Windstream, Fairpoint watch out. T plans 3M lines of fiber to the premises (including each of the next four years, expecting to get to 20-25% of their territory. Some of them will be "out of territory," including some of the ~2M homes they have reached with fiber already. I can't recall either AT&T (almost half the U.S.) or Verizon (about a quarter) expanding this way in the last decade. 

AT&T, France Telecom, and Telefonica have discovered that fiber costs are down in favorable locations. Google Kansas City has proven fiber can be profitable, including pulling many customers from AT&T. Fiber in some places can be run for < $500/home; in others, the cost is $4,000-$5,000. It's a great business if you can cherry pick areas with low costs and weak competition.

That's exactly what AT&T is doing,

including looking outside for opportunities, CFO John Stephens tells Brett Feldman of Goldman Sachs. Surprised, Brett asked a second question to confirm. Stephens replied they were already building. (below) AT&T has a massive fiber network across the U.S. to serve businesses and their 70,000 cell sites. Costs can be very attractive where they already have fiber. 

CEO Stephenson in 2004 made what seemed a very risky decision not to do a fiber build similar to Verizon FiOS. The two companies had worked together on the design, led by then CTO Ross Ireland. Last year, he said fiber costs have come down so much they would start investing.

Google has put on hold their fiber plan in Portland, partly because Century/Qwest has run fiber past almost 100,000 homes. No one challenges Verizon FiOS. Their recent decision to (finally) go to Boston may have been to pre-empt AT&T, I now realize.

Windstream has a million DSL customers, many in smaller cities close to AT&T. CEO Tony Thomas is starting a slow build of next year after losing 40,000 customers to cable. He doesn't have the flexibility to do much more, carrying $10B in debt on less than a $billin market cap. Fairpoint also has subscribers near AT&T, but their financial position is better. Century/Qwest is the biggest opportunity, only slowly upgrading.

Fiber builds are most profitable when there are customers to win. The return varies enormously with the take rate. Broadband is an extreme case of high fixed costs and low operating costs. It costs a large telco or cableco $5-$8/per month to service each additional customer. In the U.S., they charge $45 to more than $70/month, for gross margins of 80%-90%. 

AT&T is simultaneously looking to shut down their network to 10M-15M high cost homes, switching everyone to wireless. 

From Seeking Alpha

Brett Feldman - Goldman Sachs & Co.

Thanks. John, you noted that you're on track to deploy fiber to 12.5 million customer locations. You have 12.6 million IP broadband customers today, but there are 60 million homes in your wireline region that could get a broadband line. So I'm curious, as you're doing the fiber deployment, how are you deciding which are the right homes to upgrade in terms of whether you should simply upgrading existing customers or how do you determine whether it's a business case to go to some of those homes that you don't serve and deploy fiber there?

John J. Stephens - Chief Financial Officer & Senior Executive VP

There's two things that – I mean, the first thing I'd tell you, Brett – is that the ability to build the fiber to the home is a larger footprint than just the 60 million. So we can take the economics of going into some appropriate customer basis, whether it's an opportunity for real – better economics, better profitability. So, we have that kind of business-case process to it.

Secondly, I would tell you that with regard to the FCC agreement, there's particulars within the agreement that allow us to build – count so many greenfield builds, count so many more upgrades in the existing IP broadband footprint – to utilize in some cases multiple dwelling units, and then in many cases require some level, or a significant level I should say, of new builds. So, we have to coordinate all of that, take all of that into consideration. When you're done with that, you may still have some profitable builds that are at or above the 12.5 million commitment and you may go ahead and build those. We'll see where that goes over time and we'll see where that leads us.

But the ability or the schedule to build is an economics activity, a business-case activity with, of course, the opportunity to over-build in some areas being probably more timely and less expensive. But that might be capped by some of the regulatory agreements that we have in place, and we're going to certainly be respectful of those. But overall, it's kind of a normal business-case process and where we can serve our customers the best and get the best returns for them and us.

Brett Feldman - Goldman Sachs & Co.

Got it. And just as a follow-up to make sure I heard that right, I think you said that you are considering taking fiber outside of your traditional wireline region if the business case makes sense. Is that – did I hear that correctly?


John J. Stephens - Chief Financial Officer & Senior Executive VP

We've already done it. We've already done that in many cities. So, I don't want to suggest to you that we haven't.

Brett Feldman - Goldman Sachs & Co.

How do you pick those markets? Are these places where maybe you've already done a lot of fiber for your LT networks so it's a natural extension or are there other characteristics that tend to be appealing?

John J. Stephens - Chief Financial Officer & Senior Executive VP

Just customer characteristics, competitive situation, access to other facilities we might have, a whole collection of considerations, whether it's a technology corridor like Raleigh-Durham or other such considerations. But that's a normal business-case process for us.