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While the wireless business is the largest contributor, AT&T‘s (T 0.64%) The fiber internet business is proving to be a potential growth opportunity as revenues are definitely increasing. Capturing growth comes at a cost. Building fiber networks is capital intensive and requires significant outlays with no guarantee that consumers or businesses will sign up for the service.
AT&T operates a huge traditional wireline network serving consumers and businesses, but its business is in constant decline. Even the company’s non-fiber broadband service is slowly declining as subscribers are lost. Wired service revenue from businesses has declined particularly rapidly, dropping 11% year over year in the fourth quarter of 2023.
AT&T’s fiber Internet business is already large enough and growing fast enough to drive overall consumer broadband revenue and overall consumer wireline revenue. AT&T expects broadband revenue to grow at least 7% in 2024, more than twice as fast as wireless service revenue growth.
Expanding opportunities
Fiber networks are expensive to build, but they have a long lifespan and are relatively easy to upgrade to increase capacity. AT&T estimates the useful life of its cables, wiring, and conduits to be 15 to 50 years. The company extended the expected useful life of its fiber assets in early 2022 based on historical experience and the lack of viable alternative technologies to replace fiber.
AT&T’s fiber network currently reaches 26 million locations, including homes and businesses. At the end of 2023, the service had 8.3 million consumer subscribers. The company’s long-standing goal is to reach 30 million locations by the end of 2025. Although it is still on track to achieve that, the company now believes there is an opportunity to expand its network as its fiber investments are yielding better-than-expected returns. It reaches 45 million transit points.
Fiber offers several important benefits to AT&T. As CEO John Stankey explained on the fourth quarter earnings call, fiber is more energy efficient, requires less maintenance, and is more sticky than traditional wired networks. In many areas, AT&T’s fiber service is the best option for home internet. Therefore, it is no wonder that consumers continue to use it for longer compared to traditional services.
Those customers are paying more. Average fiber revenue per user on the consumer side for Q4 2023 was $68.50. By comparison, he paid $61.38 for non-fiber broadband. Their number is rapidly increasing. Consumer fiber ARPU has increased 15% over the past two years.
Billions of dollars in additional revenue
AT&T’s fiber optic business generated $1.7 billion in revenue in the fourth quarter of 2023, with an annualized operating rate of $6.8 billion.
If AT&T were able to successfully expand its fiber network to 45 million transit points while maintaining the same fiber penetration and ARPU, its annual fiber revenue would nearly double to $11.8 billion.
Currently, fiber optic consumer penetration is 39%. This means that 39% of the stores he passes are paying customers. Assuming that ARPU does not increase and AT&T fully builds out its network, each percentage point improvement would translate into 450,000 additional customers and approximately $370 million in annual revenue. If AT&T can continue to increase his ARPU, the opportunity for growth will be even greater.
Once AT&T builds all the fiber it builds, the capital required for a fiber network drops precipitously. There will be competition from wireless home Internet services, but it will be difficult to beat fiber-optic reliability. For decades, AT&T’s fiber optic network will continue to generate high-margin revenue. While fiber revenue will still be much smaller than wireless revenue, it will contribute significantly to the company’s free cash flow.
Wireless is AT&T’s backbone, and that won’t change for the foreseeable future. However, fiber optics is growing even faster in the future and could become a very profitable business for AT&T in the long run.
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