Good morning, everyone, and thank you for joining us for our 4th Annual Summit. And thank you all for the support you've given us as a firm. Some of you who saw our last session with Disney heard Michael say the same thing. But all of us, on behalf of the whole firm, We can't thank you enough for the support of that you've given us. And it's hard to believe that we're now in our 4th year doing this.
And thank you for those of us who are those of you who are joining us by webcast this morning. I'm really delighted to have Matt Ellis joining us this morning. Matt, congratulations again on your new role. Thank you. Obviously, one of the themes that we're going to talk about a lot throughout this conference.
And I know the topic, just judging by the question I get, everybody wants to talk about M and A. I'm going to talk about that with you a little bit. But I want to start with the most recent transaction, StraightPath. I wonder if you could just tell us What was it that was so compelling about StraightPath? There was a sort of sense of urgency about getting StraightPath.
What was so compelling about it? And what do you plan to do with it? Yes.
So good morning, Craig, and great to be here. Before I start, I think we have our safe harbor slide, which I Need to reference, if we can put that up, please. We'll get that up here in a second. I'll make reference. Obviously, we'll make forward looking statements this morning, and there's obviously risk associated with that.
The full statement is on our website. So with that said, there we go. There it is in all its glory. So with that said, to get to your question, as you think about straight path, I'd suggest you think about it in terms of the overall ecosystem of building out 5 gs and really the journey we've been on for the last 2, 3 years now. When we first started on this, we talked about we felt that there was Some great use cases around 5 gs, and there was a lot of talk about the standards aren't going to be there until 2022, 2023.
And We said, well, we think if we put our muscle behind that, that it doesn't need to be that long. And so we've partnered with All the carriers around the globe, specifically in South Korea and Japan, we've partnered with some of the network manufacturers such as Samsung and Nokia and Ericsson. And you've seen us really make a lot of progress there. We've tested the technology first in lab. And then last year, we took it out of the lab into the field.
And now this year, obviously, we're doing the precommercial scale trials that we're just kicking off now. So what you see us doing is really building out what we need To launch 5 gs as we go forward, and obviously, one part of that is spectrum. And so we have some 5 gs, the millimeter wave spectrum through The XO transaction, that got us 28 gigahertz spectrum in significant parts of the country, but not all of the country. And then when you look at the straight path asset, they bring more of that 28 and also nationwide coverage at the 39 gig level. So It was really a case of adding another asset that we're going to need to build out 5 gs and be able to deploy as quickly as we want to.
There will be other 5 gs spectrum that comes available through FCC Auctions, but that's probably a couple of years away. And we felt like taking the uncertainty off the table of participating having to wait to participate in the auction, we now know what we have, And it puts us in a position we can deploy the 5 gs solutions as soon as they're available.
And is it fair that I presume the answer to this is yes, but that your engineering tests have been sufficiently positive to say, look, this is actually going to work for issues like rain and trees and leaves and that sort of thing that you're confident that there's the real business case for deploying the spectrum. Absolutely. So that was part of
the taking out of the lab last year and doing some of the field trials. We demonstrated that it works. We demonstrated that you can deal with some of those issues and how you do the beamforming as you operate in these much more high frequency bands, which is different than our traditional spectrum. And so we proved that you can solve those initial challenges that people saw to the point we said, right, we're going to now test it on a larger scale, which is what we're in the process of launching right now. We're doing that in 11 different cities, which have different topographies, so we get comfortable with how that you use this spectrum And make it work, and then we'll deliver the business cases coming out of that.
So those trials are just starting too soon to tell you how they're going. I'm the most eager person to know. But we should have answers out of that as we get later into the year, And then we'll talk more about specific use cases. Obviously, we think the fixed wireless broadband is will be the first use case. And then after that, we'll get into mobility use cases as well.
Well, I'm going to come back a little bit to fixed wireless broadband later, but I want to start with the core business. In wireless, it's fair to say the Q1, not just for you but really for the industry as a whole, was a very challenging quarter. And with slow growth in phones but also ARPUs down, and I think it was the industry's first ever year over year service revenue decline after 17 years of growth. Competitive intensity, I would argue, is probably the highest we ever saw in the Q1. What's the argument that it gets better, first for the industry as a whole and then for you specifically?
Yes.
So I would say, look, I'll talk about where we are, and we feel good about where we are today in the industry. You have the combination of the best network and the largest face of customers. And so what you saw us do in the Q1 was launching unlimited Because we've reached the point where customers were having to make a choice. Other carriers have decided to launch unlimited, and it was leading our customers to make the choice between, Do I want that feature function where I don't have to worry about how much data I'm using anymore? Or do I want to be on the best network?
And so what we did was we launched unlimited, Customers didn't have to make that trade off anymore. And we immediately saw a benefit in the results. And as I think we said on the earnings call, I fully expect that we will be phone net add positive during the Q2. So we're certainly seeing turnaround in the business since we launched that. The other key component around this is when we made that change, it wasn't a price reduction.
I mean, there's certainly customers optimizing and taking advantage of it and but also customers stepping out to it. So overall, we think that this will not be A negative to ARPU by going on unlimited, and it was really just getting on that same level playing field from a functionality standpoint And going from there. So we like where we're positioned today. We're still premium priced. We launched it in a disciplined fashion.
It's at a premium to where the market is because we have the premium network. So we like where we're performing today.
Have you seen any sign that the competitive intensity that was that made the first quarter soft for you and everyone. Have you seen any real signs that, that's abating in any way? And what should we be looking for? You said phone net add positive, but what else do you look for to say the business is starting to turn?
Yes. So look, from the competitive environment standpoint, it's certainly been a competitive industry, not just in the past year or so but at Various times over the last 20 years. And I think if you look where we are today, it shows that we compete effectively even in that type of environment. We'll see how the industry plays out the rest of the year and if it gets more aggressive or less aggressive as different devices come out. We'll wait and see.
But from the let's talk about service revenue for a second as an answer to your question. 1st quarter, we saw the negative 6.1% year over year, And we said we expect Q2 to be in a similar type of range. But then we said we expect the back half of the year To show improvement in that trend. And so if I break that apart a minute and maybe explain why we have that confidence, you'll see that improve. If you look at the different components in service revenue, one of them is the line access fee.
So if you go back to August of 2015 when we launched the price plan when we introduced small, medium, large, extra large sizes. That was when we said we're not going to be fairly even on customer choice between the subsidy model and device payment model. We're really going to go more to device payment. And when a customer went to device payment, you go from that $40 line access fee to the $20 Now you're collecting the revenue elsewhere and equipment revenue, as you know. But from the looking at service revenue, you've got that trade down.
So when we get into the Q3 of this year, We have the 2 year lapping of that, really getting behind that. And so the headwind in the line access component of service revenue We'll be less when we get to the back half of the year. And then the overage component. Again, in the Q3 a year ago, we added features to our plan with safety mode and carryover data that started to allow customers to manage their overage more so than they could in the past. And obviously, that's a significant feature of Unlimited as well that you get there.
So we've seen significant migration of the base to both the plan We launched last summer with those features and now certainly with unlimited. And so we'll start to lap the anniversary of that as we get into the Q3 as well. And so the headwinds in both the line access and the overage will start to reduce as we get into the back half of the year. And the other thing that we're seeing is We're seeing customers in the base step up to get to unlimited. Whereas previously, they say, I'm not sure I want to pay an extra $20 a month To get an extra 4 gig of data, let's say, well, I've got an extra $20 a month and I get unlimited, and we're seeing more step ups that way.
So when you add those things together, The reductions of those headwinds that we see line of sight to beginning in the third quarter, We're confident the service revenue trajectory gets better in the back half of the year.
And do you actually so we tend to do an accounting adjustment for ARPU and service revenue. I suspect you internally do the same so that you can get a sort of apples Apple's view. I don't know whether you do it the same way we do. But do you think, adjusted for the downdraft stuff that comes from transitioning customers to EIP. Do you actually get to positive ARPU growth in
the back half of the year? I think
it's we certainly see the ARPU situation improving. The exact timing of that getting to growth, We'll see whether that comes in the back half of the year or whether that gets to sometime further out in the future. That depends a little bit on how things But to your point, that's why we also look at service revenue plus installment payments. Because what I'm really interested in, irrespective of how I bifurcated the bill out And all the mess we've made with this. You get to what's the total amount of billing the customer monthly.
And again, in the Q1, even though service revenue was down 6.1% year over year, the billings, whether it's a service plus installment billings, We're up on a year over year basis. So that's another reason why we feel good about the business.
Okay, good. So then let's talk about your network now because You talked about going to unlimited. And the big controversy, I think, that I hear from investors is whether the network is ready to handle the kind of load that you're seeing. So I guess the first place is just at a 30,000 foot view. How's the network holding up as unlimited data usage ramps up?
And I think the argument was you probably only saw because it came late in the quarter and people had to opt in, you probably only saw just the front edge of the increase in volumes that you're going to see over the rest of the year.
Yes. Look, the network is performing great, and it's performing as we expected when we decided to launch Unlimited. We started thinking about Unlimited last year. We're not convinced we were going to do it, but we obviously, as it was in the place. We asked ourselves, is it something that we can do if we want?
And obviously, the core Brand promise that we make consumers is about the quality of the network experience. And so we said very early as we started to think about Unlimited, what if we're going to go there, We're not going to jeopardize that brand promise. So we're only going to go there if we're convinced that the network performance can continue to lead. And so the network team was confident in that. They spent a lot of time on the back end of last year convincing the rest of us that was the case.
And so when we decided in the Q1 where we saw the competitiveness in the marketplace And what we're seeing customers were really looking for that functionality, we've reached the point where we felt network was there. Look, if I break down network, and And I understand where the question comes from. We think about network in terms of coverage and capacity. So we completed really the build out of coverage of the LTE network really about 3 years ago now. And since then, we've been adding capacity.
And there's different ways you add capacity. This. We think about adding capacity with spectrum. We add capacity with the network architecture, and then we add capacity through densification. So From a spectrum standpoint, we continue to deploy more spectrum to our LTE network.
Today, we're running just over 50% of our spectrum assets are supporting the LTE network. So there's significant amount of spectrum we still have to deploy against the current network, Whether that be the AWS 3 spectrum, which is starting to go into service this year, whether that be refarming PCS and 8 50 megahertz spectrum that support of 3 gs and voice networks. If we get customers migrate off those, we refarm that spectrum over to the LTE network. And then as I think about heading into 2018, We're going to get access to unlicensed spectrum too. So we are continuing to add spectrum assets to the network.
But then you get to the network architecture And whether that be some of the features in LTE Advanced or whether that be what we're doing with CRAN and those type of technologies, We are more efficiently deploying the spectrum today than we were 5, 6 years ago when we launched the LTE network. So every piece of spectrum we have is doing more now and capable of doing more, and we see further opportunities to have gains just through the And then you get the densification. And we're doing exactly what we said we do. Remember, we came out of the AWS-three auction, and there were some cities that we didn't win, And we chose not to go. We said there's a price at which it makes more sense to add capacity through densification versus the spectrum.
And we've done what we said we were going to do by densifying the network, and you've seen the network performance in that time period since then Continues to lead the industry. So densification very much works. There's still a lot for us to do with densification. And a couple of other plus points about densification. 1, it prepositions the network for 5 gs Because by putting the small cells in, putting that dark fiber in, you're creating some of that backbone that you're going to need for that next generation network.
And then secondly, It's more efficient to densify than just to add capacity through spectrum. For example, here in New York, it's certainly a market where we've had to add capacity. If I'm going to do that through spectrum, I go buy a piece of spectrum that covers yes, it covers Manhattan, it covers the 5 boroughs, but it covers areas outside that too. I may not need additional capacity throughout that geography. When I do it through densification, I pinpoint specific location, I may be right here, and I'm able to add capacity here without adding capacity where I don't need it, which is obviously that's efficient.
We're very comfortable with the network performance on Unlimited, and we're seeing what we thought we'd see when we decided to go all in.
