AT&T (NYSE:T) recently released details regarding its Project AirGig. While technical details are sparse, the crux of this opportunity lies in small, inexpensive radio stations that attach to electrical lines. These devices could allow the company to deliver fast, wireless internet connections to underserved parts of the country, including many rural regions, and also any markets that simply lack competition among broadband providers.
In this episode of Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Daniel Kline dive into the details from AT&T, what AirGig could mean for consumers, and the challenges the company will likely encounter before this technology can contribute significantly to its top and bottom lines.
A full transcript follows the video.
This podcast was recorded on Sept. 27, 2016.
Vincent Shen: Welcome to Industry Focus, the podcast the dives into a different sector of the stock market each day. It is Tuesday, Sept. 27th. This is your host, Vincent Shen. On tap for today, we have another quick update regarding the ongoing game of musical chairs at Viacom. Then, we will be diving into the big story for this episode, which is Project AirGig. Joining me on this show to discuss this major opportunity at AT&T is Fool.com contributor Mr. Daniel Kline. Hey, Dan! Great to have you on the show again!
Daniel Kline: Hey, nice to see you!
Shen: Last Wednesday, Viacom released an action-packed press release. There was a lot of news in this thing.
Kline: That's putting it mildly.
Shen: We're getting right into this. They announced a dividend cut, the end of the search for minority investor for Paramount, which is the main studio behind its filmed entertainment segment.
Kline: We could see that one coming.
Shen: The departure of interim CEO Tom Dooley in November, which, I think, surprised a lot of people, because he's generally pretty well liked at the company. Then, a $150 million writedown for an upcoming movie release. So, Dan, before we dive in on this very full plate, I wanted to zoom in on that writedown. I know that you and I are movie buffs. We've covered the movie industry on the show before, and some of the companies there. The flops are pretty common in the movie industry. Even some of the most reliable, successful companies -- think Disney -- have been forced to incur pretty big writedowns.
Kline: Sure, John Carter $200 million something.
Shen: John Carter is a great example. It was several hundred million dollars.
Kline: Anything starring Johnny Depp that isn't a pirate movie.
Shen: Exactly. Huge projects that didn't pay off, they incur big writedowns on those. But, incurring a $115 million charge for a film that hasn't even come out yet, how bad does that look?
Kline: It's absolutely amazing. The movie we're talking about is called Monster Trucks, and it's actually based on an idea from a four year-old, if I remember correctly. What happened here was they were supposed to make a very broad Pixar-style movie, like Cars. Cars, the story is basically Rocky. There's all your lovable kid characters, but there's an underlying sports underdog tale that would make mom and dad want to go to see it.
What happened with this Monster Trucks movie, which is essentially monster trucks that have personalities, and there's some sort of blob-like creatures that are the human part of the monster trucks. What happened is, they somehow made a movie that's narrowly focused at little kids, which means it's not going to be a big hit. Winnie the Pooh does $30 million at the box office, whereas Cars does $0.5 billion or $1 billion or whatever it is. So, this is really an epic disaster when you look at the source material.
Shen: Based on Paramount's release pipeline, Monster Trucks is pretty much the main candidate, they think, for the writedown. The trailer is out for the film. Listeners, if you want to see if it really looks that bad, I will withhold judgment and let you judge for yourself. You mentioned the four year-old, that's really surreal. I think the president of Paramount, when this project got the green light, I think his name is Adam Goodman, they mentioned specifically that this was the brainchild that he had with his son. And I think it started from the right place.
They wanted a franchise, they wanted something that would be really easy to sell consumer products off of, mainly toys and other accessories. And that makes sense to me. And they also wanted to develop their animated film capabilities, that arm of their business. That makes a lot of sense. If you look at the top three highest grossing films in 2016, two of them are animated films.
Kline: I think what they missed is that things in the last two years have changed. It used to be that an animated movie aimed at families was pretty much a guaranteed hit. In the last couple of years, we've seen some pretty big flops. The Ice Age sequel, the Penguins of Madagascar movie. You're starting to see movies that seem like no-brainers, they're being released for family audiences at a time when families should go see them, and people aren't seeing them.
It's why I think they should have sold part of Paramount, because Paramount is never going to be more valuable, because the reality is, Disney has Pixar and Marvel, their own in-house brands that pretty much guarantee hits. Pixar could put anything out, probably three movies in a row, and they would do $700 to $800 million globally until they really proved to the audience, "No, these movies are terrible." Comcast has some of those franchises. Viacom and Paramount don't, and this was an attempt to establish one. And it's become really that much harder. It's really hit-or-miss, even if you line up all the celebrities, you get your comedians to play wise-talking parrots -- who knows, it's probably wrenches in this case. But, it's just not as easy as it once was.
