Transcript: AT&T’s Randall Stephenson on the network’s strength

STEPHANIE MEHTA:  Hey, Randall.  How are you?

RANDALL STEPHENSON:  I’m well.  You’re doing all right?

STEPHANIE MEHTA:  I’m doing all right.

RANDALL STEPHENSON:  Good.  Where do you want me?

STEPHANIE MEHTA:  Have a seat right there.  You get the green chair.

RANDALL STEPHENSON:  The green chair.

STEPHANIE MEHTA:  So, because I was up here I didn’t get a chance to talk with Randall in the green room, but I think in one of our earlier conversations we have a pact that we’re going to try and make spectrum allocation and HTML5 really interesting, right?

RANDALL STEPHENSON:  Good luck with that.

STEPHANIE MEHTA:  We’re going to do that, and that’s going to —

RANDALL STEPHENSON:  I’m the only guy in America that cares right now.

STEPHANIE MEHTA:  We’ll have an applause-o-meter at the end, and we’ll see how we did.

I wanted to start off by asking you about something that’s in the news right now, and I actually forgot to ask Brad Smith, since he’s on the board of this company, but at one point, AT&T (T) was very heavily in partnership with Yahoo! and, in fact, I think at one point AT&T owned —

RANDALL STEPHENSON:  Still are.

STEPHANIE MEHTA:  Well, and at one point you owned 3 percent of the company.  Are you still an equity —

RANDALL STEPHENSON:  No, we don’t have any more of an equity position in it, but they — so our online business, our e-mail client, our portal for our broadband connection on all of our broadband services, they are the engine underlying all that.  So, we have a longstanding partnership.  I can’t remember, it’s probably been 10 years that we’ve had a relationship with them, and it’s been a very important relationship to us.

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STEPHANIE MEHTA:  Right.  And they have a new CEO.

RANDALL STEPHENSON:  I heard about this.

STEPHANIE MEHTA:  Yeah, big news.

What advice would you give to Marissa Mayer?

RANDALL STEPHENSON:  Stay a while.  (Laughter.)  I mean, I’ll be honest, it’s been kind of frustrating for us.  They are very critical.  I almost consider them like an infrastructure partner, right?  I mean, they are the guts of a lot of our broadband and our mobile Internet business.  So, you have this kind of turmoil in a very important part of your ecosystem, it’s a little maddening.  And we have a big revenue stream that comes from this platform.

And so I’m actually excited that they’ve picked somebody.  They’ve picked a veteran in the industry, somebody with a track record.  I’ve never met her, but her reputation is just terrific.

So, my advice would be — who am I to give advice to an Internet company, but to me what’s fascinating about Yahoo! is it’s an unbelievable brand, and all the turmoil that this company has been through over the last four or five years, and from a consumer standpoint the brand is still just rock solid and a very, very strong brand.  So, leveraging that brand in the marketplace is going to be very important for them, I believe.

STEPHANIE MEHTA:  And I want to come back to the brand conversation a little bit later, but just to quickly follow on was there any point during the turbulence at the company that you considered doing your own?  I mean, you guys have a lot of technologists in-house.  Why continue to outsource that e-mail function to a third party?

RANDALL STEPHENSON:  I believe do what you do best.   And so the e-mail function, that’s not that big a deal but it’s the things attached to it, so advertising and monetizing a lot of the traffic that goes across your 17, 18 million broadband customers, and as you think about your mobile business how do you monetize that.  That’s the kind of thing that Yahoo! and now I guess indirectly or probably directly Microsoft is involved in.  So, just to me it’s an ecosystem that kind of hangs together and you want to put the monetization advertising with those platforms and those clients.

STEPHANIE MEHTA:  So, the last panel talked about this, but this has been a theme that we have been hearing throughout this conference.  Everybody is going mobile.  Everybody wants to move their content onto mobile platforms, their apps onto mobile platforms.  Mobile is it.  And I don’t need to tell you that AT&T is a big part of making sure that these transitions take place, whether it’s the consumer-facing part or the B2B part.