So one of the arguments that I think Everybody here will be familiar with is notwithstanding all the things you said about the ways that you add capacity, There's still a broad perception that you are spectrum constrained and that particularly relative if you take metrics like megahertz pop per subscriber and that sort of thing. How do you so Say more about how you think about spectrum. It used to be you would say, I want to make sure I have spectrum to plan ahead 12 to 18 months. Is that time frame still appropriate? And are you how confident are you that you do have the spectrum assets that you need?
Yes. So we still plan ahead, and that 12 to 18 month window is still the right one. But we forecast Where we see demand going and we see where we have capacity and then you obviously see where that equation looks like it's going to break and then you architect a solution. And that solution is going to differ by geography. I mean, in the old days, it used to be all just put up another macro cell site, and I have to have the spectrum there to make that work.
Now it's a question, okay, how am I going to use small cells? And there's different types of small cell solutions. So what's the right solution For the geography, where you're going to need to add capacity 12 to 18 months out. And we had we showed a video at the sell side event last week that's Available on the website where you can we showed 3 different geographies and how you're densifying in different ways in those different geographies because of the specifics of each location. So the team continues to do that 12 to 18 months out.
That's what they've been doing. The things the engineers are deploying in the field today are things we started planning for in the first half of twenty the And the things that we're planning today is for activity we'll actually deploy in 2018, and that continues to be the case. Spectrum is one way that we can add that capacity, but it's not the only way. And as I said, it's really about Looking where we think we see we need additional capacity 12 to 18 months out, and then we find the right solution. And that is often as much around densification as it is around I need more spectrum in that particular location.
And so the densification story has been a somewhat slower one for almost everyone than I think we would have anticipated a couple of years ago, whether it's zoning, whether it's the cost of roof rentals and street furniture rentals and that sort of thing. Can you talk about the taste. You said you're planning 12 to 18 months in advance for getting that done. But how long does it take to scale of small cell network in a given location.
Well, I mean, you touched on some of the points that are there. I mean, certainly, the zoning and permitting and so on takes time, which is why we plan that far in advance so that we can get it done. And that's we are I think we know how to do that. We've been doing it for a long We've shown that we can get there. I don't think you don't just go in and say, I'm going to densify a city and say, okay, it's done densifying.
There's layers to that. You go into initial densification, and you come back and you can densify further and so on. So it's continuous how we do that in different geographies Because you're adding the capacity that you're going to need some for us in the future, 18 to 24 months out, but I'm not necessarily trying to put the capacity I'm going to need 10 years out. That would be a little inefficient to deploy it that fast. So but the reason why we do it that, right, is just the timing to get the to work with the local authorities to get there.
I think we know how to do that now, and I think we've demonstrated that. That's why we've added the amount densification we have in numerous cities across the country, and you see it in the network results.
And so is it fair to say that's becoming a more and more important part of your capital budget? The densification piece? Yes.
Yes.
I think when you look at the capital budget, overall, the number stays fairly consistent. But what's in there evolves significantly over time. If you think you go back a number of years, obviously, it was around 3 gs, and then it shifted to files, And then it shifted to 4 gs. And even within 4 gs, it's moved from initially it was about coverage to now it's moved to capacity. And within capacity, There's a fair amount of that, the densification.
And as I said earlier, we're thinking about it not just deploying densification for 4 gs. But how as you put that densification in, we're pre positioning for 5 gs deployment as well so we make that asset deployment as efficient as possible.
And so bottom line, I guess, for me and for a lot of your investors is, Is the core Verizon strategy of network advantage in wireless Still possible, is there still room for network advantage to be a differentiator? And do you still own that position?
Absolutely. And I think that shows up in the numbers we saw in the second half of the first quarter after we took away the functionality difference, unlimited versus not unlimited. And you saw the numbers we had in the second half. And that's with the price premium against where some of the other guys are. So It shows that consumers understand the value of the network.
They're willing to pay that premium to get on the Verizon network experience, And we fully expect to continue that. And we're as I think about not just in 4 gs LTE, but as we get 5 gs. We're confident that we are leading the way there. We're going to deploy that first and continue that history of that network leadership.
So let's talk about 5 gs for a second. You mentioned the trials that you're already doing and that it Maybe too early to report anything back on what you're seeing. But what's your intuition about let's take fixed wireless broadband for a second. What's your intuition about the geographies where it's going to make sense? Does it make sense only in extremely dense markets?
Does it make sense only in sort of in the suburban rings around dense markets? Where does the business case play out for fixed wireless.
Yes. So I think what it ultimately depends on is how far you can kind of propagate that signal, right? And that's really why we're doing the trials to get comfortable with how far that really says how far out in that dense urban to suburban ring and so on It makes sense to go. So we'll have more sense later in the year on that on the size of that particular opportunity. We certainly think it's significant.
We certainly think it's a meaningful business case, and we look forward to getting to the end of the trials And being able to be a little more specific about that. But we don't believe, at this point, it's just a dense urban opportunity. We think it moves A little more broader than that.
And like in the case of building a wireline network, is it, I'm guessing advantaged in places where there's aerial infrastructure relative to buried infrastructure. And Presumably, it's easier in places where there's telephone poles or street furniture than in places where there's not or the street furniture, which I guess has become a euphemism the streetlights.
Yes. So as you think about it, and really what I may take you back on this one is What we're doing in Boston, which is about the value of a fiber network across multiple usage And architecting that network to provide multiple uses, whether it's connecting cell those. Whether that's a 4 gs cell site or becoming a 5 gs cell site, whether it's providing a residential solution as we are in the Boston build With the Fios product, whether it's connecting small businesses or enterprise businesses going into the tall buildings in the center of the city And connecting those up for enterprise solutions. And then even as we move forward here, how do you connect up with the smart city solutions, the kiosks that are out there that you see a number of cities now, just passed 1 on the way here this morning, right? And then the smart lighting solutions and traffic cameras and the like.
And so it's a case of putting that fiber in That's going to support those multiple uses, including the 5 gs business case. And when you build if you think about that fiber going out and using the street architecture, And as you say, aerial plants, easier than obviously when you have to go dig the ground, but it's a combination of those things. And I think we've also learned How you go even when you have to put the fiber below ground, we know how to go do that as efficiently as possible.
Lowell has talked about the architecture that you're using in Boston. And Nick and I, some of you may have seen, just published a pretty extensive report on the 5 gs architecture, our small cells part 2 piece. That suggests it's a pretty expensive proposition to start doing 1700 strand sheets in lots of different geographies. Is it a fair expectation? You said before that the mix within your capital budget changes over time.
But is it reasonable to assume that as you start to build extensive 5 gs that it's going to have to take just playing more capital spending, that it's a more capital intensive business than what we've seen so far.
Yes. I don't know if that's I wouldn't necessarily say that's the case. I mean, we're going to have to see. We'll get through the trials, and we'll determine the size of the opportunities we discussed, and then we'll decide how Quickly, we decide to deploy against that. So I'd say more to come there, but I'm not sure that I'd say that that's not a foregone conclusion by any means.
I'm going to wrap up on wireless with just one last question, and that is your margins in wireless consistently been the envy of everyone in the industry. But that's both a blessing and a curse, right? I mean, there are some who would argue that We've seen peak margins. They'll never be sustainably that good. There's others that would say, no, you've actually got as the upgrade rates stay low, and you keep taking costs out of the business.
How do you think about those 2 things? And how do you think about the margin trajectory of the history of the wireless business as you look out.
Yes. I like that question. We've I think we've got it for a number of years now, and We keep getting asked because we keep reducing the margins, right? So look, it's about continuing to improve the efficiency of the business. And we don't always talk about it probably as much as we should do, but there's a number of ways that you see us continue to the cost side of the wireless business.
It starts with network. And as we deploy the network more efficiently this year than we did last year and the year before that, The cost per bit comes down, and we're constantly doing that. And that's been something that each generation of the wireless industry, you've seen us do that. The 1st year of any of the generations is the most expensive cost per bit, and then it continues to come down from that. And we could see continued line of sight With the LTE network to continue to bring down that cost a bit through the remainder of this year, next year and going forward.
So the network piece, we think, continues to get more efficient. And then as you think about other parts of the cost structure, from a distribution standpoint, we think there's still opportunity to reduce the cost of the distribution side By making distribution more of a digital first activity. And so there's opportunities there to continue to reduce the cost there. And then on the customer care side, We continue to work and understand what's causing customers have to call and take away those reasons as causing them to call. And if there are things they need to do, how can they do that in a self serve fashion?
With the app we launched last year, there's a number of things that a customer used to have to make a call They can now do on their own time and just take care of themselves. So And
is it fair to say that a customer who's on an unlimited plan has a lot fewer reasons to call?
Yes. I mean, there's obviously less things they have to call about, so that helps the cost side of the equation. So there's a number of levers there to continue to drive the cost side, whether it's network, distribution, care, other things, too. So that's And every year activity for us. It's not just kind of a
one off program. Yes. It used to be in these interviews, we would say, now let's turn to the wireline But in some ways, the wireline business isn't really a separate business anymore. A lot of what you've been talking about is really integration of wireless and wireline. So let me step back for a second because you've divested A lot of your wireline assets to Frontier and a couple of sequential transactions.
But on the other hand, you seem to be increasing your dependence wires. Can you talk about that trade off of, on the one hand, coveting wires, whether from someone else or building more and on the other hand, divesting some of what you already have. Yes.
So I'd start off by saying that we still very much do have two segments, how we think about go to market. We go to market with wireless products and services, and we go to market with wireline products and services. That's not fundamentally changing. What you're seeing change a little bit more is the network, their provisions. Historically, we've talked about the wireline network and the wireless network.
And as you said, that's where you're seeing more convergence because the wireless network, the reach of fiber Into the wireless network or wires in general is a lot more than it used to be as you move from a macro cell site network to 1 with more small cells in. So what's important to the products and services we offer, whether that's a wireline or a wireless to a wireline customer, Is the quality of that fiber asset in the underlying network architecture. And so you've seen the things we've done around that. Certainly, we talked a little bit about and how we're building the network there. And you should think of that as a blueprint for how we're building fiber in other locations as well.
You mentioned we've divested some assets. Obviously, the last one was the 3 geographies that we divested to Frontier last year. What we really did is we took those properties that still had a large amount of copper in them. We divested those, and we took the proceeds and used that to buy the XO asset, which gave us 5 of metro rings in 45 of the top markets around the country. So we are certainly committed to the wireline asset.
It's the foundation of the networks, both to provision wireline and wireless. And in addition to, obviously, buying assets like XO. You see the agreements recently with Corning and Prismium to spend $1,300,000,000 over the next 3 years buying fiber. So we're committed to the wireline business because it's really it's the backbone of all of the network services that we're offering.
One of the alarming numbers to me that I saw in anybody's first quarter report was the decline in the rate of decline in AT and T's wireline business in their commercial wireline business. Yours was much more of a constant trajectory that it's been a it's not an easy business. But they had a very steep acceleration in the rate of decline in commercial wireline. Are you seeing what are you seeing? Or is that a canary in a coal mine for that industry and that segment as a whole is getting more challenging?
No, I think we're seeing the continuation of the trends you've seen in our results for the past few years now. And so we've done a couple of things in that space. We've First of all, at the start of this year, we talked about we've broken up those customer segments. We used to have what we call consumer mass business and then enterprise. And within that, you had within consumer mass business, it was always consumer was the primary focus.
And then within enterprise, Certainly, the larger customers were the focus. And so we did. We brought the mass business out of the consumer piece. We brought the more medium sized business out of the enterprise and formed That new customer group, and they're very much focused on the SMB space, including state and local government and education institutions. And so now that you've got a group that's very focused on that category, we're developing product offerings where you may bundle the voice and data needs of those type of customers in a product that fits for them.
And we're optimistic that, That will help us to offset some of the secular declines in just from legacy voice and data or from copper based services. When you get to the enterprise space, yes, you've got some of those secular declines that we've seen now for a few years. But I think we've been the first to deploy some of the SD WAN products in that space and seeing great take rates from customers. And so we've got those product offerings out there, some network virtualization offerings out there that are really allowing us to grow those businesses Offset some of the secular decline. So we're confident that the revenue trajectory we've been on, we'll still be in that low single digit negative number where we've been.
