Telecom giant AT&T (T 1.09%), now free from its failed foray into the media business, has set its focus on two areas: 5G and fiber. The company already provides voice and internet services over its wire-line network to both consumers and businesses, but demand for those legacy offerings is in decline. The future of AT&T's wire line business is fiber.
AT&T's fiber network provides far faster internet speeds than its legacy telecom services, and it's been the growth engine for the wire-line business as the company expands its reach. On the consumer side, AT&T's fiber network had 6.9 million connections at the end of the third quarter, up 21.2% year over year. Despite significant declines in revenue from legacy services, fiber helped drive a small increase in total consumer wire-line revenue in the third quarter.
On the business side, AT&T's fiber network now serves 675,000 business buildings and 3 million business customer locations. Fiber growth is so far not enough to fully offset declining legacy services, with business wire-line revenue down 4.5% year over year in the third quarter.
Adding to a big goal
As it stands today, 9.5 million business customer locations are on or within 1,000 feet of AT&T's fiber network. On the consumer side, AT&T's fiber network has the ability to serve 18.5 million customer locations. By 2025, the company is aiming to grow its fiber footprint to reach at least 30 million residential and business locations.
Building out its vast fiber network is an expensive proposition. Before winning any customers in a particular location, AT&T must lay down the fiber that passes by homes and businesses. When a consumer or business opts for AT&T's fiber internet, the company then must run fiber to that home or office. It may recoup some costs by charging installation fees, but it takes a lot of spending up front before AT&T begins collecting revenue from fiber customers.
The capital intensity of building out the fiber network puts a limit on how quickly the company can expand. Last week, AT&T announced a new initiative that will increase the number of potential fiber customers without requiring the company to foot the entire bill. AT&T is teaming with BlackRock to form a new joint venture, called Gigapower LLC, aimed at providing wholesale fiber services outside of AT&T's existing fiber network.
Gigapower will serve internet service providers and some other businesses, rather than serving homes and offices directly. AT&T will be the first wholesale customer, leveraging Gigapower's network to expand its fiber customer base. Initially, Gigapower plans to deploy a fiber network capable of serving 1.5 million customer locations. For AT&T, this number will be in addition to its target of 30 million customer locations.
Details of the arrangement, including the exact ownership structure and how much capital AT&T will contribute, were not disclosed. AT&T doesn't plan on consolidating Gigapower's financial results into its own, but it will report any consumer subscribers served through Gigapower's network as part of its subscriber total. The company's fourth-quarter report in January will update shareholders on any impacts to capital spending and free cash flow.
AT&T's balance sheet may be one reason for the company's decision to team with BlackRock. The company is still recovering from its failed attempt to transform itself into a media conglomerate. Total debt sat at $134 billion at the end of the third quarter, a number that the company is aiming to bring down over time. Knocking down the debt is particularly important in a rising interest rate environment, since any debt that needs to be refinanced may come with higher interest payments.
The joint venture with BlackRock will allow AT&T to expand its fiber customer base beyond its existing fiber network while reducing the capital spending required to do so. The deal makes sense, although investors will have to wait until January to hear more details about the financial impact.