So, let’s talk a little bit about how you’re going to help companies make this big transition to mobile.  Let’s start with an obvious question that you always get, and that’s the network.  Is this network of yours ready to handle this transition from in some cases the physical world straight to the mobile world?

RANDALL STEPHENSON:  I feel as good about our network today as I have in five years, literally, and it’s been difficult getting here. We’ve had a volume surge that is hard to explain what’s transpired.  The last five years we’ve had literally in the mobile Internet traffic going across our network it’s been a 20,000 percent increase in traffic, and we’re seeing no signs of that slowing anytime soon.  In fact, we’re on a pace this year that it grows another 75 percent, and our current planning assumption is that that just continues for the next five years after this year.

So, there’s a tremendous influx of volumes.  We don’t see that changing.  So, what do you do to ensure that you have the capacity, just the pure capacity — this is not very sexy stuff, but just the raw capacity to accommodate this?  There are a lot of guys in Silicon Valley who have business models premised on just having the raw capacity to accommodate the mobile Internet.

I have been very, very vocal over the last couple of years about spectrum and the need to get just more raw spectrum — that’s the capacity in our business — into the marketplace.  And the government is doing a lot, probably not enough but the government is doing a lot.   They’ve identified a block of spectrum that they’re going to auction.

And so think about it, we’re a business — we go through about 10 megahertz of spectrum a year.  That’s not relevant to you until I put it in context for you.  The government just approved auctioning off 50 megahertz of spectrum to the entire industry.  And we’re kind of in a place where within the next three, four years we have line of sight to exhausting the spectrum that we currently hold.  So, think about 50 megahertz coming to the entire industry.  The process that’s been set up to get that spectrum into the industry is going to take — if anybody puts this spectrum in service within the next six years I’ll be stunned.  So, we have an issue as an industry, where do we get more spectrum to accommodate the growth in traffic or just raw capacity?

And so I’ve been talking a lot.  I’ve been in to see the FCC.  We’re working with the policymakers about there is spectrum out there in the marketplace that is not being put to work.  There are a lot of companies that own it.  They own it on a speculative basis.  They need to be encouraged if you own it put it to use, and if you’re not going to put it to use get it to market and sell it to people who will put it to use.  And it’s not an inconsequential amount of capacity that’s sitting fallow in the marketplace.

If you believe that’s important, and I do, and I think most in the industry do, the next step is, government, when people put this spectrum up for sale, you’ve got to move fast.  We can’t operate at traditional government speeds on approving this spectrum and getting it into the marketplace.  We had spectrum transactions last year that took 18 months, 12 months to 18 months to get done.  That’s not going to cut it.  We’re operating at Internet speed here.  The government is going to have to step up.

To their defense, the FCC in the last four or five months have approved some transactions in three month, four month time horizons.

So, this is all good, but it’s going to take multiple things to keep these networks, to keep the capacity available for these business models to continue to grow and materialize.

STEPHANIE MEHTA:  Is more spectrum the only answer to the capacity issue?  I mean, there’s a lot of really bright technologists in this room.  Is there a technology solution that you can apply to the network that can help alleviate some of the issue?

RANDALL STEPHENSON:  There are several technology solutions, small cell technology where literally cells, you know, that are the size of a shoebox that you can begin deploying, which basically is just splitting the cells, really, really small cells gives you more capacity out of the existing spectrum that’s in the marketplace.

We’re working this technology, we’re working it hard.  We’ve got it in the labs, we’re testing it.  This will take two, three years to scale this technology.

There will be things like spectrum sharing where the government may spectrum that they’re not willing to get rid of but they only need it at certain times of the day or certain times of the year.  Well, can people step into that spectrum and utilize it when it’s fallow and not being used by the government?  Significant technology innovation is going to be required to utilize that.  We’re working that.  The whole industry is working that.  That’s a much longer term solution.

But there are multiple type technological solutions that we’re all working on.  Wi-Fi is going to be critical, distributed antenna systems.  One of our biggest efforts right now is going into New York City and San Francisco and Chicago and putting antenna systems within the buildings, because if you do that then you get the traffic off of the wide area networks down on the street and you free that capacity up there.