But we see the things we're doing in terms of new products and services providing enough of an offset To the decline in the legacy that we don't see any significant, like, downward trend that you discussed.
And what about in the consumer business?
What's the future of Fios for you?
Yes. Fios is a great business. I mean, it's And I think you see in this quarter, we've added some things with around the gigabit connection.
And has that had real traction?
We're seeing some traction, certainly. But what you've got is and it continues to be because of the symmetrical upload and download speeds. It's we believe it's a superior product to other products that are out there. And when we put the right offering out there around it. We see it resonate in the marketplace.
So it continues to be in full look, broadband It's going to be very important to the home connection going forward, more so today than it was yesterday and more so tomorrow than it is today. Customers are going to continue to connect more devices in their home to their broadband network. And so having that broadband network that can handle all those connections on it It's incredibly important, and we think the Fios network gives consumers the best broadband network that to handle all of that.
And so that I take it that is still a business that you see as strategically core.
I think Spring broadband in home solutions
is still contingent. In the sort of Fortress Northeast, as I've always said.
Yes. At this point in time, certainly, in the Northeast is where we've got that footprint. And so we think that continues to be a very important product.
And I guess the same question I asked about on the wireless side, Wireline margins have actually been one of the untold stories. You've actually had a nice turn in wireline margins. How much more runways there for wireline margins or lapping the Frontier transaction that we now see most of what we're going to get.
Yes. We said we would take out the stranded costs with the Frontier transaction. The team's worked well there. You're also getting to the point this year where you kind of lap the benefits coming out of the labor contract last year. But we've said and certainly, Q1 came in at a little north of 22%.
We'll see fluctuations in the margin throughout the year as we typically do in wireline. But for the year as a whole, We certainly think it'll be better than a year ago, being below 20% range. And we'll continue taking cost out As we go forward, I think the wireline team, because of some of those secular declines that we talked about, have been out there for a while. The team really knows how to continue to the the cost side of the equation. And you see that and that's why you see the results and the margins you do.
So we think, as I say, it will be in the low 20s, and We'll see what we can do next year on top of that.
I guess the one last thing we haven't talked about Svyat within the portfolio is AOL and Yahoo!
Is that
big enough to move the needle as a growth driver?
Yes, absolutely. I mean, so just even in the day we close, when you say the 2 businesses, even without any integration benefit, it's a $7,000,000,000 business on an annualized run rate. So that's not small by any means. And as you heard Tim talk about last week. His goal is to get by the by 2020 up to around $10,000,000,000 or so.
So That business has the ability to move the needle. We think there's tremendous advantage of bringing the Yahoo! The eyeballs they have, the content platforms they have into merge that with the AOL content, and then you got the ad tech platform underneath. The challenge today with the current business is just not having as many eyeballs there as we need to drive the growth there. And when you bring that volume of eyeballs that Yahoo!
Has and you start building out these super channels that we talked about around news and sports In finance and tech and lifestyle and so on, there's a tremendous opportunity to build a very good platform. Tim likes to talk about Building the brands that consumers love and building platforms that companies love. And that's the challenge that the team is working on. They've got a great integration plan. They're ready to go, and we look forward to closing and getting on with it.
We were joking about Game of Thrones before, and There's certainly a sense pervading this summit of that there's this sort of pendency of a huge wave of M and A coming. Your strategy has been pretty different than certainly than AT and T's, but then a lot of peers and a lot of what people expected and that you've done a series of what, by contrast, are relatively small deals now with StraightPath but previously with Yahoo! And then going back to AOL. Nothing like the kind of giant deals that some people have speculated about. Before we talk about what some that piece of it, when I look across the portfolio, can you get this business Back to consolidated GDP like growth without big acquisitions?
Absolutely. And look, you start with service revenue in wireless. Obviously, that's the biggest part of the business today and just moving that piece. So we talked about some of the headwinds that are in the service revenue piece right now this. We have line of sight to as we get to the second half of the year, start to dissipate.
So excited about that. Certainly, with The change in the customer acquisition metrics, pre- and post unlimited, makes us feel good about the impact on service revenue in wireless. As we said, we expect service revenue trends to improve in the second half of the year and get back to year over year numbers during the course of 2018. So That will be a significant move from what you've seen over the past year or so. Wireline, we talked about, we think a lot of the trends there are You're going to see what we've been seeing.
And then the growth from the new businesses, we certainly think the combination of AOL, Yahoo! It will not be a $7,000,000,000 business. It will grow significantly from there. And then even telematics, with the acquisitions we did last year, That's now a business that's at about a $1,000,000,000 annual run rate from a revenue standpoint with significant growth ahead of it. So you add all those things up, And we certainly see that there is a path to revenue growth as you go forward here, as you kind of work through those headwinds over the course of the next few months quarters, and you get back to just the businesses we now own and closing Yahoo!
And being where we need to be.
So now let's talk about the topic everybody wants to talk about. We've made jokes about whether it's the dating game or Tinder or all those kinds of all the different combinations that everybody wants to make for everybody else and everybody is playing the billionaire matchmaker here. You've been matched to wireline assets, the cable operators. And to be fair, you, as a company, didn't go out of your way to dispel the idea that you might be interested in buying cable. You've also been speculated as a buyer of big spectrum assets.
You've been speculated as a buyer of content companies. Talk about each of those things, if you will, and just kind of how you think about this the sort of strategic sufficiency of the portfolio and what each of those things might bring.
Yes. So let me maybe take it to a high level first and think I'll talk about how we think about M and A in general. You start with you have the strategy of what it is you're trying to do with the business, how you're going to grow the business going forward. And then the question becomes, does M and A provide an opportunity To accelerate the execution of that strategy and do it in a manner that generates additional shareholder value versus just organically building and executing that strategy.
So that seems like that's distinct from, say, we're not diverse we're not talking about M and we're talking about it in service of our existing assets. Is that fair to say that's
the guiding principle?
I would think that we always have to articulate how M and A fits with the existing strategy of the business. Okay. And so when you apply those two screens of does it accelerate the execution of the strategy and can you do it in a fashion that creates shareholder value, A large number of opportunities don't survive going through those two screens. And so you've seen the things we've done, and it's been different to what some other folks Look, in the certain as we think about kind of network assets and fiber assets, we've talked a bunch over the past few months About why we think fiber is important, the fact that there's a lot of fiber that's out there, but it's not really the fiber that we're looking for To execute our strategy and how we want to build the network and this kind of this converged fiber network that we've spoken about. So Look, if there's an asset out there that allows us to accelerate the deployment of that in a way that creates shareholder value, we certainly would look at that.
But As you heard Lal said in the TV interview he did a couple of weeks ago, we haven't seen anyone that's got the network architecture that we're looking for. And certainly, by the agreements that we talked about with Corning and so on that we've shown that we're certainly comfortable Just organically adding to that network capacity to get where we want to go. And I think that same type of thinking applies across other spaces too.
So spectrum and content, same concepts? The spectrum, so
As it relates to LTE, as I think about spectrum, you say, okay, I know I need to continue to add capacity to the We talked a lot about that earlier, and I can do that by adding spectrum. So we've said all along that spectrum at the right price is certainly something that we would have a conversation about. We buy spectrum in the secondary market all time. We did a number of transactions last year and continue to do so. So spectrum at the right price is certainly something we do.
But we have other opportunities to densify the network and get where we need to. When you move to 5 gs, we said we don't have the spectrum that we need. We're not sure that we want to wait for an auction and the certainty around timing of that, and you don't know how an auction is going to play out. So we said, let's go ahead and Go get that spectrum and certainly we've done that through both Ekso and now StraightPath so that we can execute our 5 gs strategy on the time line we want to And I'll have to wait for the asset to be available. And then as you think about content, look, the content industry It's changing.
We've all talked a lot about some of the pressure in linear TV. But just because of that pressure there doesn't mean consumers are consumer less content. They're just doing it in very different ways. And certainly, as we bring AOL and Yahoo! Together under the Oath brand, We think that will be a significant platform at which consumers come and consume content.
Some of that content we own. We own some today who AOL has with things like HuffPost and TechCrunch and so on. And certainly, Yahoo! Has a good amount of its own content. We're also confident that with the ad tech platform, we can participate in the monetization of that through digital rights and not having to own all the content that come through there as well.
So look, we're constantly looking at how the content is evolving as the way people consume is evolving, and We'll see the best way for us to participate there, but we're happy getting digital rights as we do today and using that as the way that We can then monetize it through the ad tech platform.
So I want to wrap up with a question about the balance sheet. There was just the 8 ks that came out, what, a week or so ago about the S and P change in targets. Is there anything you can add about the trajectory of your leverage ratios and your targets?
Yes. Really, there was all that was really about was the trajectory hasn't changed. As we said in the release, we remain committed the strong balance sheet with improving credit metrics. And so I don't see a change in the trajectory. The reason why We issued that 8 ks, which of course, S and P sort of changed their view of the industry.
And therefore, Their requirement to get to that higher credit metric moved, and that was one we saw. We're not sure our trajectory Was online with that new number, so we felt it was the right thing to do to communicate to our investors. But The way we're managing the balance sheet hasn't changed as a result of them kind of changing that metric. So I continue to expect that I'll see the same improvement in the credit metrics that I would have done if they'd left that threshold in the place they previously had it.
And we're just about out of time. So I want to leave it for you to as you look out at the audience, you've got an awful lot of either shareholders or potential shareholders here. What do you think that they might not understand or should understand better about Verizon? And make the case for why, at this valuation they ought to own Verizon.
Yes. Look, I see tremendous opportunities across our business as we go forward, And that's on many levels. Look, and it starts with the portfolio of network assets we have that allow us to be the network leader today, But also as we get into next generations of technology. So we have the best LTE network. We have great fiber assets, And we are leading the way as we go to 5 gs, undeniably so.
So when I think about that, network is the foundation of the strategy and allow us to do things And at a faster pace than I think a lot of the other folks that we compete with. And so then when you have those network functions, both now and as we think looking forward. And you combine that with the base of customers we have, the products and services that we have the opportunity to develop and enrich those lives in this connected world that we live in. We have the opportunity to do things at a scale that I don't think anyone else has. And so that's a tremendous opportunity.
And you add in what we're doing with some of the new businesses. And so we got into those businesses. We got comfortable with them. And then we decided, okay, now is the time to add scale. So we've certainly done that, and we'll talk about what we're doing with Oath and what we're doing in telematics and those businesses coming together.
So There's a number of opportunities for us to lead going forward and to generate significant shareholder value. And I look forward to being back here, and we can talk about the progress that we've made. And I'm very confident that we're going to deliver on across that portfolio.
Matt, I look forward to that as well. And I thank you for coming this year, and I thank all of you for joining us. Thank you.
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been But thank you all for joining us for the summit. And for those of you on the webcast, thank you for joining us as well. It is my absolute pleasure to introduce John Stephens, who's going to be talking about AT and T in their first visit to our Summit. And John, I'm really delighted to have you here today.
Thanks, Angelus. We appreciate it. Good morning, everyone. Good morning.
Yes, these chairs are almost too comfortable, so we'll do our best stay awake. John, I'll let you give your safe harbor in just a second with your first answer. Let me just kick it off because you guys certainly have a lot going on in your business. But maybe the place to start is with your vertical integration strategy with a big deal that is pending. Take us back to the genesis of the vertical integration strategy And just talk about how you plan to leverage the combination of assets of now distribution, DIRECTV and ultimately, the content from Time Warner.
Sure. And Greg, thanks for having us here. Thanks, everyone in the room. Today's conversation will forward looking statements that are subject to risks and uncertainties. You can provide you can find further information on our website or in our SEC filings, And I think that will satisfy all our legal disclosure requirements.
Secondly, I usually do this at the end, but I want to do this right from the start. Just one message. If no other message you get from me today, one message you walk away from today is a couple of 100,000 people a year either killed or seriously injured from distracted driving car accidents. As a company who provides Cellular service to millions and millions of customers, we really don't want any revenue from people who are using our devices while they're driving. You can cost a life.
