AT&T has itself to blame and not economy for slowing residential wireline revenues

Last month, AT&T's chairman and CEO Randall Stephenson told an industry conference a slowing economy is taking a toll on the telco's residential wireline broadband market segment.

That doesn't exactly square with a forecast by the Telecommunications Industry Association (TIA), which said yesterday that the telecommunications industry should see strong growth over the next three years, driven largely by increasing demand for broadband.

Reports Grant Gross of IDG News Service:

The trade group expects the worldwide telecom market to grow to $4.6 trillion by 2011, compared to about $3.9 trillion in 2006. About $1.3 trillion of the 2011 market will come from the United States, the TIA said.

Driving these increases will be broadband, with its consumption doubling in 2006 and quadrupling again in 2007, said Arthur Gruen of Wilkofsky Gruen Associates, a consultancy that focuses on telecom and other industries. Video and entertainment applications are pushing customers to buy more broadband and telecom providers to build more capacity, he said.

Rather than the blame the economy, AT&T need only look in the closest mirror for declining residential wireline revenues. It has halted DSL buildouts, failing to meet its "Project Pronto" goal of systemwide DSL availability by last year. The telco is currently engaged in a half hearted effort to build a halfway capable system (Project Lightspeed/U-Verse) that will meet only a fraction of the burgeoning demand for integrated IP services in the residential segment.

AT&T can hardly blame the economy when it chooses to sit back and milk existing revenues and depreciation from its aging copper cable based system rather than aggressively growing its residential business.

Lack of patient capital condemns AT&T to also ran status in coverged IP services

Taken in combination with a recent financial analysis of AT&T, a survey of telecom execs last year by IBM's Institute for Business Value suggests that while telcos look to the convergence of Internet protocol-based voice, data and video services to grow their companies, AT&T isn't likely to get a major share of the action.

The reason: a lack of "patient capital" that the company needs to upgrade its network -- particularly over the final segments before it reaches customer premises.

With digital convergence blurring industry boundaries, telecom providers now believe they can expand their addressable market to include areas of media and advertising that were once beyond their reach. Many telecom operators are investing in digital content with the expectation of offsetting declines in voice revenues.

The most promising areas of advanced content services are television and video. However, delivering all but the most basic digital content services over networks that were originally designed for voice communications and Web browsing is challenging, and telecom operators are having to upgrade their networks to compete. The returns on these network upgrade investments remain uncertain and are likely to be positive only in the long term.

"Positive only in the long term" means patient investment capital. However, a recent analysis by DSL Prime's Dave Burstein found an absence of such funding at AT&T. Rather than increasing spending on its infrastructure, Burstein found the company instead slashed capital expenditures by 50 percent since 2002, which explains AT&T's abandonment of its planned system wide DSL deployment dubbed "Project Pronto."

Tennessee broadband build out debate highlights conflict between public and private interests

The Tennessee broadband build out bloodbath is heating up, according to the The Tennessean. The cable industry is running TV ads suggesting AT&T will redline rural areas if the state enacts AT&T-backed legislation putting the state rather than the local governments in charge of issuing Internet Protocol TV franchises.

The redlined areas will likely remain unconnected for decades from AT&T's new U-Verse fiber and copper based service offering IPTV, voice and high speed Internet. AT&T denies it redlines in the dozen states where it has rolled out U-Verse. Wrong, according to a couple of industry analysts quoted in the story. AT&T lacks patient capital to invest in providing a wider base of U-Verse service and therefore installs U-Verse infrastructure in selected areas only where it believes it will get the quickest return on investment.

This story aptly illustrates the clash between public and private interests that has produced the incomplete and balkanized crazy quilt telecommunications infrastructure that has effectively divided the U.S. into two nations: one with access to advanced telecommunications services based on broadband Internet and one without. Public policymakers are rightly concerned about this situation given the increasingly important role of broadband access to the economy.