So, I can go on and on, but yes, it’s going to be an all of the above strategy.  Government is going to have to move faster, you’re going to have to get spectrum that’s out there fallow in the marketplace into the marketplace, these technological solutions are going to have to keep going, investing and moving those aggressively, and long term the government has to define large blocks of spectrum to bring to the marketplace.

STEPHANIE MEHTA:  So, where is that European spectrum coming from and where is the American spectrum that you have identified that’s fallow?

RANDALL STEPHENSON:  A lot of it’s held by speculators.  So, 2007, a classic example, before the government was going to auction off this big block of spectrum that we bought in 2008, there were a lot of speculators out there that had aggregated a lot of this spectrum, and literally playing golf with an individual who was an owner of some of this spectrum.  He and I agreed we ought to sit down and talk about this.  We paid $2.5 billion for his fallow spectrum.  They were sitting on it, speculating on it.  There’s a lot of these companies out there doing these kinds of things.
We have done multiple transactions already this year around various places in the United States, but it’s kind of interesting because it’s just scattered, and so you’re having to aggregate it, put it together.  It’s hard to put to use little chunks of spectrum in small geographic areas.  You want big swaths of spectrum, because people don’t want a service experience where you’re going in and out of coverage areas.

STEPHANIE MEHTA:  So, let’s take a quick break and go to the AT&T polling question.  Did you compose this music?

STEPHANIE MEHTA:  So, this is a question about wireless traffic growth.  During what five-year period did wireless data traffic grow or is expected to grow fastest on a percentage basis?  So, text 42345 to submit your answer, A) if you think the fastest growth on a percentage basis took place 2001 to 2006, B) if you think it took place 2006 to 2011, and C) 2011 to 2016, and we’ll come back to this in a few minutes.

So, Randall, the last time you and I did this we did a speed round where I kind of went through and asked you to talk a little bit about friends, enemies, and frenemies in the space.  Apropos of this question, I wanted to talk with you a little bit about which of the services that travel on your network create the biggest pain points for you?  And I think we were going to try and do a scale from 1 to 10 but you didn’t want to get quite that granular.  So, I thought we could do bandwidth piglet, bandwidth potbelly pig and bandwidth hog.

RANDALL STEPHENSON:  How about just utilizing the most bandwidth?

I say that because, look — and I’ve kind of conditioned people to think of this way, but — and I’m having to talk internally to the company this way as well.

So, we have gotten ahead of the capacity glut here.  Now, we’ve got spectrum crunch coming, but I believe the industry has gradually and finally gotten the pricing model right.  And so once you get the pricing model right, then I don’t think about them as pigs and hogs, right, now I think about them as services and revenues and it’s not all bad.  In fact, data becomes a good thing.

And you’re seeing the industry moving the pricing model rather significantly so that perhaps you get to a place where the revenue model begins to closer approximate the capital requirement model.  So, when capital requirements are growing in the teens, the $20 billion capital budget we’ll have this year, when that continues to grow but revenues are flat on these businesses, you go, wow, that model doesn’t last, right?  So, I think we’re getting the pricing model right, and so I don’t think of them as hogs but I think it’s important to think of the consumption of services.

STEPHANIE MEHTA:  Right.  But that seems like an acknowledgment that the industry was sort of hoisted by its own petard, right?  I mean, you set the pricing model.

STEPHANIE MEHTA:  So, let’s talk about an interesting concept that you have floated as a pricing model, which I think I’d love to hear how you think this happen in practical terms.  So, you’ve talked a little bit about the 1-800 model, right, whereby the business owner pays for my call to him, it’s a toll-free call.  Is there a toll-free data equivalent where basically the company pays for me to access the data?

STEPHANIE MEHTA:  Really?

And I have believed and it’s proving to be true that whether the carriers drove it or not, the content players would ask for it.  And it’s just like go back, you know, 30, 40 years, who drove the 1-800 voice model?  It was Sears.  Why?  They wanted the customer not be apprehensive to come to them.  And so they said, look, we’ll pay for the long distance business, the long distance traffic if you get the customer to us.  So, we developed these services, allowed the customer to call without paying for it.  Sears picked up the tab.  And what happened?  It drove the cost of long distance down dramatically, those services did.