You can ruin a life. If you don't do it for yourselves, if you don't do it for your families, if you don't do it for your neighbors, Do it for my grandchildren. We really don't need anyone to be distracted while they're driving. So please, it can wait. It definitely can wait.
With that said, with regard to our fully integrated strategy, let's take a step back and make sure, first of all, we're a fully integrated network carrier, Whether it's our wireless and extensive wireless holdings and extensive wireless capabilities, whether it's an extensive fiber footprint, Whether it's an extensive traditional wireline network, whether it's our satellite distribution, we are the integrated carrier. So we have the capability to deliver services to customers anywhere they live and work, anywhere they want. With that, we found that premium content was critical to that. And both not only content, but premium content was critical to the success of that. That is what customers really wanted.
The Time Warner transaction is clearly has significant, significant content of but the more important thing, it's of the highest quality. And so the ability to do that and take that and incorporate it in, if you will, convergence with our various delivery and capability services is phenomenal. So from that perspective, that's where it came from. It started with this network integration and has moved on to now what the customers want, what are they focused on, and they want this ability to have this content anywhere they live and work, anywhere they want to use it. With regard to that, it's also quite frankly, from a financial perspective, Just a really very attractive transaction in the sense of the diversity of the revenue, the revenue growth perspectives, the cash flow growth perspectives, if you will, the payout ratio improvements.
Quite frankly, the diversity of revenue from a regulatory perspective, Even though the regulatory environment has certainly significantly improved over the last 6 months, Time Warner and its content revenues are much less regulated than our traditional business. The CapEx intensity characteristics are very positive for our business. So from all those aspects of it, it was a very attractive transaction. And then quite frankly, the leadership At Time Warner is at Nulies, on our part, very, very well respected, great talent. Jeff Buechis, My counterpart, Howard, I will all do a great job and are great to work with and have great teams.
And so that's another critical aspect of why this thing works for
Can you preview some of the things that you can do uniquely with the vertical integration strategy, whether it's You've already done a lot with bundling DIRECTV with wireless and what have you. Can you just give us a sort of sneak peek at some of the things that the ideas that keep you excited at night when you think, Wow, I can't wait until we get this and here's what we can do.
Sure. And Craig, you touched on one, but I mean 6,000,000 customers already are bundling our wireless and our video products. And that goes to not only a really great experience, but quite frankly, Our smartphone churn in the Q1 was 0.9%. It was dramatic, really great. So you can see the actual financial results in our business from doing that.
If you look at our recent Unlimited Choice and Unlimited Plus products. You can see where Unlimited Plus, we're adding to it, the ability to have DTV or DTV NOW at a real value rate, a $25 coupon, the ability to put HBO on that. What we've seen so far, it's early in these offerings. What we've seen so far is a really great, Great response from our customers. We're really pleased with them.
So those are some of the things. If you go deeper, though, and you say, I've got this company who's got 25,000,000 distribution points on video, 15,000,000 plus distribution points on broadband, maybe 100,000,000 distribution points on Wireless, we talk about tablets and phones. You got this tremendous amount of data. And we take that data and say, Warner Studios, this is what people are actually watching. This is what they're engaging and this is what they want to look at.
Can you take this information and help you in the production side of how you choose movies and what projects you want to do. Hey, Turner and TBS and Cartoon Network and Adult Swim And here is what viewers are actually looking at. And on your digital properties, this is what they're looking at on the cell phones. And can you take this information to really learn more about your business? We all went through the election cycle.
And quite frankly, the pollsters, I think all of us would agree we're inaccurate. We all witnessed what happened with Brexit and the EU leaving that, and I think all of us would agree that most Just had it wrong. That same kind of data is what the content industry uses today. What we'll offer detailed real viewing information, real usage information that can be used, 1st and foremost, Simply in the production, in the decision making, in the internal workings. Secondly, it's going to be that same information can be used for advertising services, marketing services by advertising companies say, what do customers really watch and what do they really cling to?
We can use it there. And of course, you can do it use it And this combined company to be more effective with your advertising. Those are really great opportunities across the board. I will tell you the ability to have really high quality talent on the video side to then take videos and curate them And modify them for use on the wireless screen, for use on the phone screen, for the use on the tablet. Having people who do this with great skill and talent is a huge opportunity so that we can curate, We can develop, we can get customer focused delivery of video products that we probably aren't nearly as qualified to do on own, it would be much more difficult to do on our own.
Now I want to talk about Time Warner just as a business for a second, separate from the synergy opportunities. The cable nets business is a business that faces some real secular challenges, and that's still a big part of what you're buying. Talk about the way you see the Cable Nets business and sort of within the mix of assets. They've got studio movie studio, television studio, HBO.
So Warner, great studio, wins awards, Emmy's, Oscars year in and year out, have a great, if you will, business relationship with talent and the ability to retain talent and produce talent. So from that standpoint, really great opportunity. We might be able to provide them support from administrative sides or from technical sides, but great talent in and of themselves, great reputation. What really adds to that is a phenomenal library. And so when you think of this distribution of wireless, 100,000,000 points.
If you think of the distribution of broadband, if you think of distribution on video and suddenly you have now this tremendous high, high some would say it's the best library out there, certainly one of the best, but many, many people would say it's the best library of content there. And the ability to use that throughout the business and to coordinate it gives a whole new meaning to this merger. When you look at Turner and you think about 4 of their stations are in the top kind of 50, really closer to the top 40 And 3 of them are in the top 20 of rated stations out there. So as the bundle changes, as we go from 300 channels To something other than that, 85%, almost 90% of their revenues are in those top 40 channels. It gives the finance team very great good feeling about the reliability.
And then when you think of the quality of their products that they the shows that they have, the sports contracts they have. Feel really good about that. Now the ability then to once again curate that, use it differently, deliver it over tablet, deliver it over phone. The curation gives us a lot of excitement using a coordinated effort on a digital delivery service. So instead of DTV NOW being a platform we're developing and CNN Digital and so on and so forth, All being separately done, the ability to take our resources and say, let's just come out and come out with the best digital platform for all our properties.
That cost saving item and that quality and that speed of delivery is really important. And then you go to HBO and you think of just really The industry, the player in the industry that's got the best capabilities to deliver an over the top video on demand, pay quality and the ability as we've done, we've done studies where in many cases, it's more attractive to HBO on your phone than it is to give you a free phone. Many of our customers value the HBO more than they value a free piece of equipment. So those kinds of things are where we see the activities. And as I say, it's just It's a tremendously high quality product and company and great results.
It also will fit very well, mesh with what we have, our capabilities and skills together.
Well, let's talk about DIRECTV for a second. That's another business where the pay TV category as a whole, shepherded a very challenging quarter with real acceleration in cord cutting. You've talked about that as that you Clearly, went into DIRECTV with an expectation that, that was going to happen. Can you talk about the trajectory of cord cutting and how you think about that business and going forward.
Sure. So you're right in the sense that we expected the pay TV business on the other side to come down, and then there'd be other opportunities on over the top and other delivery mechanisms. I can tell you the first from July of 2015 through the end of last year, our satellite performance was better than we had expected in our kind of modeling and our forethought. In the Q1, we gave some of that back. When you look at the Q1 for us, there was a lot of involuntary churn.
We had been aggressive in Last year, Anne had sought after some customers that we previously hadn't sought after some packages and offerings. And quite frankly, we went too far, and about half the churn we had or about half the customer just under half the customer losses we had were involuntary in the quarter. So That was a business decision we made to go after them. It was a business decision we made to adjust the numbers in the Q1. So that's just what happened.
With regard to that though, if you will, more or less, we're kind of in line on a customer comp base on the satellite side with where we expected to be. We are continuing to work on DTV now. We're continuing to work on our other over the top, whether it's Adder Media Partnership, whether it's the other things We've got going to develop that opportunity to sell to those 20,000,000 households that don't have paid TV subscription. And the ability to have the content relationships today through the DIRECTV subscriber base, through the U verse subscriber base Gives us a footing to go put those kind of products together.
So before we talk about DIRECTV NOW and that transition, How do we think about the trajectory of the traditional satellite business going forward?
I think it's the same as we had when we bought it, that it will be a We think we can hold or maybe improve market share but in a business that the overall linear TV will be coming down. We think it's got a slower trajectory than many do, but we do think it will be coming then.
Fair enough. And so now let's talk about DIRECTV now. Has that met your expectations. And how should investors think about and measure success for DIRECTV NOW?
Yes. No, it has met our expectations. Actually, Kind of was phenomenal results in December. The promotions we put with the Fire Stick and the Apple TV were Overwhelming, positive, great. When we after we did that, we said, okay, let's now now that we've got that big customer base built, Let's go test the system.
Let's go test the platform. And let's focus our efforts in that Q1 on really improving the platform, making sure we get all the technical kinks out, making sure the customers get the best quality experience. That's what we did. We weren't focused on putting a lot more sales out. We wanted to see how the promotions reacted from a churn perspective.
We continue to add customers throughout the quarter, so that's a great thing. And our next step is To add, as you may have heard, we've announced we've added 14 Fox affiliates. Local stations are now going to be added to the package. We're adding some more premium content. We're looking to do things like features like a cloud DVR and those kinds of things.
Those are the things we're going to be working on now and will be ready we expect to release in second half of the year. For an overall success base, we feel good about where we're at. If you're Craig, if you're asking me, do we have a targeted specific number of subscribers that I'm writing down? No, Dawn, and quite frankly, I don't mean to be flippant about that, but it's really very directly. We're going to go through a merger with Time Warner, We've got some pretty good products and brands, things like HBO and some pretty good digital offerings, and we're going to need to go through that process and make sure We figure out which is the best ones to take.
But the development of DTV NOW is really important in the sense of having the opportunity to go in Those 20,000,000 households who don't have pay TV, the people who don't want to maybe want to have an alternative delivery system, they want to get it wirelessly as opposed to a dish or they may not have table where they're at. We have the fiber connections. But so it's really important to have that and have that platform. And so we feel good about the progress
And why the choice not to disclose subscribers for DIRECTV NOW in the Q1?
Because pretty simply, we've got 145,000,000 wireless customers, 25,000,000 TV customers and 16,000,000 broadband customers, and we serve everybody in the Fortune 1,000. These numbers aren't material. And so we don't want to get into a situation where we are we want to manage the business for the focus on the quality of the product as opposed to saying, no, we were up 3,000 this month and down 1,000 next month. We want to focus everybody on what's the best thing for the product and the offering.
And one last question before we turn away from DIRECTV NOW. How do I think about the customer lifetime value of DIRECTV NOW subscribers. You've got enviably high margins in DIRECTV And but that's both a blessing and a curse, right? I mean those customers are extraordinarily high value customers. Is there any way to replace that with DIRECTV NOW customers?
Or do you have to look to the value of what they bring in wireless churn to Yes.
We're not looking at DTV Now as a replacement for DTV. We're looking for DTV Now as a way to get customers a service that they wouldn't otherwise have, whether it be When I'm traveling and being able to watch TV easily and very conveniently on my tablet or whether it's one of my children Who wouldn't have don't have a full subscription because they're not interested in, for example, sports. My daughters and my son-in-law just don't have an interest in sports. So they prefer DTV now. They don't have a it makes it very easy for them.
They can take it where they want. They really like it. It's Touching those that we wouldn't otherwise touch. It's a product offering. That's the point on it.
If you then can bundle it with wireless, Whether it's what we're doing today with our traditional postpaid product, but if we can then get it in a bundle with prepaid And you can get other products added on, then bundling it with Cricket, for example. And then we can touch a market that we underserved today. And if you can if you will get that relationship built with them, when they become a more traditional homeowner, more traditional buyer of our services. We already have the relationship. We already have the commonality with our products and services.