Taking America's heartland by storm: WISPs swoop into areas neglected by wireline providers

Telecompetitor reports several WISPs are sweeping into several U.S. markets where wireline broadband service isn't offered. Not surprisingly, they are quickly signing up customers who have been waiting in vain for years for telcos and cable companies to provide high speed Internet:

All of these companies are targeting “underserved” rural markets with a broadband alternative. Underserved generally is a code word for markets served by large RBOCs and/or MSOs who have not invested in local broadband networks. These markets are often identified as a part of the “digital divide.” DigitalBridge says they have reached 10% penetration within 6 months of one their first market entries, Rexburg, ID. These growing rural deployments are leveraging quickly evolving broadband wireless technology and pent up demand for broadband in markets where little or no broadband competition exists.

According to Telecompetitor, one of the WISPs, Oklahoma City-based Stelera Wireless, has rolled out service in Floresville & Poth, Texas using recently auctioned advanced wireless service (AWS) spectrum offering maximum speeds of 7.2 Mbps down and 2 Mbps up. However, Stelera informs me that its users get average download speeds of 1.5-2 Mbps down and 350-380 Kbps for uploads.

Notably, the WISP does not use telco circuits for backhaul connections, instead relying on its proprietary OC-3 and OC-12 microwave network. In Stelera's Texas markets, service is backhauled to San Antonio via microwave and from there via long haul ethernet to Stelera's Oklahoma City HQ POP.

At broadband crisis point, U.S. should invest $100 billion to build 100 Mbs fiber to every home by 2012

The United States is so rapidly falling behind other developed nations when it comes to broadband access that it’s reached a crisis point demanding a bold new course of action, posits a January 2008 white paper by EDUCAUSE.

EDUCAUSE describes itself as a nonprofit comprised of colleges, universities, educational organizations and corporations to advance higher education by promoting the intelligent use of information technology. The white paper, A Blueprint for Big Broadband, argues the current national policy that relies exclusively on private sector telecommunications companies to build out broadband infrastructure is flawed because they are unable to respond quickly enough to rapidly growing demand for faster speeds driven by increased use of video and other bandwidth intensive applications.

Private sector wire line broadband providers are driven by short term economic incentives and operate within — at most — five year time horizons. This has led to drastically slashed R&D spending and curtailed broadband deployments that would serve large unserved areas of the country.

The result in an incomplete broadband infrastructure that doesn’t extend to many homes and businesses, creating choke points on the “last mile.”

Instead, the U.S. should from a public-private partnership to invest nearly $100 billion to build an open access fiber to the premises (FTTP) local infrastructure to ensure every home in the nation has access to at least 100 Mbs (and capable of scaling up to 1 Gbs) by 2012.

How to raise the $100 billion? A Universal Broadband Fund (UBF) modeled after one used in Canada that would get a third of its funding from the feds in the form of direct appropriations or bond proceeds, another one third from the states, and the remainder from private or public sector providers. The UBF would allocate $8 billion per year for four years to be distributed to the states, which would put up matching funds.

"The U.S. broadband crisis is a unique challenge,” wrote the author of the 74-page white paper, telecommunications attorney and consultant John Windhausen Jr. “Unlike past threats to our future competitiveness, the solution to our broadband connectivity crisis is primarily local. The benefits of broadband connectivity are felt directly by every consumer and business, and final decisions must involve our local leaders under a comprehensive federal program. The United States needs to move beyond the rhetoric and begin to adopt a specific action plan for the future.”

The comprehensive report also includes a detailed and current summary of actions by state and local governments to improve broadband access for their residents.

I have questioned the adequacy of state government broadband initiatives since they typically provide funding in 10s to low $100 millions in the form of grants and loans, which isn’t going to be sufficient incentive to private sector providers to deploy fiber infrastructure on the scale called for in the EDUCAUSE white paper.

The key to the success of the proposed UBF is getting the federal government on board as willing partner with the states and the private sector. That’s not likely to happen unless feds are convinced of the white paper’s assertion that universal access to fast broadband will benefit the U.S. economy and its global competitiveness. Congress may be receptive to attempts to make that case given its approval this week of a $150 billion economic stimulus plan.

