Where Do I Begin?

August 9, 2023 | While I no longer sit in the analyst chair, sometimes I get reach outs from contacts seeking my opinion about themes impacting the industry. One such inbound came this past week when someone asked my thoughts on the recent Fortune article (Why AT&T and Verizon’s infrastructure woes run much deeper than lead cables | Fortune). The title alone (“Why AT&T and Verizon’s infrastructure woes run much deeper than lead cables”) could send shivers down any telecom investor’s spine.

When I read the write up, I could not help think back to a song from the record album my parents seemingly played over and over when I was a child: Love Story.  For those whose memory does not go back that far, the name of the soundtrack’s main song was titled “Where Do I Begin?” (random sidebar: most Jennifers born in the 1970s were named after Ali MacGraw’s Love Story character.  While my mom still denies it, I know it is likely true of her only daughter!)

To understand the issues the telecos now face, one needs to have a historical perspective of the path they took to get us to today.  And after following this sector for 25 years, this perspective is firmly in place.

The article reviews much of the telecos’ history. The author did a good job of going through the key milestones that bring us to the present day (hint: it was a long and very windy road!).  While there were clearly many strategic missteps made, that is all in the rear view mirror today.

To answer my contact’s original ask on the article I opined on its conclusions with some quick “Agree” or “Disagree” thoughts. Thought it would be fun to share!  Here goes it….

1. Telecos have had years of underinvestment –> AGREE

As we now see with telecom fiber enthusiasm, there seems to be a realization from telecoms that a gut rehab of the broadband pipes was long overdue and band-aid fixes do not work.  Despite this enthusiasm, the main challenge the telecoms are facing is the many pulls on their capital – fiber, spectrum purchases, deployment of this spectrum through infrastructure investments AND (perhaps most importantly) their meaningful dividend commitments.  Worth noting that in the 1990s many more wireline carriers had such dividends.  Now two remain.

2. 5G is NOT an ‘overhyped bust’ –>  AGREE

Investors seem to think the slowdown in wireless spending (see 7/19/23 Fritzsche Forum writeup) is an indication that no killer 5G apps exist.  I do not concur.  Like the Field of Dreams movie taught us all: “build it and it will come.” Memories are indeed short in Wall Street land and what investors seem to forget is Uber, DoorDash and other apps like these did not even exist before 4G came in to play.  It is fair to assume AT&T and Verizon likely see something in the 5G revenue pipeline for them to pay $100B+ (combined) in the C-Band midband spectrum auction alone.   If no ROI will ever be realized, there is a (very) high carrying cost to that spectrum bill.  Most agree midband spectrum will be the foundation on which the 5G ecosystem will be built. The key question is if 5G will be more embraced by the consumer or enterprise segment.  If the latter (which I believe will be the case), that runway for incremental customer growth is a long one for wireless carriers.

3. Verizon Made Wrong Spectrum Bets –> DISAGREE

The article implies that Verizon took their eye off the ball being aggressive in its purchase of mmWave spectrum before buying C-Band. What this analysis does not discuss is the small amount of absolute dollars Verizon spent on this spectrum on a MHz / POP basis (the main spectrum metric unit).  With mmWave spectrum, VZ essentially bought that top of the spectrum ‘wedding cake’ and with over 1200 MHz of mmWave spectrum per market the channel depth of this spectrum should not be overlooked. Having more spectrum tools (and the depth to boot) in its spectrum toolbox will serve VZ very well in a 5G environment.

4. Cable Competitors Several Steps Behind –> DISAGREE

The article is somewhat dismissive of the cable competitors.  It assumes they are asleep at the wheel.  This is a dangerous assumption.  With all the fiber to the home (FTTH) love being seen by the telecom players, cable is not sitting still or being passive.  Last month, CableLabs – an innovation lab for future-forward R&D for the cable industry – held a DOCSIS 4.0 event which drew great participation from the cable community, showcasing both cable modem termination system (CMTS) and cable modem (CM).  Results were encouraging here with DOCSIS 4.0 producing speeds in the range gigabits-per-second for BOTH downstream and upstream.  This symmetrical nature of the speed realization is a big point, as that has historically been the Achilles’ Heel for cable.   As cable continues to upgrade its network to DOCSIS 4.0, they create more arrows in the quiver to make the teleco fiber challenge a more even battle.  Simply put, one should not underestimate this foe.  History is against such a bet.

5.  Content Bets Took Capital Away from the Telecoms Infrastructure –> AGREE (But Times They Are a Changin’)

The article walks through all the history (and drama) of telecom’s flirtation with the media space.  The point was made these players took their eyes (and wallet) off the ball of infrastructure investment. This is true. But those days are over in telecom.  Verizon and AT&T have both officially divorced their former media partners (Comcast is still there with NBC). The network (both wireless and wireline) is THE focus for telecom players now.  As mentioned above, capital structures admittedly present some handcuffs there, but in 2H 2023 and 2024, we expect private capital to further embrace the “rails” and help loosen that handcuff pressure. In my view, this potential lifeboat is the elephant in the room the author most ignored.

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