That's a great offering. We're doing this very, very successfully with Cricket. We started that over 3 years ago when we got into the prepaid business in a different way. It was a much different view for us, but we are extremely pleased with how it has performed, and And we think it's a great sign that looking to touch those customer base that we wouldn't normally touch, that we wouldn't normally address It's certainly a worthy endeavor, and that's what DTV NOW provides us that opportunity to do. As well as a guy like me who likes having that convenience of Having the icon on my tablet, turning it on and being able to watch it wherever I am, whether I'm waiting for a plane or in between meetings or in my hotel room when I'm well, not
for nothing, but isn't it interesting that we've been talking for now getting close to half the session, and we've been talking all about entertainment and media types of businesses instead of wireless and wireline. And it's a sort of glimpse of the future maybe of the new AT and T and how much your portfolio has changed. Generally, it is
a glimpse of that. Generally, a person a finance guy with my background is not one people talk about content. So it is a surprise.
So well, let's turn to the wireless business for a second. First, the Q1 was a challenging quarter for the industry. What are you seeing in the Q2 so far in terms of competitive intensity? And is it any more measured than it was in the Q1. Sure.
So first of all, the unlimited offers and specifically The change in process by one of our competitors to go to unlimited changed things in the Q1. When Verizon did that, we took a breath and said, okay, what are we going to do? We took a methodical approach. We didn't immediately respond. And because of that, There was some disruption in our customer accounts.
Since we've come back with our unlimited choice, unlimited plus plans. And quite frankly, it happened then, but even since we've added HBO to our unlimited plus offering, We've had really great customer accounts kind of really turned to a very good situation. So we feel good about that. One thing I want to point to, though, is we had record EBITDA margins in our wireless business In the Q1 of right under 42%. So we have a lot of noise about this, but the team is really performing on a generation of value basis.
And secondly, if you look, we had some really good performance on our smartphone postpaid churn, a 0.9%. We had good performance on our prepaid. So yes, there was a lot of noise. And yes, there was some competitive pressure. But I want to step back and make sure The team that runs that business did a really great job for us and had a good, good financial quarter.
Next step is this. If everybody in the industry wants to go to a competition level that's based on capacity, Because if you go to unlimited, you're then competing on capacity. If you want to go to capacity, we didn't start this we weren't the first movers here. But my goodness, we are by far, without question, best positioned to compete in that. 60 megahertz of spectrum that we're now have a now not only are putting in the heavy ability to put into service To dramatically improve or dramatically expand our capacity, but we also have a check from the federal government on a copay arrangement to Pay for most of it, dollars 6,500,000,000 through our FirstNet contract.
We have a FirstNet contract that gives us this 2x10, 700 megahertz, It's very, very high quality low band spectrum that they negotiated with us and we negotiated with them that we can use this for our commercial customers. We can use this for our day to day needs. Granted, they can use our overall network for FirstNet customers. So they got $100,000,000,000 worth of assets and $60,000,000,000 worth of spectrum to use for FirstNet. We get to use the 700 spectrum and that capacity for our day to day customers.
But if you think about that, if you want to move to a capabilities or a competitive environment It's based on capacity. We feel very, very good about our position. We are like no other. This is not a This is something that we can do today, that we're doing today, whether it's this deep fiber footprint we've had from our legacy companies the expansion that we did with VIP or the extensive fiber we're putting in to satisfy some of our commitments with the DTV transaction, Whether it's 4 way carrier aggregation and 4 way MIMO and the 500 meg speeds we got in Austin on our LTE network last quarter in our test there, whether it's Air Gig and the new technology and the patents we have around delivering broadband to the home, Whether it's the testing we did with the 28 gigahertz in Austin to provide a 1 gig millimeter wafer or whether it's the leadership we're providing On the 5 gs standards, we are like no one else. There's a lot of stories out there.
Nobody's got the capacity, capabilities and quite frankly, the progress already today and in the near term, dramatic improvement progress. We feel very good about that. We didn't start down this road. But if that's where it's going to take us, We will be in very, very good shape and completely different than anybody else you'll hear at this conference. Well, let me ask you
a question the question that I just asked your counterpart at Verizon in the last session. Do you believe in network advantage the wireless strategy anymore. There's certainly a sense from a lot of investors that the age of network differentiation is behind us and that's sort of a bleak future for wireless. Do you I'm guessing you would disagree, but Is there a path for AT and T to really assert network advantage and keep network from being a commodity?
Yes. 1st and foremost, it's what we talked about at the very start, the converged product set and the ability to deliver video and curated. So
A quarter of that is what content, not just the network itself.
It ties together. But secondly, it's this ability that as content grows dramatically, Networks can get full. Networks can get constrained. And whether it's through Whatever means, people can get quality that can erode or not be as high. We are not that company.
In fact, we're on a road to even improve what we're already providing. The second piece for us, though, If you do this, as our network team has laid out, if you do this at the same time you're doing network function virtualization or converting it to a software defined network. You can do this and then lower the ongoing operating costs. So dramatically lower the per megabit cost to deliver the service. So you get higher quality at a really efficient price.
We believe that, that is critical to the financial competitive advantage we'll have for ourselves, for our shareholders, for our customers. The ability to sustain that is provided by that. So it's A multi step process that the team is going through. It's just that we the FirstNet contract provide us 2x10, 20 megahertz nationwide spectrum and a $6,500,000,000 copay to really jump start us in this process.
And so bottom line, as we look out for the wireless business, when do you see revenue stabilization in that business.
We'll see that we'll see it as network capacity And other people's networks start to fill. We'll see it as we get the build out of the FirstNet. So we have this capability to sell FirstNet services but also smart cities but a nationwide platform of Internet of Things. We're seeing it today, And we'll see more of it in our Mexico wireless business. And it's a real distinction for us because we've got 100,000,000 customer capabilities Just south of the United States, that is growing revenues, growing very, very fast in constant currency and growing in U.
S. Dollars We're growing dramatically fast, Constance, adding 3,000,000 customers last year. So we'll get it from there. So for us, we'll see it from all of those aspects. As I say, this balance that we're going through and we're continuing to add prepaid customers At a real strong clip.
That has a benefit for today. But quite frankly, it has a benefit in future years as those customers may change and migrate up to bigger plans.
Let's talk about network densification and particularly the path to 5 gs for a minute. You looked at straight path, decided not to chase it. How confident are you you've got your fiber tower spectrum and you have some spectrum, but how confident are you in the millimeter wave business as a business plan. Have you seen enough yet to give you some confidence that there's a real return on investment there for building out the density that's going to be required at those spectrum bands.
Yes. So let me say it this way. We're extremely confident in our overall wireless network strategy. For us, it's a comprehensive strategy. It doesn't just rely on millimeter wave working or not working.
It's comprehensive. It's the deep spectrum position we have. It's the deep fiber. We have more fiber out there than I think anybody based on our legacy business, Based on what we're doing with fiber to the prem, based on the number of businesses passed, it's based on all of it. So the millimeter wave is an important piece to it.
Our Fiber Tower Holdings opportunity for Fiber Tower Holdings because we don't have FCC approval yet, But we do think we're going to get a meaningful footprint out of that at a very, very attractive price That will allow us to build out in the 39 gigahertz space. You guys can look at the filings. They have somewhere under license, somewhere in the just under 400 megahertz nationwide. So we'll work through and we've got some challenges that we'll work through with the FCC, But we're encouraged that we'll get a meaningful footprint to build off of. But we our strategy doesn't just rely on that.
We can get fiber to the home with Air Gig. We can excuse me, broadband to the home with Air Gig. We get broadband to the home with fiber. We get broadband to the home with fixed wireless local loop. When you think about most of the non urban areas of the country.
And you think of the low band spectrum we're going to have in service, there's going to be a tremendous mobile broadband speed capabilities that you can get from that process. So we're optimistic about millimeter wave helping. I think it's small cells backhaul will be very good. I think getting 5 gs, not necessarily millimeter wave but 5 gs into the core network will be very, very helpful. We will see how millimeter wave as a broadband replacement to the home works out.
We're interested in it because we've got so much local footprint that we can leverage off of that millimeter wave of the home and offload it onto our own network, making owners' economics really sensible. The challenge for others is if you don't own that network, You have to pay freight to somebody on that, and that's what causes it. So we'd love for it to work for us because we're in the best economic position, but it's not Our only game, the network team has done a great job of having multiple choices in this ongoing trip or ongoing path to the best continuing to have the best quality, highest speed, deepest network.
You mentioned the wireline business and the synergy between wireless and wireline, which I think has really reignited investors' imaginations in the last year or 2 as people have come to view them It's much more complementary than I think a couple of years back.
I appreciate you saying that because we've stuck by our wireline business, And people have had differing opinions on that, but that integrated carrier model, which has led to the converged content and distribution model. It's something that we believed in for years. This is that and I say I point that out that There's some long term consistency and reliability to our strategy and our story. We actually follow through on a long number of years on a consistent pattern, a consistent thought, and we're proud of that, and it's working for
Let's so one of the businesses there, U verse Broadband, was actually one of the highlights of the quarter. You did a IP Broadband did very well. You did real well in IP Broadband. Talk about that for a second. Couple of things.
Well, we put a lot fiber out there, and that's helped. Secondly, we're getting through the DSL legacy business. If you look at the numbers, it's 6%, 5% of the total broadband is in that DSL. The rest of it's in the IP broadband. So we kind of got through that maturity process, the migration process.
Is that a growth business again?
Once again, on a long term basis, absolutely. On a quarter by quarter basis, I got to tell you, the 2nd quarter is traditionally a seasonal business that's challenged for that quarter. But yes, It's going to be a growth business for a lot of reasons, but one of the better ones is that we continue to maximize our utilization of fiber we have out there, and we're adding to it. We'll have 6,000,000 fiber to the prem by the end of the year. We'll have 12.5 by the middle of 'nineteen.
And quite frankly, the $12,500,000 is a commitment number that we've made to the FCC. But quite frankly, because of the way the how teamwork. We'll probably have closer to 13,000,000 or 14,000,000 for the prem locations by 2020 or so. It'll just be the way the numbers work. So that's a really great opportunity.
And what kind of return are you seeing on that? I mean, is it I know that, that was part of a commitment that you made in order to get the DIRECTV deal done. But have you found that to be sort of an attractive investment in its own right that says I'd be happily doing this anyway.
On the stand alone basis, it's meeting our investment projections and it's meeting our ROIC standards. The exciting part about it, though, that's a longer term payout as most network assets are network investments are, but it's good, solid returns. But the exciting part about it is what it's doing to churn when you bundle it with wireless, when you bundle it with video, when it gives us that capability, when it eliminates us our position as a one product offering to the home because now I can now with the video offering, Whether it's a U verse or whether it's satellite or DTV Now, now I have the broadband to go with it. And so that bundling, as I mentioned earlier, we're seeing Pretty our quad play products are seeing some pretty significant, very, very measurable reductions in churn, And we're making progress on that. Most significant of the inwards on the broadband, in particular, are bundled.
And so Broadband standalone, good product. We're getting the returns that we expected. The real value is the ability to bundle it with other things.
And One of the we talked about IP broadband as one of the strong points. One of the softer spots in the quarter was in the on the commercial wireline business, where those declines
accelerated meaningfully. Can you talk about what was the source of that softness. So two pieces of it. 1 is the strategic services continue to grow. They grew at about 8% level.
We saw continued slow business fixed investment. I think most of you saw the GDP growth rates of 0.7% in the first quarter, And we tend to trail some of the response on GDP growth. So Our strategic services did really well in an environment where there was low growth, but we saw some grooming and we saw a lot of voice choices that were made by our customers to say, okay, we've been running dual systems with regard to VoIP or with regard to wireless reconfiguring our operations. We run a lot of backup systems on from our legacy products since we've gone to strategic. Now we're going to groom those off.
So we did see that. That's correct. We adjusted our marketing plans and our sales teams And set out some directly set
up a group of folks who
are going to specifically address those issues. What I would suggest to you is that we're certainly hopeful and expected that revenue losses will change, but the key here for us is to get the business fixed investment going again in the economy, and that will drive that strategic service growth. We would hope to get it back where it was just a year or 2 years ago in the 12% and the 15% range. We're almost to the tipping point. We're at 40% of that revenue stream In strategic services, we can get that over to the tipping point where it's the majority of it and have those kinds of growth rates at 8% 10% You can see where that's a very vibrant business.
The you've talked about SD WAN for a long time, mostly as a cost savings opportunity as an operator. But it's a double edged sword, I suppose, in that your customers Can look at it as a price saving opportunity. Can you talk about what your thoughts are about SD WAN? Is that a net positive? Is it a net negative?
