Telecom giant AT&T (T -1.64%) is best known today as a leading wireless provider in the United States, but it's also investing heavily in fiber internet. The company now has 7.5 million fiber customers, up 19.2% over the past year, and it's gaining an average of just under 300,000 new customers each quarter.
One thing to know about fiber is that it's very much an "If you build it, they will come" kind of business. To expand it, a provider must start by laying down fiber in neighborhoods and near businesses -- a capital-intensive endeavor -- and then hope that enough customers sign up for the service to make its investments worthwhile. Right now, AT&T's fiber network reaches 19.7 million homes and 3 million business locations, but only a fraction of those potential customers have signed up.
Sharing the burden
It can cost something like $27,000 per mile to lay fiber, according to the Department of Transportation. Depending on the density of homes and a wide variety of other factors, passing a single home with fiber can cost in the ballpark of $1,000. And that doesn't include installation of the fiber connection to the home itself, a service that's often offered for free or at a subsidized price to potential customers to induce them to sign up. AT&T has the advantage of already having infrastructure in its existing markets, so it can likely lay additional fiber at a lower cost compared to starting fresh.
AT&T generated an average of $65.92 in monthly revenue per fiber subscriber in the first quarter, so it can take quite a while once a subscriber is on board for the investment required to connect them to pay off. Late last year, AT&T announced a new joint venture with BlackRock, called Gigapower, meant to spread the cost burden of laying fiber while enabling AT&T to further expand its network.
Gigapower, which offers wholesale fiber services to commercial customers, officially launched earlier this month with AT&T as its first client. AT&T plans to grow its own fiber network to pass 30 million homes and businesses by 2025, but those will be limited to its existing service areas. Gigapower, on the other hand, will lay fiber in areas outside of AT&T's current network, allowing it to offer services in new locales by tapping into Gigapower's network.
Gigapower is already up and running in Mesa, Arizona, and AT&T is activating its first customers on the network. The joint venture will soon expand to Las Vegas, other areas of Arizona, northeastern Pennsylvania, and parts of Alabama and Florida.
Sticking with its guidance
This strategy from AT&T is similar to one embraced by semiconductor giant Intel, which partnered with Brookfield Asset Management last year to help fund $30 billion worth of investments in chip factories. For AT&T and Intel, these arrangements provide the ability to conserve cash without sacrificing important capital investments.
In conjunction with the news of Gigapower's official launch, AT&T reiterated its full-year outlook for at least $16 billion in free cash flow. That number could rise in the years ahead as the capital intensity of AT&T's investments cools off a bit.
AT&T's fiber business is now at a $6 billion annual revenue run rate. As it expands its network, increases its penetration in areas where fiber has already been installed, realizes higher average pricing, and taps into Gigapower's growing network, AT&T's fiber business has the potential to grow at a double-digit percentage annual rate for the foreseeable future.
