AT&T Inc. Chief Executive Officer Randall Stephenson said he’s “cautiously optimistic” about using new broadband technology to wring more value from rural phone lines, backing away from a plan to sell them off.
The company aims to use an enhanced version of digital subscriber line technology to speed up Internet access in rural areas,
Stephenson said today at an investment conference hosted by Sanford C. Bernstein. AT&T (NYSE: T) had targeted the lines as an asset it could offload, though he said today that a deal would face regulatory hurdles and require multiple state approvals.
[AT&T provides telephone service to much of North Carolina, including substantial amounts of rural territory.]
Stephenson also said cellphone plans that count only data usage are likely to come in the next two years. In such a scenario, phone calls and texts would be considered as just another form of data. He didn’t say AT&T has such a plan in mind, but he suggested that someone in the industry will likely offer one.
“I’ll be surprised if, in the next 24 months, we don’t see people in the market place with data-only plans,” Stephenson said at a Sanford Bernstein investor conference in New York. “I just think that’s inevitable.”
Voice Call Volume Shrinking
Analysts see such plans as a logical extension of trends in wireless technology. Smartphones with data service can already use it for Internet phone calls and texting through services such as Skype.
Phone calls are also taking a back seat to other things people do with their smartphones. AT&T has been recording a decline in the average number of minutes used per month.
However, phone companies still make most of their money from calling plans and texting, which use very little data. That means phone companies would want to compensate for the revenue fall-off somehow, perhaps by raising data prices.
The switch would be complicated by the fact that phone companies charge each other to connect calls to phone numbers. That’s one reason calling plans are charged separately from data usage now. But at least in the U.S., connection fees are low, and phone companies could make up for the cost by raising their own fees. Connection fees for international calls are much higher.
AT&T has said that it wants to introduce wireless data plans that allow a subscriber to share a data allowance over several devices, such as a smartphone and a tablet computer. Another AT&T executive, wireless head Ralph De La Vega, has said these plans are close to being introduced.
Such plans also represent an opportunity for phone companies to add more data revenue, but they are a possible pitfall as well, as consumers will effectively be getting a discount compared with buying separate plans for their devices. Stephenson said AT&T is determined to make more money from the plans, not less.
When you have millions of devices such as tablets that lack cellular data plans, Stephenson said, “it seems to me it’s a lift, not a deterioration” to get them connected.
Tablets such as the iPad are often available with cellular data modems, but the majority are used only on Wi-Fi.
AT&T has also floated the idea of letting websites or video services pay for the data used to access them, instead of having the data count toward the visitors’ allowance. That idea, similar to “800” toll-free numbers for websites, is more controversial, as it would let deep-pocketed websites make themselves more attractive than startups.
Stephenson said he expects experimentation along those lines to begin in the next year. He didn’t say if AT&T would be the one to do it, but he said Web content providers are already contacting the company about setting this up.
“It’s not us going out and mandating this. The content guys are coming in asking for it,” Stephenson said. “If you don’t allow those kinds of models to flourish, you’re going to inhibit the potential of these services.”
The move to update rural lines would mark a shift for AT&T, which had identified its rural lines and its Yellow Pages directory service as “underperforming assets” that were dragging down the growth of the company. AT&T, based in Dallas, agreed to sell a majority stake of the Yellow Pages business to Cerberus Capital Management LP for $950 million in April. Rural lines had been next on the block.
Stephenson may have struggled to do a deal, forcing the company to squeeze more revenue out of the assets, said Roger Entner, an analyst at Recon Analytics LLC. Meanwhile, the carrier faces steeper competition from cable companies, which are offering broadband in a wider swath of rural areas.
“If he can’t sell them, then he has to make the best out of them,” said Entner, who is based in Dedham, Massachusetts. “His lines without high-speed Internet are sitting ducks waiting to be picked off by cable companies.”
Stephenson expects to make a decision on whether to bolster the assets or sell them by the second half of this year.
“I do feel more optimistic about the opportunity to get more broadband into rural areas,” Stephenson said on last week’s conference call.
Of the roughly 50 million homes in range of AT&T’s network, about 30 million are within reach of its U-verse fiber-optic system. AT&T can sell those people a bundle of lucrative services, including broadband Internet access, phone plans and television.
It’s more challenging to offer services outside that range. About 15 million of the homes beyond the U-verse boundary can be served by DSL, which can be slower than cable broadband.
To speed up those lines, AT&T has been using a network device called an Internet protocol digital subscriber line access multiplexer, or IP DSLAM. It serves as a high-speed gateway for viewing Web content or video downloads. The cost of deploying IP DSLAMs has been better than expected, Stephenson said.
“Rural lines are lower-growth assets compared with AT&T’s overall average, but they do generate cash,” said James Ratcliffe, an analyst with Barclay Capital in New York. Bolstering broadband coverage could spin off more revenue and help ward off competition from cable.
Still, 5 million homes in AT&T’s coverage area are located too far away from a network hub to receive any kind of broadband, Ratcliffe said.
Another option for boosting broadband access is wireless technology. AT&T had planned to use its takeover of T-Mobile USA Inc. to better reach the rural market with mobile Internet service. After that deal failed, Stephenson said on a January conference call that the company no longer had a solution to its rural broadband challenges.
The IP DSLAM approach has changed AT&T’s view, Stephenson said.
“We are giving this a hard look,” he said on the JPMorgan call. IP DSLAMs “bring broadband capability in a more cost- effective manner, with a better revenue profile than perhaps we would have thought two years ago.”
(Bloomberg news contributed to this report.)