Governor: "We ought to consider what Tennesseans want"

Tennessee Gov. Phil Bredesen made it clear earlier this year his policy priority as AT&T seeks legislation allowing it to offer advanced broadband services under a state charter is ensuring the company build out a complete infrastructure rather than the partial one that presently leaves many state residents on the wrong side of the digital divide.

Bredesen underscored that point in remarks reported by the Associated Press Feb. 4 that suggest he's putting the interests of his constituents first:

"Last year and so far this year, it's shaping up into what AT&T wants versus what the cable TV companies want," Bredesen said. "Maybe at some point, we ought to consider what Tennesseans want. It's something I am taking a look at how I might have an influence on."

AT&T hikes DSL prices, newspaper reports

The Chicago Tribune is reporting AT&T is raising prices across the board for its DSL service by $5 a month. The exception, a company spokeswoman told the newspaper, is residential customers who pay $35 for the Elite plan and customers with long term contracts.

AT&T said the increase is needed to upgrade infrastructure to support more bandwidth intensive applications such as video and music files.

I'm doubtful of the company's stated rationale for the increase because it has effectively pulled the plug on upgrading its legacy first generation DSL plant and is instead directing funding to its hybrid fiber/copper Project Lightspeed deployment in selected metro areas. This deployment is in support of the telco's U-Verse all digital triple play bundle of voice, high speed Internet and Internet Protocol TV (IPTV).

The DSL price boost is an effort to merely extract greater incremental income out of existing services. That's in line with AT&T's highly risk adverse cash flow and depreciation based management strategy that shuns significant physical plant upgrades that would eliminate large swaths of its 22-state service area where AT&T offers no wireline-based broadband services.

2008 a pivotal year for wireless broadband

The year 2008 will be a pivotal one that could mark the beginning of the end of the duopolistic hold the telcos and cable companies have over broadband Internet access marked by widespread market failure and lack of competition.

The Federal Communications Commission is set to make key decisions this year that determine whether broadband will be delivered over the air and provide the much needed wireless "third pipe" for broadband delivery starting in 2009.

The FCC is currently auctioning off portions of the 700mhz spectrum that could carry both mobile and fixed broadband services. The agency is also testing revamped prototype devices
developed by a consortium including Microsoft, Google, Dell, HP, Intel, Earthlink and Phillips that would transmit broadband signals at speeds reaching as high as 80Mps that would blow nearly all existing U.S. wireline broadband providers out of the water.

The White Spaces Coalition's prototypes failed the first round of testing last year. The coalition hopes to prove the prototypes, which transmit on unused portions of digital TV broadcast frequencies, won't interfere with TV signals.

The road to America's transportation infrastructure future should be paved with fiber as well as asphalt

Rebuilding America's aging roads and highways should not involve only concrete and asphalt. Instead, the U.S. needs to install fiber optic cable to upgrade its weak broadband distribution system. Doing so takes more vehicles off roadways would allow more to work from home, which the Heritage Foundation's Ronald Utt suggested in an interview broadcast today on NPR's Marketplace:

RONALD UTT: We've been providing the public sector with all this tax revenue and what-not for roads, but we have not been getting new roads in return for it.

Utt says part of the long-term solution is to get a significant amount of commuters off the roads -- by allowing people to work from home or at least closer to home.

NTIA report on US broadband access blasted

The feds are once again drawing well justified criticism for papering over America's sprawling broadband black holes by relying on an outdated, 12-year-old formula for measuring broadband access. The formula, promulgated by the Federal Communications Commission and adopted in a report on U.S. broadband access released this week by the National Telecommunications and Information Administration (NTIA), simply measures whether anyone -- even just one address -- in a given ZIP Code can obtain broadband, defined in the circa 1996 standard of at least 200kbs in one direction.

One only needs to take a look at two states, California and Tennessee, where large areas are mapped as having no wireline broadband services to see how far off base this federal government report truly is.

One of the FCC's commissioners even took issue with his own agency's data that was used in the NTIA report. "This report relies on widely-discredited data in a strained effort that only distracts us from the real work ahead," Commissioner Jonathan S. Adelstein said in a statement.

