIDE its footprint (where it is using only its own capital), the challenge AT&T may have is that of its own balance sheet. This balance sheet needs to be cared for and protected because it has been through the ringer.

The best analogy to this situation I can think of is when I popped my ACL on a ski hill. Stay with me here…but the pain and trauma of that event kept me off a ski hill for 2+ years. While I love love skiing and knew it was where I wanted to be on basically every vacation, I worked as hard as I could in PT to get back on the slopes. I knew getting back on a mountain was the goal but I needed to treat that knee with tender loving care to get me ready or the longer term consequences were too great.

How does this at all relate to Big Blue? Well, what AT&T is now doing with fiber INSIDE its footprint (where its balance sheet is feeding the capital), think of this as its own “PT stage.” They need to take it slow and steady to protect this once wounded balance sheet (aka ‘knee’ in my analogy!). AT&T fully knows that fiber ultimately will prevail (which is why it did not back away from the 30MM home goal inside its footprint), but its balance sheet (after all it went through these past few years) is in recovery mode and needs to be treated with kid gloves.

But OUTSIDE the wireline franchise footprint, where it can grab on the coat tails of low cost capital, AT&T can do the slalom runs as fast as anyone. Again Stankey himself may have said it best:

“….what makes me most enthusiastic about this endeavor is that we believe Gigapower provides us long-term financial flexibility and strategic optionality in what is the definitive access technology for decades to come, all while sustaining near-term financial and shareholder commitments.”

So while AT&T may still have to do some PT sessions inside its ~ 23 state footprint this year, outside this region, watch them tackle those double black diamonds with the greatest of ease and extreme precision.

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