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AT&T Mulls Upgrading Rural Lines Instead of Selling Them

June 01, 2012

AT&T Mulls Upgrading Rural Lines Instead of Selling Them

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. Photographer: Chris Ratcliffe/Bloomberg

AT&T Inc. (T:US) 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 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.

The move 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.”

Decision Coming

Stephenson previously discussed the rural-broadband plan last week on an investor conference call hosted by JPMorgan Chase & Co. He 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.

High-Speed Gateway

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.”

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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