Shen:Yeah. And this situation very much represents a lot of the challenges and hard decisions the company is going to have to make in terms of its management, the structure of the company, how it deals with what are, frankly, changing consumer preferences, in a very competitive marketplace as it is.
Moving on to some of the other stuff in the press release, let's look at the departure of Tom Dooley. What's going on there?
Kline: Tom Dooley realized, while he had a chance at the job, he was probably not the favorite for the job. If you've been in a company for 35, 36 years, they know you. So if the board is not saying, "Yep, Tom, we're going to have to do a search, because it's due diligence." If they're telling you, "You're probably not going to get it," it's time to bow out. And what that says is that either they want a "yes man", someone who's going to do exactly what Shari Redstone and whatever's left of Sumner Redstone's mind tell them to do, or they're going to combine with CBS. And really, what are looking at is paring down the debt, paring down the assets, clearing the debts, and putting Leslie Moonves in charge, which, frankly, is probably the best bet.
Shen: A little bit of context in case you haven't been following our previous episodes where we talked about all this drama with the Redstone family at Viacom -- basically, Shari Redstone, daughter of the man who really drove this business and turned it into what it is today, Sumner Redstone --
Kline: Controls 80% of the voting shares of CBS and Viacom.
Shen: Very good point. She has basically managed to wrestle control of the company from the former CEO, Philippe Dauman, and he's out. Quite a few legal battles. But now we're here. What else do you think, looking forward, investors might have to stomach?
Kline: I think, as an investor, you have to look at, there's going to be a lot of pain here. They have a movie studio that doesn't have franchises and has a very underwhelming upcoming slate. Are you excited for the next Jack Reacher movie? I don't remember the last Jack Reacher movie. You look at their cable portfolio, MTV, the Video Music Awards just happened, and it was kind of underwhelming. So this is really a portfolio in a changing climate that has to be dramatically overhauled. There's going to be years of debt and pain before you see any positives here.
Shen: And, before the show, we had talked about the $1 billion bond offering that the company will be going into. They admit that with the amount that they already have on the balance sheet, this is going to cover some near-term maturities. It's just stacking on top of that, essentially.
Kline: Yeah, and they cut the dividend. But when you're a company that's in debt, you have to eliminate the dividend. And when you do that, you take a stock hit. Viacom may have some underlying good parts. There are some very good cable networks there. Paramount does have some good properties. But you're going to have to retrench and retool, and that means getting rid of a lot of people.
Tom Dooley leaving pretty much says that all of the ongoing management is eventually going to get shuffled out. You have to make a decision, is this a stand-alone company, or does it make more sense being part of CBS? And once again, with the changing face of cable, and everything moving to streaming, I would rather bundle all my assets together and have my own delivery system, my news angle, my sports, all of this stuff, and put it together. And you have an excellent CEO with Les Moonves, and he's obviously someone that can manage the Redstone family. I think that's probably where you have to go.
Shen: Absolutely. Just to leave it off for investors -- the stock is actually, considering the amount of volatility with what's going on in management and the business overall, it's only declined about 11% year-to-date. But, I think to really put things in perspective, that filmed entertainment segment in 2011 made up about 40% of their total revenue. That segment has declined over 50% in the ensuing four years. Calls to potentially split off that part of the business, both Sumner and Shari were vehemently against it, they said absolutely not. But they presented no options to turn it around.
Kline: Yeah, and I'll go back on, that's a mistake. Sumner and Shari Redstone are operating in a world that has changed. It's become, blockbusters are based on major properties. They don't own Star Wars, they don't even own X-Men. They have lesser franchises. So, every time they bring a movie to box office, it's an unknown or lesser-known property. And that's just not going to fly anymore.
So if they had someone willing to take a piece of that company and to minimize their risk, that would have been a very smart thing to do. Maybe the correct play is to sell a big piece of it to somebody in China or somewhere else where it can open up new movie markets for them. But Paramount is not going to be as successful as Disney or Comcast unless it buys properties, and there's very little out there that guarantees $1 billion at the box office. And that's what you need to get to the numbers you have to get to.
Shen: Yeah. Those big budget bets are very much more of a gamble when you don't have that established storyline or brand.
Kline: A $200 million upfront budget on an idea from a four year-old, or whatever the budget was for Monster Trucks, is crazy if you don't have Pixar or an absolute guaranteed hit. Yes, it was the director of Ice Age. Ice Age was a long time ago, and it's also been a diminishing returns franchise. So this was just a bad idea on top of a bad idea. And the Redstones seem to be doubling down on that.
