AT&T today laid out a broad plan to upgrade both its wireline and wireless networks and keep its growth moving.
Project Velocity IP, or VIP, consists of an investment of $14 billion over the next three years -- $8 billion for wireless and $6 billion for wireline -- and is designed to expand the company's 4G LTE coverage on the wireless side and faster service, more fiber-optic lines, and expanded U-Verse availability on the landline side.
Project VIP is significant because it represents the first time in many years that AT&T has significantly ramped up investment in its networks. While AT&T already spent billions of dollars on the networks over the past few years, the new plan signifies that AT&T is willing to open its wallet a little wider even it means it takes a hit in the near term, with wireless spending estimated to get a 25 to 30 percent bump in investment over this year.
"We have felt that AT&T had been under-investing in its business and over-earning in 2012," said Macquarie Capital analyst Kevin Smithen. "We believe the company is making the right long-term strategic move."
Smithen, like many other analysts, warned that the stock would take a hit as investors digest the prospect of slower earnings growth over the next few years.
The plan comes as several critical measures of the company's health have slowed, much as they have with the broader telecommunications industry. On the wireless side, its most profitable pool of customers, those who sign long-term wireless contracts, continues to see a deceleration in growth. The wireline business, meanwhile, has long been experiencing a deterioration in traditional phone service and lackluster growth on the business side.
"This directly addresses the strategic questions concerning our spectrum position and gives us a bigger platform for new growth," AT&T CEO Randall Stephenson said during an investor presentation today. "The last five years have been an adrenalin rush, and in the next five years the cloud technology will drive even more change. The past five years changed communication industry, but over next five years every industry will change and there will be demand for high-speed secure networks."
AT&T, however, believes that the move toward advanced services on both ends will keep the company's growth moving at a healthy clip, and answer critics who wonder where the next phase of growth will come from. The company has already increasingly relied on more smartphone customers with pricier data plans, connected devices such as tablets, cellular-connected dog collars and medicine bottles, bundled television, Internet, and phone services under U-Verse, more advanced connectivity services to businesses, and even home security.
The carrier said today that it will extend its 4G LTE coverage to 300 million people by the end of 2014, 50 million more people than previously planned, when it had expected the deployment to wrap up by next year. The company expects to cover 99 percent of all customer locations with 4G LTE. Meanwhile, AT&T is looking for the government to rush the clearance of new wireless spectrum. In addition, it will focus on deploying "small cell" technology with more distributed antenna systems and cell sites to increase the quality of coverage.
AT&T would also expand its faster wired Internet protocol network to 75 percent of customer locations in AT&T's 22-state wireline territory by the end of 2015. The company leans on its U-Verse bundle for growth in the consumer wireline business, and expects to expand it to 8.5 million additional customer location.
Project VIP's upgrade plan will also mean significantly higher speeds offered to its customers. With technological advances, the company will eventually be able to offer 90 percent of its U-Verse territory will eventually get speeds of 75 megabits per second, while 75 percent will be get speeds of 100 megabits per second. While significantly faster than what most people currently have, Verizon and a few cable providers already offer those kinds of speeds.
The upgrade to an Internet protocol network means AT&T is looking to shut down the older switch-based, or TDM, network. But there are many regulatory hurdles to that, since local and state governments mandate that these services be in place. The company doesn't expect the migration away from older switch networks to occur for roughly five years as the company gets approval all over its territory.
In areas where its wireline network can't be expanded in a cost-efficient way, AT&T will rely on its 4G LTE network.
The plan also calls for bringing faster fiber connections to more businesses, covering half of the large office buildings in its territory by the end of 2015.
Once the investments are made, 90 percent of AT&T's revenue will come from its high-growth area as the company looks to shed its older legacy businesses such as traditional phones and landline connections.
AT&T said its per-share earnings will grow at a mid-single-digit rate for the next three years, although it talked about the opportunities for broader growth.