And when does it start to show up in your commercial wireline numbers?
Yes. It's I mean, we're starting to see it now. We're starting to see SD WAN providers want to talk to us about doing deals together with us. You're right. On an embedded base, there's some risk.
But quite frankly, net risk on some of the legacy services might be there anyway. And so from our perspective, protecting that base by not looking to the future is not As opposed to looking to the future, we're going to always look to the future. So we have made some investments in SD WAN. We're looking forward to making it a part of our product offering, understanding that giving customers better quality service internally leads to them buying more products and services from you. It may not change the total revenue picture, but it does change the stickiness and the quality of service and then using it as a tool for new business outside of our existing footprint.
Okay. Got it. So I'm going to zoom out a little bit now 2 some bigger picture issues. One of the themes that everybody wants to talk about at this conference is M and A. You're involved in a big transaction, so in some ways, you're We're going to be careful.
If I look at the wireless business, do you think consolidation is possible in wireless horizontal consolidation as possible in wireless. You guys have some experience of the regulatory process there. Is that is it possible. And what would that do to industry dynamics if
you got it? Certainly, it's possible. And so we'll see, but certainly, it's possible. I'm not suggesting any likeliness one way or the other. If you think about what we do and what's Today, we've talked a lot about millimeter wave, we talked about fiber, we talked about 5 gs.
These networks take an extensive amount of investment. And so from that perspective, we have a high capital intensity type business. It makes sense to have a rational number of rational competitors. That would be good for the market. That would be good for customers the quality of service and capabilities as well.
It's good for investors. So there's some logic there. Sadly, it's a new FCC. So I would leave it to people who know more about how they might think about it, But it's not the SEC. I think we'd all agree that we had dealt with for most of the past 4, 5 years or the last 8 years.
And so it would be interesting to see how they might view it. 3rd, some of the players are facing financial challenges. And so that is one reasonable process to evaluate in this situation.
I know with a huge transaction like Time Warner on your plate, it's hard to, as a CFO, to even imagine what comes next. But We already hear people talking about, well, what about the synergies that could come from the satellite business with DISH Network or more content or is there a sort of How do you think about the different options that come after Time Warner?
So the first thing is probably paying down some debt. That's the first thing. That's the thing that comes first. We're going to have a great tremendous cash generation machine when you combine these assets. So let me get that out first.
That will be our focus. But if you look at things like what comes next, well, quite frankly, we need to get through the fiber tower and work Through in a very respectful manner, the SEC, to get approval for that. But then we'll look to that auction that's going to be coming up probably here Hopefully, by the end of 'eighteen, but certainly really in
the middle of the year.
Yes, they've got 1400 megahertz of spectrum that are auctioned off. I would assume that anybody who buys StraightPath wouldn't be interested in buying anymore, maybe limited. So the participation in that. It'll be gives us an easy path to finish that off. You'll think of things like that.
It's a very easy, doable But you
mean with respect to balance sheet planning and
Yes. So you think about that. I mean, you do think about any ways to do cost savings. You think about do I have to own all the real estate I own, And this is focused on AT and T Real Estate as well as Time Warner Real Estate, just that normal course. We look through your portfolio and look to evaluate what things did and what don't and so forth.
That's an ongoing process. With regard to cost sharing activities that makes sense, certainly, this. Those are reasonable questions for people to ask.
So cost sharing, in this case, with DISH Network, for example, whereby you could Might be able to do some cost sharing with this.
That's a very reasonable question to ask. And we'll wait till we get our Time Warner transaction Through the process to kind of go into speculation on any specific items, but I understand the issue. I mean, back in 2000 when SBC had a less than national footprint and BellSouth had less than national footprint. We brought those two companies together And operate a great wireless company called Singular. So we've looked to those things in those ways in the past.
I'm not suggesting this is anything like that. I'm just saying right now, we're going to stay focused on the Time Warner transaction and make sure we focus on that.
So if I pull all this together, so and I think about the portfolio of assets you've got, which really has transformed quite a lot over the last few years, at least if I include Time Warner as in that bundle. So I'm looking here. I have my AT and T pad here. How do we Can you show
that logo to the crowd, please?
How do we think about the portfolio growth story for a second and the path to GDP. I mean, right now, you've got a very large wireless business, but that business is facing some pressure and has is still a negative revenue growth business. I've got a wireline business It's quite large, but it's still a negative revenue growth business. And DIRECTV is about at the or the entertainment segment in general is about at the waterline. How do I think about the trajectory back to growth for AT and T and the GDP growth target.
Got you. So let me start off in simplest order for me. As you look at Latin America and Mexico and you look at what we've been doing, I mentioned it earlier, but Mexico has been a really great growth engine for customer accounts. Constant currency revenue growth is significant and we're getting through that investment phase. We've got 85,000,000 POPs built.
So and we're in effective markets where we have distribution marketing and the great network. So we're ready to grow that business, and there's real opportunities there. And we're doing it today. We've changed that game down there for those properties. Latin America is doing well, generating cash, operating in a tough economic and political environment, but it's doing really well.
So those are first ones, particularly Mexico, real good growth opportunity. Secondly, on mobility, as we get the FirstNet built out, the Internet of Things, the connected devices that continue to play in this space of prepaid And quite frankly, the capabilities that will come from having time order skill set from curation of video and other things and those abilities, Especially with this tremendously deep network, we feel very good about that. On the broadband side, as you pointed out, the IP broadband, the expansion of fiber, the ability that's growing today. It grew in the quarter that continued opportunity growth. Strategic Services, growth at 8%.
We'd hope to get that up higher, but that growth at 8% on 40% of our wireline revenues. We're talking about the legacy services. We're going to continue to face Some of that challenge, it will be there. We're not suggesting it's going to stop. So we're going to have to get through that process, convert as many of those voice customers to wireless, voice customers to VoIP, get those DSLs up to IP broadband and so forth.
We're going through the change in our life process, so to speak. And then you go over to our next business and you look at Time Warner, and you think, wow, they grew revenues, I think, last quarter 6% and did tremendous job with profitability. And then when you bring those two businesses together, that content and that distribution data and you think about the opportunities to grow revenue or profitability from the data knowledge about choosing products or projects in time in Warner Studios and how you advertise and the ARPUs you get from our CPGMs you get from Turner
or Ford Turner.
All of that, that's a tremendous opportunity. So that's how I think about it. You're And let's be straightforward. We have some legacy services that we'll continue to pay attention and try to manage very effectively, but they are legacy services. We're looking forward, though, with everything else to those next generations software defined products and services.
And I think we're doing a pretty good job of being very pragmatic while also looking forward.
And so a little nearer in for 2017. Talk about kind of the puts and takes of your 2017 EPS guidance.
Yes. So I mean, you think about it, we the investment cycle last year in Mexico was about $1,000,000,000 The simplest put, our guidance is in the mid single digits EPS growth. If you think about cutting that in half as an example, as an illustration, that's $500,000,000 or $0.05 a share on our business. That's 2% growth just by the change in the trends there. Not suggesting that's the only thing.
I'm just suggesting that, that is what's there. 2nd, if you look at what we've been doing, we've been The big iron costs are what we call AT and O, our network operations and our technology group, It's year over year reducing costs in real dollars. And that from software defined networks, from network function virtualization, From automation, digitization, I can give you examples of payment arrangements and credit arrangement programs through MyCredit Collection where We used to do 20% of those automated, 80% manual. Now it's flipped. I mean, millions of calls going away or millions of opportunities to automate things.
All of those things, you've seen us continue to maintain margins in a challenged second, I would write. That's going to continue. As a factoid, 34% at the end of the year of our network functions were virtualized. We'll be to 55% by the end of this year. Think about what cost savings that brings.
And you can start paying the savings of the prior work you've done, start paying for this investment. Last year, I was just paying for the we're paying for the investment to get up to 34%. Now that 34% is fully generating huge amounts of savings And it's a self funder of things going forward. We have those kinds of things throughout our business. Our big iron team, as my boss likes to call, is doing a really great job.
We're just about out of time. So I want to leave it with just an opportunity for you with current and potential investors in the room. What are they what should they be thinking differently about AT and T? And how do you make the case for why they should own AT and T at this valuation.
Yes. We're the next generation company. Our strategy is as sound as any strategy out there and as forward looking. We have the assets assembled. We have the customer base that's incomparable.
And with the Time Warner, we'll have all the assets, not just the distribution but the content, that we have an ability to take this collection of assets and dramatically grow the profitability of this business. The indicators are all there, if you will, the network quality, the network savings, the FirstNet transaction, the content cost, the advertising capabilities, the growth in Mexico. All of the indicators are there. And so it's a very exciting opportunity for us, And we're looking forward to get going and get after it.
John, I can't thank you enough for being here today. It's been a pleasure, and I look forward to seeing you back here next year.
Thank you, Craig. Thanks, everyone. Thank
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4 times, but it's terrific to have you back. I was just reflecting when we had our first summit and you sat in that exact same chair, Your stock was at $143 a share, and Comcast was about 3 months into the regulatory approval to acquire Time Warner Cable. So It's fair to say a lot has happened.
All is
well that ends well.
So I want Start with what you've learned in the consolidation process of Time Warner Cable and Bright House now. You're almost exactly a year in. What's gone well, and what's taken longer or been more costly than you expected?
Well, the name of our deal was Safari. And I guess we found Livingston along the way. It was long and arduous and getting it done Obviously, took an odd path. But Fundamentally, I approached the acquisition with the notion that the cable infrastructure was a superior infrastructure And that properly managed and properly capitalized, it could stand up superior products and services relative to its competitors and win in the marketplace and had a great growth path in front of it. And if you actually increase the penetration on a fixed asset, the economics of that are fantastic.
And That opportunity requires a lot of work actually though to make that happen and to transform a company So that it is capable of using its assets. And the cable industry was slow to respond to the satellite, all digital threat and had its signals clogged It's spectrum clogged with analog signals and had the capacity to take up its data speeds more rapidly than it did, Has the capacity to be a better service provider and has the capacity to use voice and other product security, other services to improve the attributes of the communications connectivity Such that it could drive itself deeper into the marketplace and really wasn't doing that. And So but in order to do that, there's a lot of work, especially in an acquisition and especially in an acquisition the size of the one we did, which was significantly bigger than us. And it's working the way I expected it to work, and the timelines are working as I expected it to work. And we're achieving the results as I expected.
Now there are issues with Recreating a company and combining 3 companies that require spending money, spending capital, spending operating dollars And getting the results of those and having those flow through the financial statements. And right now, we're in the putting it together stage. We actually rolled out all of the pricing and packaging. We're getting the response out of the marketplace that we expected. And once you get the marketing response and the subscription response, you expect the economics flow.
And you can predict them quite easily.
So you've always thought about the business as and I can remember all the lessons you've taught me over the years about measuring a business by the subscribers you don't have yet and maximizing the revenue per home pass rather than subscriber. Are you licking your chops as you look at the new territories and think about all of that greenfield and or white space or whatever the right analogy is that you see?
Actually, if you think about our cable company, it's one way to look at it, if you could move space and time, It's 50,000,000 homes passed with those 26,000,000 customers and 24,000,000 non customers. In front of the 24,000,000 non customers, if you could put them all together and you'd have fully capitalized infrastructure in front of 24,000,000 potential passings. Would you rather have that or would you rather have the 26,000,000 existing customers and the ARPU changes you can make out of that. I want them both, but and we have both. But when I think about the business, We've got this free cable company built in front of 24,000,000 non subscribers.
We'll talk about that in second. A little more prosaically, if I think about the 3 year synergy targets that you've outlined for the deal of about $1,000,000,000 can you give any more color on how quickly you realize that and have you discovered anything new about how long the runway is? Is that still the right number?
Well, we said that we would get to about $700,000,000 of run rate this year, in the middle of this year and $1,000,000,000 in 3 years. When we say synergy, we mean costs as a result of the transaction that come out of the business As opposed to all of the operating synergies that are in our business model, which are still there as well. So There's a general margin improvement that comes from the way we operate the business and intend to operate the business going forward. None of those kind of margin improvements are in our synergy numbers. So I can tell you how we're going to get all those if you want to hear it, but we're on track for the publicly disclosed synergies related to the transaction.