Gigi B. Sohn, president and co-founder of Public Knowledge, blasted the NTIA report:

“The NTIA report presents a distorted view of the state of broadband in the U.S. The Administration should not be boasting about our success at a time when consumers here pay more money for slower service with have fewer choices than do consumers in other parts of the world.

“Almost 97 percent of U.S. consumers have a choice only between their cable company and their telephone company. The Administration wiped out the policies that once upon a time allowed competition to flourish here and which now sustain the competition in other countries that consumers enjoy.

“The short-sighted policies cited by the NTIA have put our economic future at risk. The rosy picture the NTIA portrayed should have recognized that reality.”

Nate Anderson of arstechnica.com had this to say:

As broadband continues to be a key driver of economic opportunity and growth, falling behind the rest of the world will have real consequences for US high-tech leadership. Instead of addressing that crucial question, though, the report is an unabashed celebration of free-market, deregulatory policies. So enamored with their own economic theories are the authors that they resort to dogmatic lecturing throughout the paper.

Semiconductor firms hope for better broadband over copper

One might think with the price of copper on the rise, telcos would be better off selling their aged copper cables for scrap metal and using the proceeds to defray the cost of installing "future proof" fiber optic cable allowing them to offer more advanced services over the so-called "last mile" to the customer.

On the other hand, they may be hoping that R&D efforts to increase the ability of copper cable -- which was designed to handle analog voice signals and not far more delicate, digital broadband traffic -- to carry DSL and IPTV signals farther and faster with fewer errors, permitting copper lines to stave off obsolescence.

Xtendwave announced today it received patents for technology that improves broadband and HDTV service by increasing the speed, capacity and distance of signals traveling over existing copper phone lines. The company claims the technology enables broadband providers "to far surpass the limits of their existing DSL services without re-engineering, replacing or upgrading their existing network infrastructure."

Separately, Portland, Oregon-based Rim Semiconductor Company announced this week that it has developed an Internet Protocol Subscriber Line™ specification that it claims provides fiber-like speeds over the existing copper telephone lines. According to the company, its proprietary Cupria™ processor is able to crunch data traffic at 40 megabits per second (Mpbs) over 5,500 feet (1.67km) on 26AWG (0.40mm) telephone wire. Existing technologies are able to achieve just 15 mbps at this distance on this wire type, the company claims.

Cash flow, depreciation trump infrastructure investment at AT&T

If you're in AT&T's 22-state service area and wondering why your phone service is poor or you can't get broadband from the big telco, DSL Prime's Dave Burstein has done some digging into AT&T's financials that may offer an explanation.

Burstein finds company suffers from a myopic fixation on cash flow at the expense of investing in the future of its infrastructure. A good indication, Burstein writes, is comparing depreciation to capital expenditures:

Most significant, AT&T's capital spending since 2002 has been cut in half to 20 to 30 percent less than their depreciation. Over five years, their depreciation was $42B and their capex $31B. Unless they have a major discrepancy in their balance sheet, that implies they are not maintaining their network. This has raised their cash flow and stock price significantly, but presumably will bite them eventually.

Burstein's take on the recent decline in AT&T's stock price -- which the company lamely suggested was due to residential wire line customers not paying their bills -- suggests Ma Bell's derriere is exposed and already being bitten.

U.S. Supreme Court asks for government brief in anti-trust suit against AT&T

The Associated Press reports the U.S. Supreme Court has asked Solicitor General Paul Clement for his opinion on whether the high court should review a Sept. 11 ruling by Ninth Circuit U.S. Court of Appeals allowing an anti-trust suit against AT&T by four California Internet Service Providers (ISPs) to go forward.

The ISPs contend AT&T jacked up wholesale prices it charged ISPs for access to its lines in order to subject the ISPs to a "pricing squeeze" as part of a scheme to drive consumers to SBC's proprietary retail DSL services.

According to the AP, the court's request for Clement's opinion shows at least some of the justices are interested in taking up the case, Linkline Communications et. al. v. SBC California, et. al.