Now you’re entering into a world of the mobile Internet, which is constrained capacity.  It is today, it will be tomorrow, it will be 10 years from now, constrained capacity.  And so the pricing model reflects an industry with constrained capacity.

When you have this kind of pricing model and you’re a consumer, what does it do to behavior?  It reduces your consumption of that bandwidth.

So, we’re starting to have content companies come to us saying we’d either like to do one of two things:  defray the consumer’s cost of this or share in the advertising revenue streams.  But they’re bringing these to us and wanting to have these conversations, and I find that an interesting dynamic and it’s one that we knew would come.  We knew it was inevitable, because it’s these industries, they have business models premised on traffic.

STEPHANIE MEHTA:  Right.

So, I’m a little confused, Randall, and you’ll have to help me out a little here.  If part of the capacity constraint is spectrum, how will changing the pricing model help get more spectrum if, in fact, spectrum is partly tied up in government issues and partly tied up in availability?  I mean, it sounds like if you could get more spectrum the pricing model would help you with the revenue you need to get there, but if you can’t get the spectrum how will changing the pricing model help solve the problem?

So, a couple of things have happened.  The line of sight to significantly greater capacity in terms of spectrum is fairly limited.  We don’t have line of sight to an extensive amount of greater capacity in terms of spectrum.

So, once you said no significant consolidation, line of sight, you have zero line of sight to any great additional capacity in terms of spectrum, what do you do as an industry?  Prices move up.  And so as prices move up, it drives the consumption curve down, it flattens out the consumption curve, which extends the life of the existing capacity.

So, the option with the most votes on the question of the greatest percentage growth in data wireless traffic was C, but as you’ll see the correct answer was actually A, that between 2001 and 2006 wireless data traffic grew 75,000 percent.

So, explain how that can be when back in 2001 to 2006 there wasn’t any video on the Internet, there wasn’t any downloading of big apps.

RANDALL STEPHENSON:  Well, there’s a lot of people here in the Internet business, so this won’t surprise you, but you started from a really small number.  And so in 2001 the mobile Internet business was really just birthed, and it was birthed in the form of mobile e-mail, Blackberrys, as well as messaging.  So, when you start from this really low base and all of a sudden e-mail for the first time goes mobile at scale, the volumes just skyrocketed.

2007 kicked off what we call the smart phone era.  And if you go back to 2007, it was last month five years ago in 2007 when we launched the first iPhone.  I don’t know if you remember the first iPhone was a 2g device.  That started the mobile Internet era.  And it displaced Blackberrys and Palm.  I mean, Palm was kind of like the hot smart phone back in that era, right?  All of a sudden you’re in the smart phone era.  And one year after the iPhone launches you put it on 3g, now you have much faster speeds, now video, the app store comes along a year later, and so now you take off, the 75,000 percent 2001 to 2006 over the next five years became 20,000 percent on top of the 75,000 percent.  So, over the next five years from now our forecast is it continues to rocket along at about 75 percent per year for each of the next five years.  But yeah, those first five years, it was rather dramatic the growth, but it was a very different kind of traffic.

STEPHANIE MEHTA:  So, let’s go back and talk about some of these services, because I think that on an absolute basis clearly some services require a lot of capacity on your network and some services don’t.  So, we can say heavy use, medium use, low use.

RANDALL STEPHENSON:  You can go with hog if you want to.

RANDALL STEPHENSON:  It’s low bandwidth requirement.

RANDALL STEPHENSON:  It depends.  Some Facebook customers are low bandwidth because all they’re doing is updating messages on their Facebook like my wife.  My daughter is putting videos out there on her Facebook and accessing it via her wireless device, and she’s taking pictures and posting it to Facebook via her wireless device.  That’s a high bandwidth user.  Video is a huge bandwidth user.

RANDALL STEPHENSON:  Low bandwidth.  It’s messaging.

STEPHANIE MEHTA:  Voice calls?

RANDALL STEPHENSON:  It tends to be low bandwidth.

