Friday, September 26, 2008

AT&T will likely abandon residential wireline segment, U-Verse in early 2010

Sometime during the first two quarters of 2010, AT&T will probably become a pure play wireless company in the residential market, abandoning its Project Lightspeed/U-Verse deployment as part of a general retreat from the wireline-based residential/home office market segment.

The nation’s dominant telco — like other telcos — has been losing landlines to wireless phone service for several years now. When AT&T pulls the plug on U-Verse, which it began rolling out in selected markets in 2006 and which continues to fall behind deployment targets, it will likely cite unanticipated cost, technological and competitive market challenges.

The Achilles Heel of Project Lightspeed/U-Verse lies in the technological shortcomings of digital subscriber line (DSL). While DSL allows AT&T and other telcos to provide broadband over their existing copper cable plants, it’s hobbled by very limited range. When telcos first deployed ADSL around at the start of the decade, DSL’s limited range forced telcos including AT&T into a lose-lose proposition. Either they could spend significant sums of money installing remote DSLAM terminals to extend DSL’s notoriously feeble reach or leave money on the table in the form of lost opportunity costs, unable to serve subscriber premises not located close enough to their CO’s (central switching offices).

ADSL’s limited range also makes for unhappy customers who believe they are purchasing a particular speed tier only to find themselves involuntarily downgraded because the DSL signal isn’t sufficiently robust to support the level of service they ordered.

VDSL, the upgraded version of DSL that AT&T utilizes in its hybrid fiber/copper Project Lightspeed deployment, suffers from even greater range limitations. As such, it requires far more field equipment and fiber/copper interface cabinets (VRADs) than ADSL since VRADs can serve only premises located within 3,000 feet. While providing theoretical downside throughput of 25 Mbs, VDSL over copper also suffers from limited ability to scale up bandwidth to 100 Mbs and higher in order to remain competitive —at least when it comes to video — with MSOs (cable providers) and pure fiber triple players like Verizon and Surewest Communications.

Some market observers believe once copper has reached its throughput limit — many would maintain it already has — all AT&T has to do is change out the old copper for new fiber. That isn’t likely to happen. AT&T won’t bear that additional and substantial CAPEX burden and threaten its generous stock dividends when it is already struggling with the cost of the limited Lightspeed plant it has deployed to date and is reportedly cutting expenditures on it.

Additionally, given its existing alliance with Dish Network (to be replaced with DirecTV starting Jan. 31, 2009), it can still offer video without the associated CAPEX costs of Project Lightspeed and U-Verse just as it does with its marketing partnership with Wildblue to provide satellite “broadband” to the many residences located outside the restricted range of its DSL services.

What will happen to AT&T’s aging residential copper cable plant when it goes all wireless in this market segment? It will be put into runoff mode and minimally maintained — a plan that some would argue is already being implemented as resources have been redirected to Project Lightspeed. That will likely result in noisy and failed lines. But AT&T will probably simply pay any fines levied by regulators as a cost of unwinding its residential landline business with the expectation residential customers will migrate to its wireless service with the encouragement of limited time pricing incentives.

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