Shen: Yep. Alright, Dan, we're talking about big bets here, I want to move on to our next topic. That is with AT&T and their Project AirGig. The news came out about a week ago. The headline here is essentially the ability for them to use power lines to deliver internet to underserved areas. Can you give us a little more detail?
Kline: Yeah. Underserved areas are the ones that make the most sense, because they don't have internet. But really, these are inexpensive. They didn't provide any specific expense details. Clip-on antennas that use the power lines, they don't directly transmit the internet through the power line, but they use the power lines to deliver wireless. It creates the ability to bring internet connection to any place that has power lines, which is the vast majority of the country. So, yes, it could help them bring it to underserved markets, and that would be, one, meeting legal obligations they were supposed to meet anyway, and two, it would, in theory, allow them to create a national or at least semi-national internet competitor where they could go in and say, "Yep, we don't have fiber, we don't have wires, we don't have any of this, but if you want a $39.99 internet package, we could offer it to you." That could really shake up the system.
Shen: Yeah. The company has been pretty mum on the more technical details. Everything they've put out so far, like that press release, there's a video that accompanied it, it's very interesting, but they're very adamant in clarifying that the signal does not travel through the power lines themselves. It has nothing to do with electricity. The one thing I notice, the only thing they mention with voltage, is that they try to connect the antennas to the medium voltage lines, but that's only because -- Ars Technica covers this -- their location on the electrical utility poles tends to be the highest up with a clear line of sight. So, it basically allows antennas to get the best signal travel from each radio.
Kline: It's worth noting that this is in maybe early testing phases, but AT&T did an awful lot to dial down expectations. This works in their private testing on their facility. They have not brought it out to widespread, and there's spectrum issues, there's other things that could cause problems here, but this is very promising technology that we're probably about two years away from actually seeing in the field. As someone who spends some of his time in rural New Hampshire where I have satellite internet that works about as well as dial up, and we do have power lines, a high-speed alternative would be something that would be absolutely perfect for me and my neighbors.
In theory, with a two-year time clock, this puts all the incumbents, Comcast, Cox, Charter, whoever is providing your Internet, it puts them on notice and says, "Maybe some better technology is coming." And we already had some vague things out there. Google has its blimps, and Facebook has made noise about deploying some mobile Internet options. But, this is a concrete possibility where the infrastructure is already there. If I'm an incumbent who is slowly ticking up broadband prices, maybe this puts a little bit of a check, and maybe it gets me to actually deliver to markets that don't have service right now.
Shen: So, something else that immediately clicked for me is that, frankly, there's going to be more and more need in terms of high-speed access to the Internet. Garner estimates that right now, there's six billion devices that are connected in the world. That number could explode to over 20 billion in the next four years, when you have more mobile devices, more wearables, smart appliances, smart cars, and the countless other technologies that companies are connecting right now to make them more effective and efficient and usable.
A few quotes that I pulled from the AT&T announcement -- one thing they mentioned is, "This technology will be easier to deploy than fiber, can run over license-free spectrum, and can deliver ultra-fast wireless connectivity to any home or handheld wireless device." The thing that really jumped out to me is the license-free spectrum. I know all the technical details aren't there, but what we do know, and we talked about it in the past, is the fact that companies have spent billions upon billions of dollars in the past two decades at spectrum auctions. So it's interesting to see where that goes.
Kline: The other thing this does, when we talk about spectrum -- if you're AT&T, which has already invested tens of billions of dollars in your wireless network, if you create a nationwide internet network across power lines, you're also creating the ability for hotspots for your phones. We see this with T-Mobile, where they're saying, "Hey, we don't really have great service in your area. We'll actually give you a device that makes your house a better hotspot so you can make phone calls." In theory, AT&T could supplement its already very good wireless network with this wi-fi network created by this technology. So, it might lower the value of spectrum for some of its competitors that have spent billions. T-Mobile and Dish come to mind as people sitting on a lot of spectrum. So, this really could be a game-changer. But, they have to prove that it works.
Shen: Yeah. And something else I should clarify on the more technical side is, with these radio stations that they're adding to the antennas, the core of this Project AirGig, the connection is still originating, based on comments from the company, either from their current cell towers or the main hubs they use to connect, for example, a lot of their home subscribers.
Another quote from that press release, "Project AirGig delivers this last-mile access without any new fiber-to-the-home, and it is flexible enough to be configured with small cells or distributed antenna systems," like the ones you mentioned, Dan, that they stress are very low-cost. No need to build new towers, no need to bury new cables in the ground.