I'll come back to some
of those some of that operating leverage and those margin opportunities in a minute. Usually, I start the conversation with you about the broadband business, but I want to start on the video side this time. There's been a really market acceleration in the rate of cord cutting. You've always expressed some skepticism about how wide the appeal of virtual MVPDs would be. Have you changed your view at all as As you've seen, programmers increasingly sort of arm all of these virtual MVPDs with more and more better content at what are pretty aggressively low retail prices at least, even we don't know the wholesale prices, but the retail prices are awfully low.
Yes. Well, look, it's the question gets asked a lot of different ways. People talk about skinny bundles people talk about over the top. And they're really different concepts. One is How can you will programming companies allow themselves to be packaged in smaller packages that result in less penetration?
And that's a hard decision to make if you have a highly penetrated business. And so I don't think you see a lot of that really happening in the over the top space. So will there be rich, fat, over the top products? Maybe sold with no margins or sold with no margins at least for promotional purposes, Which cable is already sold that way? I think, yes, there will be competitive pressure there.
When you look back over the last 5 years, I was looking at the numbers. The whole MVPD marketplace has Shed about 3,000,000 customers over 5 years. Now I saw Disney, the other some people talking about Disney, ESPN losing 11,000,000 customers over that period of time. And if you look at during that same period, The over the top providers through the end of 16,500,000 customers, You could argue that a little bit either way. So and if you look at telco's effect on Cable, I do think that there'll be some chipping around the margins.
And I do think there's, on the margin, Less MVPD customers, which I think is a cost driven issue. I do think there are other issues in it besides just cost. It used to be when a young guy would go off to college, if he would live off campus, he would subscribe To cable to get ESPN, now he gets it over the top from his parents' account. So a lot of loss on the margin is really about lack of security And the inability of content companies who are becoming distributing companies and controlling where their product goes. But if you look at the whole pie, yes, people want to save money because it's too expensive And there's some downgrading within the category, but the vast majority of people are still subscribing to a video package And an MVPD or
a package of that. This lack of security concept, you've made some headlines at our conference over the past few years by talking about that. And so but the numbers that you just laid out for ESPN, for example, of their loss significantly larger than the loss for MVPDs in general. But the translation to virtual MVPD is quite a bit smaller than the loss for MVPD. Correct.
Is that gap in your mind a piracy issue? Is that gap a
Yes. Partial so Piracy changes the elasticity of demand a lot to particularly to the person who's stealing it or taking it. But it changes the overall value proposition, but so does price increases, And you've had both. And so you have people managing their packages down to basic only, broadcast only. And there's more that's the biggest phenomena.
And some cable companies have let that happen
in the way they market their product, too. And stepping off of that presumably is easier than stepping off of the entire bundle.
Right.
Let's put your hat on now as a negotiator when a programmer comes into the room. How does the conversation we just had about the way the programmers have responded to the various threats in their business and with the rise virtual MVPDs and OTT. How does that change the way you negotiate with your programming partners?
Well, I've actually seen a lot of change of heart in programmers recently in terms of their desire to be To rekindle an affiliation as opposed to just a transactional relationship. And there's a lot we can do for them in terms of advertising platforms and making their business more successful By helping them sell more high quality, higher CPM products and improve the video experience, there's a lot we can do And a lot of people are concerned about their general position And don't want to be disaggregated from the bundle. And but they have a problem with growth, and they have a problem with rates. They have a problem with advertising. Even with all their problems, though, it doesn't mean they should rip themselves apart and become 20% penetrated product.
So they're looking to find new ways to create new customer experiences that are good for customers. And they're looking at us and seeing what we have and seeking ways to work with us that are somewhat new.
Do you think it changes the long term trajectory of that cost item for you has been growing at high single digits for 2 decades or
at least a decade. Does it as
you look out in aggregate with the content community, what do
you see for that cost trajectory? Well, I think it's Marginally going to change to our benefit, but not much. So I think the general trend is the more likely scenario. Okay. But I think on the edges, it's There's a lot of pressure on the price for the content companies.
Okay. And it's even they've gotten to the point where They're not realizing the value of the price because it's translating into the marginal sub loss. Right.
As I think about the Q side of PxQ for a second, the quantity. I don't want to look too far out and just focus on virtual MVPDs and the OTT stuff. What about your legacy competitor, satellite. What have you seen with respect to the competitive dynamics of you and the satellite business?
Well, look, I think that's our biggest opportunity in terms of market shift. I think we have a superior platform to satellite, And we can create customer relationships as a result of the better products that we stand up, the interactive products and the nature of television viewing going forward and the advertising products that we can stand up. So And that combined with high speed data and other products that we can sell to make the total value of the customer relationship better. So I expect to grow our business. I expect to grow video, and I expect to grow data, and I expect to grow voice.
And grow video in subscribers, not just in dollars. Correct.
Both. And I expect to grow video in subscribers, and I expect to grow expanded video even faster than basic video.
Oh, interesting. So actually tiering up customers instead of tiering them down.
Yes, which has been our history, by the way. Our tendency is to sell rich products in a bundle and make the whole value of the bundle competitive. Compelling is a better word. So your video, your data and your voice And soon to be your mobile will all be combined in a way that you're better off. And people want everything.
Is when you think about your broadband business and you're naturally selling broadband to bundled customers. But as customers cut the cord, there's a pricing opportunity in readjusting the total value of the relationship to sort of preserve economics. How do you think about the price value equation of broadband?
A broadband only customer? Yes. It's interesting. I want my broadband only customers to be video, to be everything. I want to give them as much of a reason to be my customer as possible.
And again, back to giving them as much value as I can give them and still Be profitable. So a couple of 25%, 30% of our broadband only customers are satellite customers.
Is it really that low? I would have thought it was higher.
It Used to be half and but we've been growing that category fairly rapidly.
And so they would seem like a pretty obvious target.
They are. But all satellite only customers, Of all the cohorts we market to, they're the most responsive I mean, data only, yes, Charlie. All data only customers are the most responsive customer base we have to marketing. Interesting.
Why is it for marketing to video? Yes.
I send a video promotion out, send it to non subs, Send it to any cohort you want.
And do you know which of those are satellite customers and which of those are satellite customers? Yes, pretty much.
We have fairly good data on it.
And so tell me more about this responsiveness to marketing. Is it different in the satellite customers? The satellite customers are just ready for a different answer? Or is it the customers who don't have any MVPD Our ready to be marketed a better video solution or what is it?
Yes, particularly the customers have no MVPD. They're the most responsive to buying MVPD services. Now if you think about cable and you think about churn and you think about seasonality and you think about lifestyle changes, people coming in and out of the household, college kids returning, all of the things that happen in life That caused subscription levels to change, and there are a lot of them. They're less volatile in the data only space. But the volatility in video still remains.
It's higher. And so you have people coming in and out of the category of video, but they stay data only while they're coming in and out based on his I lived in Maine for a while. And in the summer in Maine, everyone went to camp. And when camp could be a lean to or it could be a house, But it was you leave your winter house and just be outdoors for the 3 weeks of summer. And people would turn off their cable.
And they still do. People turn off their cable for Parts of the year.
They turn off their video, but you're saying less so their broadband.
Less so the broadband, right. So that's so you have that volatility inside of The video volatility has always existed in the business. So that's why it is. What it means The broadband business is a highly stable business.
So now more prosaically for a second. The softness that we saw in the Time Warner legacy footprint in video and in broadband. It was broadband still grew but not at quite the same rate. Can you talk about that a little bit? How close are we to the end of that?
That's largely, as I understand it, the legacy of the Time Warner Cable promotional pricing just before the deal closed. Yes. Look, Time Warner
Wanted to make a video number. And there were data packages that were discounted that cost less if you took video than if you didn't. And a lot of those are churning out. And A lot of them were basic only. So on the margin at the end in the last year, I think they were selling 40% of their connects It's basic only.
You're not losing much when you lose one of those customers.
No. And we're actually transforming them through a marketing strategy. We don't take our existing customer base and say you have to change. You can keep your package whatever it is. What we do, though, is start marketing a high value product package, the triple play that we offer, the Spectrum branded package, And people move into it, but it takes time to move them into it, and they move in at their own pace.
And the value of that package It's relative to what they were getting before. The other thing that's going on in the Time Warner business, which was the biggest single is actually physically and Financially, the biggest single piece of our P and L now is that there were 90,000 different promotional offers. And they and many of them were deeply discounted, and they were also Piled on top of each other.
How did INAC get one of those, by the way?
You had to call in. It was a Turkish bazaar. You'd call in, bargain, you'd come up with and they would have been a package. And so there's a lot of that out there. And if you and they're also exploding packages, meaning at the end of the term, they
go back to full price. And generate lots of calls. And generate
a lot of yes, a lot of calls and big rate increases. And we, up until recently, were unable to see that Or intervene in that prior to it happening. So that was one of the downsides of lack of visibility into the billing systems and how all of those
And so how close are we to the end of working through all of that kind of more
We are we've already turned the corner in terms of unit growth, and We are selling more on a year over year basis than we were.
So the 2nd quarter is always seasonally weak, but It is. But in terms Day
by day, year over year, we're better already. Now it's going to take
And that's within the Time Warner printers.
Yes. Time Warner and the whole company. Got it.
And there's a lot of runway left in Time Warner for raising speeds. Last quarter, it was 43% are at 60 megabits per second and higher. How quickly do you get that ramped as you get people on the speeds that are really differentiated?
Pretty quickly, I think if you look at where we first did new product and pricing in Time Warner, like Los Angeles with FirstMarket, 34% of the customer base is already on the new pricing and packaging. And So about half the country right now has an offer in front of them of 100 megabits in the standard package and about half is at 60. And I think that'll get closer to the majority being 100 as we move through time. We held some back just for as we cleared broadband space spectrum. But our package is rich everywhere we offer the product now.
So it's just really a question of Marketing our way through the legacy customer base. And we do that in a deliberate way, and we do it in a voluntary way, meaning the customer Have to buy or
sort of force upgrade them. What is there a point at which Fast enough is fast enough. I mean, is there any sign of speed exhaustion in your customer base? Speed exhaustion,
yes, well,
Maybe there should be, but there doesn't there isn't. We have a pathway to get to 10 gig symmetrical.
Yes. So talk about that. Talk about DOCSIS 3.2 and what you see
coming. Yes.
So we have some 3.1 DOCSIS deployed already experimentally. Most of our network infrastructure, all of the big metal in the network is 3.1 already. So and the modems are going to price Pretty much like existing modems, sub-fifty dollars kind of modem pricing. So it's It could be rapidly deployed. The question is, so what?
Is 100 meg is a gig better than 100 In a practical way, it isn't today unless you're a business or you have some unusual use pattern, But it will be. I'm convinced The data usage trends that we've seen for a decade will continue and that we will Ultimately, stand up virtual reality products that are extremely bandwidth intensive. And I think our infrastructure is suited to do that better than any infrastructure there is. I think if you think about what that world would look like, millimeter wave technology or small cell technology or Wi Fi technology, which is also capable of multi gig speeds on a road map. It's an in home product or an in office product where massive speeds can and latency Can be delivered into creating whole new products and whole new ways of living that are hard to explain, but I'm convinced It's the
reality of our digital future. And I'm guessing your infrastructure is better positioned for that. I
think it is.
So it sort of it does tee up an obvious question, which is historically, you've always driven volumes more than price. Your preference has always been I'd rather maximize the range.
I like it all. I like it all. The question is what's the best
The sequence or So yes, so talk about that a little bit. How is your what's your current thinking
about price and volume as the two levers in your business. We've been growing at 5%, 6% customer relationship With a couple of points of rate in there, some of it's step up rate most of it's step up rate where people buy into promotions and then they self increase they increased their rates in an agreed upon rate plan as part of the promotional pricing. And so you can get 8% kind of revenue growth out of that. And in a world where you're Improving the quality of your service and increasing the life of your customers by increasing their satisfaction, which is related to rate, You extend life. That takes that reduces transactions per dollar of revenue, which reduces cost per dollar of revenue.
