AT&T Inc., the largest U.S. telephone company, is considering a plan to upgrade its rural phone lines to handle higher-speed Internet service, potentially putting off an effort to sell off the underperforming assets.
AT&T would rely on new copper-line technology to offer faster broadband in areas without access to AT&T’s U-verse fiber-optic network, Chief Executive Officer Randall Stephenson told investors last week on a conference call hosted by JPMorgan Chase & Co. The idea is to provide an enhanced version of digital subscriber line, or DSL, technology on existing lines.
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, sold a majority stake of the Yellow Pages business to Cerberus Capital Management LP for $950 million last month. Rural lines had been next on the block.
Stephenson may have struggled to find a buyer, 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 broader 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.”
Stephenson plans to discuss the rural-broadband plan again tomorrow at a Sanford C. Bernstein investment conference. He said last week that 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 the 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 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.
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. Stephenson said last week that the cost of deploying IP DSLAMs has been better than expected.
“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 on last week’s call.
“We are giving this a hard look,” he said. 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.”
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