From a market perspective, the suit spotlights a major roadblock in the implementation of federal law enacted in 1996 designed to speed the deployment of advanced telecommunications services including broadband Internet access. If the allegations of the ISPs are correct, they explain to a large extent why AT&T has not fully built out its broadband infrastructure because it set its DSL prices too low to cover the cost of doing so in much of its service area, leaving sprawling broadband black holes.

Watch for AT&T to continue to mount a scorched earth legal strategy to prevent this lawsuit from proceeding on the merits since it could effectively turn the clock back to 1984 when the break up of AT&T was ordered by a federal court. Tellingly, another big telco that could also find itself facing anti-trust litigation, Verizon, has filed in brief in the case in support of AT&T.

Think tank urges federal investment in broadband infrastructure

A paper published this week by the Center for American Progress concludes broadband deployment cannot be left in the hands of the private sector. This policy has left much of America unable to access advanced telecommunications services and placing the nation at a competitive disadvantage to other industrialized nations.

Instead, the United States should undertake a massive federal investment in advanced telecommunications infrastructure using a variety of technologies on a scale like the Eisenhower administration's National Highway Program in the mid 1950s that built America's interstates.

Writes Mark Lloyd, author of the paper, Ubiquity Requires Redundancy The Case for Federal Investment in Broadband:

The United States will not meet President Bush’s goal of universal broadband by the end of 2007—not by a long shot. The number of subscribers to Internet services is growing faster than the adoption of “dial-up,” yet for the most part these subscribers are not connected to the broadband technology Congress described in 1996 as a two-way communications service capable of high-speed delivery of data, voice, and video.

This failure to connect over half the country to advanced telecommunications service is not a technological failure. It is a 21st century public policy failure. In the 1990s, policies established by the Clinton administration to encourage public/private telecommunications partnerships, to connect schools and libraries to the World Wide Web, and to allow competitive service providers onto the networks of the local telephone monopolies all sped up the deployment of broadband around most of the nation. These policies were either deliberately abandoned or hampered by the Bush administration.

Tennessee governor says broadband build out his priority as lawmakers mull statewide IPTV franchise bill

Tennessee Gov. Phil Bredesen wisely understands that broadband build out is the single most important issue in AT&T's push in the current legislative session for legislation allowing it to bypass local governments in its quest to sell Internet Protocol-based TV over broadband connections.

According to this Associated Press report, Bredesen hopes to influence the legislative debate this year after similar legislation bogged down in the 2007 legislative session.

"The issue for me is not coming down on the side of cable or AT&T - it's just an issue of that I don't think we have adequate broadband coverage in Tennessee," the AP quoted Bredeson as saying.

California Broadband Task Force issues report with several build out recommendations

The California Broadband Task Force (CBTF) formed in late 2006 by Gov. Arnold Schwarzenegger issued its final report Thursday recommending several measures to encourage broadband infrastructure build out in the state so that all Californians can have high speed Internet access. They include:

1. Issuing infrastructure bonds and investing the proceeds with private sector companies to finance broadband infrastructure in unserved and underserved areas.
2. Utilizing the California Advanced Services Fund (CASF) recently created by the California Public Utilities Commission to use existing phone bill surcharges to subsidize broadband deployment in high cost areas.
3. Giving broadband providers a 10 percent tax credit on capital expenditures for investment in current generation broadband infrastructure capable of delivering combined download and upload speeds between 1mbs and 10mbs and a 20 percent credit for next-generation broadband infrastructure capable of providing combined throughput that exceeds 50mbs.
4. Urging the Legislature to reauthorize the Rural Telecommunications Infrastructure Grant Program, a $10 million appropriation administered by the CPUC providing grants of up to $2.5 million per project, when it expires at the end of 2008. The report also recommends the $2.5 million grant cap be lifted.
5. Authorizing local governments chartered as Community Service Districts (CSDs) to provide broadband service, either directly or through a contractor, if a private sector provider is unable or unwilling to deploy service to district residents.
6. Providing access to state rights of way on a cost recovery basis for wireless broadband providers to bring service to presently unserved areas.
7. Offering broadband providers space on state-owned properties on a cost basis to accommodate broadband distribution facilities.