The thing that's interesting, Sarah and I talked last week about drones, and a big potential they had in shipping and logistics comes from the coverage of that last mile, which, in that case, is really costly for carriers. In this case, having cables laid down on your property, if you want cable broadband access, I was just looking this up, costs tens of thousands of dollars, if not hundreds of thousands of dollars. It's a big problem for people in new developments, more rural developments, depending on your location and distance from the nearest hub. So, potentially another way this technology is addressing a very costly problem.
Kline: Yeah, it solves the problem, especially in under-populated areas. I referenced my family home in New Hampshire. The reality is, I have maybe 10 or 15 neighbors in two or three miles. It isn't worth it for whoever the cable provider -- it's satellite television for most of us. But, in the more populated parts of the town, whoever the cable provider is, it isn't worth it to them to run underground or even above-ground cable to my house. What are they getting out of it? An extra $80 a year from me? How many years will it take? And we've seen stories about individual houses even in populated areas that don't have cables run, and Comcast will want $15,000 to $20,000 -- I'm making those numbers up a little bit, but it's very high numbers -- in order to bring the wires that last mile.
This solves that problem. And it also gives an alternative. I know I live in a high-rise building now, and I have one provider. I have no choice. I have to go with whoever has wired my building. But, there's power lines directly outside my window. So, if AT&T had this, might I be able to use that for leverage, and say, "Yeah, I'm going to get AT&T, lower my price." This takes it a step. If we have one nationwide internet provider that can serve most people, then internet becomes a commodity and prices start to go down.
Shen: Yeah. Essentially, as long as your apartment has line of sight to that radio station that they set up with AirGig --
Kline: Absolutely. I have AT&T DirecTV, so unfortunately, an AT&T alternative may not work. But, let's pretend I had Dish. Dish could say to me, "We're the only provider, we're going to go up 50%." Now, of course, my building could say, "When the contract's up, we're going to kick you out." But then they have to wire somebody else. Our previous location where we lived did that. They changed providers, and it cost the homeowners association $350,000 in new equipment. These are not easy decisions. But if you take the technology out of it, then it becomes a free-for-all. When I walk into a store, if Coke and Pepsi are different prices, I can decide based on which one I want and based on cost without some of the limitations I have with Internet service.
Shen: Yeah. So, we talked about a lot of the benefits. Obviously pretty significant opportunity, assuming that some of the field tests they're starting next year prove successful, and they're able to roll it out over the next few years. But what about challenges for the technology? Things that jump out to me immediately are regulations, the fact that they're going to need utility companies that manage some of these poles to cooperate. It's still in the very early stage of testing. And what about competing technologies, too?
Kline: The challenge is the same challenge facing why you haven't been able to deliver me a burrito using a drone. The reality is, the incumbent always wins. If you are the existing companies that have laid all this fiber that Comcast and Charter, companies that have been very intractable and fought against new technologies, they might be willing to say, "AT&T, absolutely, serve these rural areas we don't want to serve." But they are not going to go so easily when it comes to letting them come into markets where they had monopolies, or in some cases, monopolies with one other telecom provider, i.e., AT&T, Verizon, Frontier.
So, what you're looking at here is, AT&T could come out tomorrow and say, "These are $0.50 antennas, we can clip them on to anything, we'll serve the whole network," and they're going to be facing years of lawsuits of obstructionism. If you are an incumbent, why wouldn't you want to be a monopoly? Would you want someone to come in? So, you can rent the space on the poles. All the rest of it is just money. But when it comes to competing with well-entrenched companies that have spent a lot of money on lobbying -- I think that's the biggest problem AT&T is going to have.
Shen: Something else I wanted to mention that could be a roadblock to this becoming a dominant way that AT&T enters the markets -- 5G technology is in development right now. There's lots of important standards that have yet to be determined, but international organizations are working together on this, because right now, we are on 4G LTE. In theory, in ideal conditions, you could get, potentially, up to 100 Mbps -- that's what you see now -- 1 Gbps in laboratory conditions. 5G technology, generally, they believe, could offer up to 10 Gbps speeds. Just to give you an idea, with Google Fiber, which everyone touts as being this incredibly fast service, you'll pay for a premium with it, if you get the AT&T version that's 1 Gbps. So, if this is delivered potentially wirelessly from cell towers, that can remove the need for something like this.
