AT&T’s SDN transition curbs business service costs, but legacy declines remain challenging

As AT&T continues to make progress with virtualizing more of its network functions to address business customers—reaching 45% of its network during the third quarter—legacy service losses continue to offset next-generation service gains.

However, the transition to SDN and NFV is paying off for the service provider by reducing operational costs. By the end of the year, AT&T affirmed it will have virtualized 55% of its network, bringing it closer to its goal to have 75% by 2020.

John Stephens, CFO of AT&T, told investors during its third-quarter earnings call that while legacy voice declines are impacting its business results, cost containment efforts are starting to have a positive effect.

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John Stephens

“Structural changes in the Business Solutions segment are impacting results, as we continue to make gains in margins even as we deal with legacy revenue pressures,” Stephens said. “Wireline revenues were down, as gains in strategic services helped offset some of the declines in legacy voice. But we continue to drive hard on cost management initiatives while increasing the percent of revenues that come from wireless, and those two things together are driving higher margins.”

Steve Vachon, telecom analyst for Technology Business Research, agreed and added that the transition to SDN and NFV in the business segment could prompt competitors to follow a similar path.

“Consolidated operating margin increased 40 basis points to 16.1% in 3Q17 as AT&T is beginning to generate significant cost savings from its NFV/SDN initiatives," Vachon said in a research note. "AT&T expects it will have 55% of its network virtualized and software-controlled by the end of 2017, at which point the cost savings from transitioning to a software-mediated architecture will likely exceed that of additional investment, a milestone AT&T’s competitors will likely attempt to mimic when devising software-mediated strategies.”

Global Business is a bright spot

While AT&T has set a strident path for the business segment, the service provider saw varied results across the individual segments within its Business Services group.

One bright spot in the mix was Global Business where revenues rose to $8.5 billion.

However, the service provider saw declines across key business service segments like public sector and global business where revenues declined to $3.72 and $3.3 billion, respectively.

Stephens said that despite ongoing legacy service revenue declines, AT&T is seeing signs of new growth and pricing improvements.

“We are starting to see some green shoots with the pricing activity in business,” Stephens said. “I'd suggest to you that there's more to come, but we are starting to see that. We continue to be optimistic about our product portfolio.”

Stephens added that while it continues to see near-term revenue challenges from legacy voice and data declines, the company is confident that the IP-based investments set it on a profitable course.

“We have a challenging business because we've got a lot of legacy voice and legacy analog data,” Stephens said. “But we continue to be convinced that our IP-based products and services are a good long-term strategy. And as you point out, we are seeing some improvement in the pricing area.”

Enhancing business fiber, broadband

In the business market, AT&T continues to enhance its copper and fiber networks to accommodate more business customers with higher speed services.

The service provider extended its 1 Gbps via its GPON build throughout its AT&T Business Fiber (ABF) footprint last year, enabling it to more effectively compete with Charter Communications and Comcast Business, two cable MSOs that continue to encroach into the ILEC's business territory.

Initially offering a top speed of 300 Mbps, AT&T has been increasing the available profiles in its Fiber Ready buildings to include 500 Mbps and 1 Gbps. The service provider now offers a range of speeds from as low as 2 Mbps up to 1 Gbps with various speeds in between such as 25 and 100 Mbps.

Overall, AT&T has been enhancing the reach of its on-net fiber into more buildings, enabling it to deliver Gbps and higher speeds to support cloud and Ethernet services. The telco is increasing its near-net footprint in several cities giving it an option to extend fiber quickly to customers that request fiber-based services.

“We're right now at about 8 million business customer locations," Stephens said. "These are locations that either have fiber that's active in their buildings or within the industry-standard 1,000 feet where it's very effective to just go in and connect them."

But fiber is just one factor in the business broadband race. AT&T also continues to enhance IP-based broadband reach into the business market, adding 25,000 new customers during the quarter, but lost 25,000 DSL subscribers.