So you get A larger EBITDA growth in percentage terms than revenue growth with a highly satisfied customer base. And so there's an art in there, deciding what the right price step ups ought to be and what the product valuation is from a consumer experience perspective and how that translates into word-of-mouth and market share growth. So I can't tell you that I know the theory behind it, but I don't know where all the number points where all the points are. So you feel your way around in there. I've got a model that works pretty well
for creating value. And it's fair to say you still think there's an awful lot of penetration ramp left
in Yes, I do. I think we're 50% share on data, excuse me, And about 50% share on MVPD. So yes, I think there's a lot of ramp. And I think the data high speed data business can grow as a
category Still. Yes, it's about 77% penetrated or something nationally. Yes.
So I think that gets up in the low 90s. Okay.
One business where you still got happily reasonably low penetration is your commercial services business, where you still have a lot of runway in front of you.
Yes, under 10% there, It's probably $20,000,000,000 Well, look, I break that into 2 categories: enterprise and SMB. And SMB, you're probably, what, 20% share? Probably, yes. I'm not sure exactly, but in that range.
But your growth decelerated a bit at in the Time Warner side at least. Is that a function of repricing? Is that that you stepped down prices and accelerated because we don't get to see the unit numbers. Yes, this is John. Although I thought we Well, you have units for the traditional measures, but particularly as you get into the enterprise, how big a ticket somebody gets?
I agree, it's hard to look at.
It's even hard to look at internally because they're all odd products. So putting so we have 2 strategies that are related. But When we look at SMB, we think, gee, this business looks a lot like residential. You can standardize it. You can go for volume.
You can get all the economies volume scale if you put the business in the right model. And so we repriced the business, And we are generating significantly more unit growth. And that unit growth We'll translate into market share, and it will translate into higher revenue growth than we had prior to the price reduction market share strategy change. It just takes some time.
And so and how long is that transition period of?
Well, we did it at Charter previously. And as I
recall, it was a couple of quarters. It was actually
quite small. Well, it's a year well, I don't look at it in quarter terms. But yes. But it's But as
I recall, it went quite quickly of there's pressure on pricing, and then there's a reacceleration out of that.
There was pricing yes. So what happens is your incremental units Are coming in at a lower rate, right? And so your revenue growth slows, but they pile up And they stay longer, and you get more of them. And then you You have a bigger number.
Is there a law of large numbers, though? I mean, you're talking about
a lot of this. You don't have a little bit
of a difference?
No, your growth rate right now is $1,000,000,000 a year of new growth in commercial or getting close to it. Is it hard to extracting extra $1,000,000,000 out of a segment like that every year. That's a big number.
Those are big markets. And yes, the answer is yes.
Yes, it's hard or yes, you're getting that far. It's
hard, but
we can do it. Yes. The enterprise space, the enterprise space, just big business, and our footprint's $20,000,000,000 and we've got less than a $2,000,000,000 business. And So it's a there's a lot of upside.
And do you get a different competitive response as you just get to that size and the telcos start to feel the pain more viscerally.
We'll see. But yes, it's a responsive market, but we can stand up much greater speeds in more places than most legacy phone companies And particularly more than legacy phone customers are paying for and getting in their existing product set. And it's difficult to take that copper product and turn it off just Knock the price down because even knocking the price down doesn't improve the speed experience and all of that. So I think we have a good we have a better physical asset in most locations where we compete.
I probably could have started this conversation with wireless, and some would say I probably should have since I spend I started AT and T with the video business. Talk about the you said 2018 for your wireless launch for the MVNO. Does your agreement with Comcast change the timing of that at all?
No. Our agreement with them on the MVNO is to explore opportunities together. We have the same MVNO. It's We're the same company. And so we're proceeding and we're proceeding to launch in 2018 regardless of our relationship with them.
But there are opportunities for us to do the same things and for us to learn what they've already learned And to make them efficient and to make us efficient. And we've agreed to explore what those opportunities might be, Things like buying handsets, things like using provisioning systems and billing interface systems, software systems that are common so that You'd have interoperability in certain cases using Wi Fi together, using our Wi Fi platforms in ways that would enhance the value of our product. We didn't agree to do any of that. We agreed to explore that.
Okay. Is it So they bought Spectrum in the auction, and it seems like their model is going to be a coverage canopy layer for when you're in your car on the highway or what have you and then a real capacity layer that you and they will have in a similar model of probably Wi Fi. Maybe it evolves to a millimeter wave or something eventually out of home. Is that the right way to think about it? And how does the fact that you don't have that coverage layer and that you didn't get capacity in the spectrum, how does that change spectrum in the auction.
How does that change the way you think about the economics of that business? Well, first,
You should talk to them about why they bought the 600 megahertz spectrum And where that is, I actually don't even know. I would I bid on it? I was in a very difficult situation with the deal pending. I couldn't bid on it if I wanted to. A couple of times, I tried to talk Tom Wheeler into being easier on me if I would bid on it, but that was to no avail.
And So the MVNO is a 4 gs MVNO And with follow on technology, so
it can
be whatever future products there are. With regard to owners' economics and owning a cellular network or component pieces of it, There may be opportunities to do that. 1, you can think of the Wi Fi network as a wireless network already. In our company, we have 200,000,000 devices connected to our network today. We are a wireless company.
In fact, almost all of the bits that we send are sent wirelessly. And almost all the and 75% of the bits that go to T Mobile's phones or Sprint's phones or AT and
T's phones
or Verizon's phones come through Our Wi Fi network, not through a cellular network. Because if you think about bit utilization and future bit growth, It's sedentary kind of bit utilizations, movies and video and maybe 4 gs in the future. And that requires a small cell architecture, which we already have In the home. And we can take that architecture up and take the speeds up dramatically. So Do you need boomer frequencies like 600 megahertz?
You do if you're in the mobile business and if you're a mobile wireless operator. And so there's to me, there's a As opposed
to a stationary wire. Correct. So most of the bits today are stationary wireless. But is that a viable long term segmentation? Or does a customer, even if they're stationary 90% of the time, that 10% of the time is still going to be really important.
It's important. Yes. So hence, in MVNO, hence, the ability why we want to have a mobile product. The question is how do you how much owner's economics do you need? How much of the total network experience
Is mobile how much of that should you own or not own? And is it fair I've always characterized it as Ultimately, the end game of the MVNO is that it starts to look more and more like an in region roaming agreement and less like a traditional MVNO, in that you're not outsourcing the whole customer experience. You're outsourcing what is effectively mid band spectrum at that point.
It's one way of thinking about it, yes. I mean, it's an MD and O, but most of the Relationship won't be there.
Okay. So you will own the customer relationship and the billing systems and all that sort of thing in house? There's the carriers are all talking wireless carriers. They're all talking about network densification as sort of item number 1 strategically. What role do you think you play in that?
Do you think you are an arms dealer of infrastructure to support all those sales. Are you a competitor to those players as they densify? How do you think about that?
Generally, I think of myself as a competitor, A long run competitor. Okay. And we're already pretty dense. We're dense, and we're not and what we don't have is the wide.
If that model is is your HFC architecture, I guess, different way to put it. Is your HFC architecture the right architecture for small cells? And if you view the wireless operators as competitors, does that suggest that ultimately That's a network you're building for yourself.
Well, our network is for our self and our customers, and that's the way we look at our network. It's our primary asset and it's our primary differentiator. And we're in a competitive world. And people can stand up other kinds of architectures to compete with us and do the same things
as us, but it's expensive
And maybe not as good, I hope. So I look at myself as a long run competitor and trying to make strategic moves for the long run so that I can end up with the customers. I think our network itself is a small cell network already. The question of whether you want to use small cells for mobile is, to me, the question. You could also use them for fixed broadband replacement, I guess, Although I think that's a very expensive
And obviously, not something that's interesting to you because you already have it.
I have it already, You could think about some of that for wireless drops. There are technical circumstances where small cell fixed point to point wireless would work for us Okay. In enterprise, for instance, getting to buildings, accessing physical locations where there is no connectivity. But generally, we have connectivity. We have a high capacity pipe all the way into that radio in the house, Which we can enhance, and we have a pathway to get to 10 gig symmetrical.
So we have we don't need wireless drops. And do you need small cells for mobility? And even when you think about mobility As a business, and you think about 5 gs or you think about products that might exist in a high capacity, low latency world like some virtual reality product. Is that a mobile product? And would you build a small cell mobile network outside so So that people could ride around in their cars in virtual reality?
Or will 4 gs be a mobile platform for that part of your life that you need a pretty high capacity mobile platform, but Not where you go for
I do certainly think the 5 gs network is still a there's a real question about what do you use it and winning the business case.
Yes. So that's so I don't know the answers to those questions, but I think our Architecture lends itself to answering those questions better than any other architecture.
Well, it brings me to the popular Game of Thrones game that everybody is playing at this conference for the next 2 days. M and A, everybody wants to think about every combination. John Malone pointedly talked about how cool it would be to see wireless and cable combined.
John likes M and A. Talk about that.
Talk about the logic of a combination of preexisting assets, so an existing cable operator with an existing wireless operator. Is that do you see the logic behind that?
Yes. But I don't know that it's necessary. I mean, I think all the things I just said about how you can use an MVNO and what a 4 gs network is and how that's combined with the kinds of capacities we already have. It makes it feasible not to have 1. Now at the right price and the right owner's economics, would it pay to have your own network?
Maybe. But I don't think it's a foregone conclusion that you have to.
And Any you want to expand at all on the right price and the right economics? What the No.
I'm not going to go try to sell market price.
John has also talked about talked favorably about the combination of content and distribution. That's something that's always been near and dear to him. Do you see the value of vertical integration into content?
There are some advantages to having it, I guess, but there are disadvantages, too, in scale the natural scale issues in the content business. In order to have if you think about AT and T buying Time Warner, Are they going to turn Turner into an AT and T exclusive product or HBO? Probably not because The value of those businesses would be 3 quarters less than they are And what they're paying for, right? Yes. So you need a national business, which means you have to have relationships with distribution.
You have to run it As a programming business, it's hard to run it for your own internal purposes. And so I see that as a fundamental issue with owning content. But I think NBC went to Comcast at a very good price, and it's a very good asset. And they did very and they'll do well with it because of what they paid for it.
But that's different than saying there's compelling vertical synergies. It's just that was a good asset that they bought at a good point.
Yes. That's I think that's right. I mean, they may argue that differently, but that's what I think.
And lastly, horizontal consolidation. Do you think there's more room for horizontal consolidation in the cable industry? Or have we come
to the bigger There isn't that much left, but I love the cable Assets and think they're good. And I think that there are platform economics by integrating. And so if they were available, they would be interesting to me.
As a place to wrap up then, given all of that, how do you think about your long term balance sheet and capital deployment. Where are your priorities?
Well, that
hasn't really changed. If we can invest in the business, we will. And if we can find M and A that's accretive, we will. And if we can't do any of that, we can buy back our stock. We bought a couple of $1,000,000,000 back in the last couple of quarters.
And the company is set up from a balance sheet perspective quite well. I expect it to grow and increase EBITDA, and I expect capital intensity to come down and How low. How low. Lower. And I mean, it's high now Because of the integration, duplicate costs, but it comes down.
I mean, you saw what was coming down at legacy Charter. You saw what legacy Cablevision today. It comes down and should come down. It comes down for a lot of and technology is bringing it down. So EBITDA goes up, capital intensity comes down.
Interest costs, we've got a really nice fixed interest portfolio with low equal towers out for a long period of time. So we're very liquid from EBITDA to interest rate. I think we've got a $3,000,000,000 interest rate budget this. And if you take capital, if we ever had Any kind of liquidity issues, we have huge capital budgets that can be managed. So we've got a very secure debt structure.
And we have the ability to throw enormous free cash flow in the future. And I think that's a good business.
I think there's a lot of people in the room that would agree with you. So Tom, thank you very much for joining us, And I look forward to having you back for our 5th next year. All right. Thank you.