Thursday, March 30, 2017

FirstNet ties its train to AT&T’s train and they are heading in the wrong direction. Why would the tower companies raise their outlooks based on AT&Ts forecast?

As the heading suggests, that is a big question surrounding the announcement of FirstNet’s approval to move forward with their AT&T “partner” in the Nationwide Public Safety Broadband Network. First, you have to remember that AT&T’s forecast for the future is based on what AT&T does every day; expand its spectrum holdings so it can expand its commercial services coverage as to increase their profit margins, thus the recent whitespace auctions. AT&T will have to expand no matter what FirstNet wants to do -- if it wants to succeed in the broadband consumer space that is. Upgrades to 5G, Small Cells or even fiber market plays are a no-brainer for the AT&T model; they have to in order to stay competitive.

Every ten years or so, all the commercial carriers have to go through an upgrade phase, which means more capital expenditures depending on what the consumer demands. It must be clarified though, that AT&T’s business is based on a “consumer” business model, which means low overheads and off-loading of as many physical assets that it can afford to insure to increase the bottom line for its shareholders. What does that mean? It means AT&T has to design, build and maintain its infrastructure at the bare minimums as to increase its profit margins on top. What does this have to do with the tower companies?

For the tower companies the lower expenditures for AT&T to maintain means the more leasing availability and income for the tower provider. AT&T doesn’t want to own the infrastructure, so they can lower overheads and increase profit, so leasing allows AT&T to offset they expenditures of capital requirements and migrate those costs of leasing the assets over to the opex portion of their 10Ks. So while AT&T moves money from one side of their coffers to the other, the tower companies get to expand their outlook on long-term leasing, thus the increase in the bottom line to the market forecast. Quite simple, and is done all the time, and has been done for a long time. For those that can remember, this closely resembles the fiber swaps to inject capital into the bottom lines of fiber providers back in the 90’s; only in this instance they aren’t doing it between competitors – that we know of. But how does all this pertain to FirstNet?

The issue with the configuration for AT&T is that FirstNet, and it’s Opt-Iners, have just tied their wagons to the same train that AT&T is on. But, is that the wrong train to attach too? Yes, why? Because AT&T wants to decrease capital expenditures to increase profit margins. By connecting to AT&T’s train all FirstNet has done is now link their own capital requirements to the same business model, whereas the offset of FirstNet’s assets will now, and has to be, connected too AT&T’s rollover of capital costs to long-term operational costs. This is bad for AT&T and FirstNet.

For AT&T this means that additional costs will be applied to their long-term opex costs, thus increasing their loss and directly effecting their revenue and profit forecast. In order to repair this AT&T will be forced to readjust and move those capital requirements back to the capex thus forcing AT&T, and its shareholders, to reevaluate their revenue projections ultimately forcing a hard look at expenditures in their deployments to offset the added demands of FirstNet. In short, AT&T will have to see if expanding their footprint physically is cost justifiable for the future, thus forcing the AT&T consumer model to go up against the FirstNet Public Safety model, forcing the fight right back to where it started – AT&T can’t build out to rural areas without losing money on the effort. FirstNet has to cover the rural areas else why partner with AT&T. But, will FirstNet pay? Or will they try to come back for more taxpayer money?

For FirstNet this is bad because all of FirstNet’s, thus Public Safety’s, requirements will be thrown into further disarray, which in turn will force those States, that decided to Opt-in to FirstNet’s solution, to reconsider the path forward with FirstNet. But, it may be too late for those Opt-In States at that point. Why? Because any States that Opt-Out will have to compete on a first come first serve basis for any market ready contracting resources that can actual install their solutions, plus the private equity market will be focused on the Opt-Outs versus Opt-Ins, resulting in the Opt-in States to be moved to the back of the line. In the end, those States that tie their wagons to FirstNet, who has tied their wagon to AT&T, will be going in the wrong direction and heading for unfinished tracks and will be forced to have to wait for someone to come and repair the track.

All of this confusion with the AT&T and FirstNet partnership will have no effect on the Opt-Out States, which is great to know. Why? Because the Opt-Out States will fashion their own, or should fashion their own, business model and public private partnership towards creating their own private broadband company for wireline and wireless service offerings. In this model there is no conflict between AT&T’s desires to expand profit margins, nor any other carrier, thus opening up a more focused statewide solution rather than trying to connect their engine to a carrier business model, of which they have no control over. In fact, a State that decides to Opt-Out and create its own solution, is actually better suited for AT&T than the current AT&T and FirstNet partnership! Why?

By the State choosing to perform its own P3, to construct its own network, it will be laying the ground of hardened infrastructure asset ownership, which in turn could allow AT&T to ride as an MVNO – or any carrier -- thus eliminating capex requirements for AT&T. AT&T would not be exposed to the capital requirements to expand their service and coverage model, plus AT&T would only see a small marginal increase of opex costs due to the fact that they don’t have to shift their current exposure on capex. So, in the end the Opt-Out solution, much like what Colorado just put out, is better suited for AT&T and Public Safety than by tying the FirstNet train to the current AT&T model.

For AT&T, the bigger issue they face is an internal struggle as to why they have to “own the spectrum” in order to profit from it. It is the nature of the carrier, because of how business has been done in the past, the mindset that it must own its own spectrum. But why? Why can’t AT&T, or any carrier, just use someone else’s infrastructure instead, i.e. Opt-Out State? Isn't that what they do with the fiber and tower providers today. When I worked at Global Crossing we ran more transport VOIP traffic for AT&T than AT&T did. In the past it was all about the competition, the completion were the ones that owned the infrastructure. But in this instance there is no competition unless AT&T doesn’t play. Maybe AT&T needs to rethink what track it is on itself?

But who am I other than….

Just some guy and a blog…..

No comments:


Words to Live By: “Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… The ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… They push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.” (Steve Jobs)