Kline: For about six months in our since-sold vacation home -- or, about-to-be-sold vacation home -- I used a T-Mobile hotspot, a 4G hotspot using the T-Mobile booster I mentioned earlier. And I could watch video, I could very badly watch Netflix. It had to buffer a lot, it wasn't a great experience. But it was not a huge leap to think, "If this technology just got a little bit better, even with delivering 4G," so that I had an optimum signal where I was, "this might be worth it for me to say, OK, I have unlimited, I will pay the extra money so that I get full speed. Maybe I don't need an Internet connection." Now, that might not be viable for someone in my line of work. But for my mom, who watches an occasional Netflix movie and checks her email, you're right, you might be looking at mobile hotspots and 4G, 5G technology.
The other thing you're looking at is, you have Facebook and you have Google out there. They're testing floating devices -- blimps, let's call them -- that deliver Internet and broadcast it out. You're starting to see them at stadiums and other events where the existing infrastructure can't handle the surging crowds. So, you're right, technology could make this irrelevant. But I don't think so. I still think 5G and 4G, it's spotty, it's location-based, whereas power lines are hard and fixed. And at least in rural areas, I think this is going to be a very good option. Frankly, in rural New Hampshire, as I've referenced a couple times in this show, I do not have any sort of signal on my cellphone. So, this would provide a wi-fi hotspot that I could also use my phone.
Shen: You mentioned how you used that hotspot, and it worked really well for you. I noticed an interesting trend, I don't remember the report I saw it in, but they're talking about how basically, broadband access in the U.S. among the population is plateauing. And what they're saying is that some people are transitioning to smartphone-only access, where that's their primary needs, they're not wired to their home. It's still a very small portion of the population, but it is growing. So, clearly, some people feel comfortable with that.
Kline: It's worth noting that broadband numbers have been skyrocketing every quarter. They go up a few hundred thousand in the slower quarters, a million in the busier quarters. I don't have the numbers in front of me. So, homes are adding broadband. But what you are seeing is the homeless -- by which I mean, people living in apartments, living with roommates, not actually homeless -- the younger people that are less tethered, that don't have families, they are perfectly comfortable watching Netflix or Sling TV or whatever it is, or just YouTube videos, on their tablets and phones.
This, to me, is ridiculous. I have a 55-inch television. I don't want to sit in my living room and watch TV on my tablet. But younger people will actually have a TV in the background -- this is making me sound a 100 years old. I'm 42 years old. But, this, to me, seems silly. But, certainly, your phone connection in most places, or your hotspot, can deliver a decent experience on smaller screen. And there's absolutely an audience of people that don't yet have roots or money that that's very appealing to.
Shen: Yeah. Alright, Dan, wrapping up here, I wish we could give the listeners a more solid idea in terms of what the revenue opportunity is, or what the profitability of something like this could be. But, it's very much in the early stages. But I will leave listeners with this: the FCC, the Federal Communications Commission, in their 2016 Broadband Progress Report, they mentioned that 10% of all Americans --34 million people -- were lacking access to broadband or high-speed internet. In that case, that's only defined as 25 Mbps download speeds, 3 Mbps upload speeds, which, in general, I think, would be considered pretty slow among people who have access to something like Google Fiber, or even your average service in metropolitan areas.
But going further than that, 39% of rural Americans -- 23 million people -- lack access to broadband. Those underserved areas could present a pretty large market. Pairing with that, World Bank data says 100% of the U.S. has access to electricity. On top of that, 80% to 95% of that electricity is delivered through a power grid with overhead or above-ground lines, which is exactly what these AirGig radio stations would be attached to. The infrastructure is there, and assuming that maybe some competing technology doesn't usurp everything, I think this is a pretty interesting development for AT&T.
Kline: It's a big potential market. I keep talking about our house in New Hampshire. The satellite service we have is 5 or 6 Mbps in speed. It's relatively slow. You can't watch more than one stream at a time. And it's expensive, it's significantly more than I spend at my regular house, where there's, in theory, not in my building, but in the town, there's competition. So this is a market where AT&T could go in and reach people where yes, they might have internet service, but it's lousy, and they're offering them truly high speeds. And they might be able to come in at $60 to $70, rather than $29 to $39, because if you don't have something and you need it, you're willing to pay more for it.
Shen: Thank you very much, Dan, for joining me on the show today.
Kline: I'm going outside to wait for my drone burrito.
Shen: There you go. That's all the time we have for today. We can continue the conversation on Twitter @MFIndustryFocus, or you can send us any questions or comments by email to IndustryFocus@Fool.com. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening, and Fool on!
Daniel Kline owns shares of Facebook. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook, Netflix, and Walt Disney. The Motley Fool recommends T-Mobile US and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.