AT&T Inc. (T:US), the largest U.S. telephone company, plans to tell investors tomorrow that it will extend high-speed Internet service to far-flung customers in an effort to boost sales in its struggling rural business.
Through a combination of upgrades to the phone lines and the expansion of its long-term evolution, or LTE, wireless network, the company would be able to reach customers in rural areas with faster connections. About 23 percent of AT&T’s 52 million subscriber households can’t get broadband lines, according to John Hodulik, an analyst at UBS AG.
As rural consumers switch to mobile phones for voice calls, they’re getting rid of home lines, causing AT&T to lose customers who might otherwise stick around for broadband speeds. Instead of attempting to get rid of what it has called an “underperforming asset,” the company is seeking to revitalize rural lines. The idea is to get the operation’s sales growth closer to the 6 percent rate at the rest of the company.
“AT&T has two choices with the rural lines: They either sell them or invest in them,” said Roger Entner, an analyst at Recon Analytics LLC in Dedham, Massachusetts. “The worst thing they could do is nothing and let the business decay.”
The plan will be unveiled tomorrow in an event with analysts, Dallas-based AT&T said last month. Chief Executive Officer Randall Stephenson will lead the meeting.
Last year, AT&T outlined a plan to improve its overall sales performance in part by eliminating slow-growth units. In April, it agreed to sell a majority stake of the Yellow Pages business to Cerberus Capital Management LP for $950 million. Along with the directory unit, rural lines were under scrutiny for “fundamental changes,” Stephenson said in January.
“I think the lines they were looking to sell were scattered through several states, making it difficult from a regulatory perspective,” said UBS’s Hodulik. “Also, I’m not sure who the buyer would be.”
Verizon Communications Inc. (VZ:US) sold New England telephone lines to FairPoint Communications Inc. (FRP:US) in a $2.72 billion deal in 2008. The company struggled to absorb the costs and debt and filed for bankruptcy protection in 2009. While FairPoint emerged from bankruptcy last year, the episode underscored the difficulty of acquiring rural lines.
AT&T has about 52 million subscriber homes, or about half the U.S. total, by Hodulik’s estimate. About 30 million of those homes can receive AT&T’s fastest network service called U-verse, and another 10 million homes are connected via digital subscriber lines, or DSL, according to Hodulik.
That leaves about 12 million homes outside the reach of AT&T’s broadband service. AT&T said in June it was considering more DSL technology to serve additional rural lines. On a conference call with analysts last month, Ralph de la Vega, AT&T’s top wireless executive, said LTE offered possibilities.
“It could serve as an alternative to wired broadband,” said de la Vega. “In the terms of speed and reliability and flexibility, it is absolutely very, very possible.”
Any sign that AT&T would chose to invest in its rural lines would be seen favorably by regulators, who have concerns that high-speed Internet access is not reaching all Americans, said Recon’s Entner. The move could give AT&T some bargaining points with regulatory agencies, he said.
“We have to invest in rural America,” Entner said. “I think it makes sense from both a business perspective and as a way of pushing the country toward a digital revolution.”
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