The CBTF report did not set a time frame to achieve universal broadband access in California. The CBTF was tasked to “remove barriers to broadband access, identify opportunities for increased broadband adoption, and enable the creation and deployment of new advanced communication technologies.” Gov. Schwarzenegger also requested that the CBTF “pay particular attention to how broadband can be used to substantially benefit educational institutions, healthcare institutions, community-based organizations, and governmental institutions.”

A number of maps of wire line-based broadband access were developed by the CBTF that show broadband infrastructure is deployed unevenly throughout California, with nearly 2,000 towns and communities lacking broadband access while other parts of the state, mostly in metro areas of Southern California, enjoy state of the art connections.

The report views broadband as vital form of infrastructure. “Just as California has invested in other critical infrastructure such as roads, electricity, and water, the CBTF believes that the state must seize the opportunity to promote private-sector investment, leverage public/private partnerships, and lead the effort to increase broadband availability and adoption,” the report states.

A key question is whether the build out incentives proffered by the CBTF will be enough to fill in California's broadband black holes in a relatively short period of time without expanding the state's current universal telephone service requirement to include broadband services.

An executive summary of the report can be viewed by clicking here.

The full report of the CBTF can be viewed by clicking here.

A spokeswoman for Schwarzenegger said the governor applauds the CBTF report and will be reviewing its recommendations.

In April of 2006, Schwarzenegger suggested a news conference that $200 million of Proposition 1D funds, the school construction bond approved by voters in November 2006, that are earmarked to expand the use of telemedicine could be used to help subsidize broadband build out in California.

AT&T's failed broadband deployment strategy

AT&T has a bad habit of starting broadband technology deployments with bold declarations of new "projects," but half heartedly following through on them, leaving its infrastructure in disarray and like an unfinished information highway to nowhere.

Near the start of the current decade, AT&T (then SBC Communications) announced Project Pronto. The goal was to speed up the deployment of high speed Internet services — Digital Subscriber Line (DSL) over copper cable and twisted pair — to 80 percent of the phone company’s service area by 2002 and throughout its entire service area by 2006. Both deadlines were missed, with more than one in five residential customers unable to obtain any broadband services from the telco by the end of that year.

Now AT&T has decided to abandon that incomplete project in favor of another -- Project Lightspeed. It eschews the legacy DSL of the failed Project Pronto in favor of faster DSL -- VDSL -- running over a hybrid of fiber to the node (FTTN) and copper to the premises. The purpose of Project Lightspeed is to provide the necessary infrastructure to deliver AT&T's bundled Internet Protocol-based voice, data and video services known as U-Verse.

Like Project Pronto before it, Project Lightspeed/U-Verse appears to be faltering amid various technological and market challenges with the number of subscribers falling far below AT&T's goals and setting the stage for yet another incomplete initiative.

Complicating the picture is AT&T's decision to halt new deployments of its older legacy DSL technology in favor of the new VDSL Project Lightspeed platform, leaving large segments of customers who have been waiting for years for DSL hookups left in the lurch.

AT&T badly needs a management shakeup. It's time for an end to the fits and starts of ill-fated "projects" in favor of a new, long term comprehensive broadband strategy. It should commit itself to a deployment plan that covers all -- and not just selected portions -- of its 22-state service area and see it through to timely completion.

AT&T's customers deserve better. So do its shareholders, whom I believe would have the patience and perseverance AT&T's management has been lacking and would back a comprehensive broadband strategy if management clearly laid out the long term benefits.

The future of AT&T is at stake. It must decide if it wants to enter the digital, Internet telecommunications age or remain a mere "telephone company," content to rest on its laurels and passively depreciate its aging analog copper cable infrastructure while burdening itself with large dividend payments (recently five percent or $1.60 a share) that divert funds from needed investment in technology research and updated delivery infrastructure. If it chooses the latter course, then it shouldn't be surprised if bears and short sellers start stalking the company in the near future.