RANDALL STEPHENSON:  Massive bandwidth.  And it’s not just the data being driven by VPNs, Virtual Private Networks we call them, like a lot of your companies use, but VPNs are now the platform on which videoconferencing, telepresence, and those types of services are being deployed, and those take dramatic bandwidth.  We’re talking 1 gig pipes going into businesses in a lot of places.

STEPHANIE MEHTA:  Netflix?

RANDALL STEPHENSON:  It’s a big bandwidth driver.  In fact, somewhere around a third of the bandwidth on our mobile network is video driven, your traditional video players that you could probably name right here.

RANDALL STEPHENSON:  No, it’s YouTube, Netflix, HBO to go.  You’ve got a lot of them out there now.

MARC HOLZMAN:  Thank you.  Marc Holzman, Chairman of Meridian Capital.  We’re a several billion dollar private equity fund based in Hong Kong.  I also have a home here in Aspen, and I’m a longtime loyal AT&T customer.  And I might add that I’m one of those people grandfathered into that international data plan —

MARC HOLZMAN:  — at $69.  I don’t intend to.  I don’t intend to.

And I admire the way you’re running the company and the challenges you have.

My question is kind of more basic, and that is having lived here also summers and the holidays in Aspen for 16 years and having a ranch 20 miles down valley, I don’t mean to disturb you with this rudimentary question but there are so many blank spots like on Route 82 just — (laughter) — from —

MARC HOLZMAN:  My wife told me I shouldn’t ask this question.

RANDALL STEPHENSON:  I have a Yellow Page billing issue.  That comes at my shareholder meeting.

MARC HOLZMAN:  Just from the snow mass here, which is such a high volume area for about five miles for 15 years.

MARC HOLZMAN:  Yeah.  So, the question is, what are you doing to upgrade the basic voice network so that loyal happy people like me can just remain connected, because it means that I can stay home with my family and work at home?  I live one mile outside of town here and I just want to be able to use my cell phone.

No, actually these kind of issues, less densely populated areas, it’s obviously an issue for cellular coverage.  When you’ve been chasing capacity the way we’ve been chasing capacity it may not surprise you that over the last four years New York City, San Francisco, Los Angeles, Miami, Chicago, Dallas, that has gotten all of the attention and all of the capacity that we have to deploy coverage and so forth.

STEPHANIE MEHTA:  Tough life.

RANDALL STEPHENSON:  What’s that?

STEPHANIE MEHTA:  Tough life.

STEPHANIE MEHTA:  I’m the help.  (Laughter.)

RANDALL STEPHENSON:  So am I today.

So, now the objective is let’s go fill in those areas that are hotspots for people, customers like yourself.

New York City is a classic example.  There are — I mean, we’re down to a neighborhood street level in New York City where we have customers that we’re seeing drop routinely in just very specific neighborhoods, and we’re going in and just doing very, very targeted small cell type deployments to start to cover those.  So, it’s not fixed but this is kind of like the next stage of the effort.

STEPHANIE MEHTA:  Let’s do two more questions.

STEPHANIE MEHTA:  Right here and then we’ll go here, and then we’ll have to wrap up.

QUESTION:  Michael Sanders, CEO of Mobile Verity (ph).

I have two questions.  I heard a rumor today that Facetime is going to be over 3g but there’s going to be an extra charge. I wonder if you could comment on that.

RANDALL STEPHENSON:  I heard the same rumor on Facetime myself.  It’s too early.  We’re working with Apple right now just to get the technology stabilized and so forth.  So, it’s too early to talk about pricing.

So, Internet access on airplanes, I think most of us are using that regularly.  As those companies, so GoGo being one of them that’s a big provider of Internet technology on airplanes, as their coverage model gets improved or the satellite guys that are delivering it via satellite, as those technologies scale and get better, then VoIP on a plane ought to be a no-brainer.  It’s data, right?  And so it’s just then VoIP will probably be a low bandwidth requirement.  So, it ought to be one you could price and could be a good runner on an airplane.  I don’t think we’re going to be there in the next 12 months on an experience that many of us would find acceptable, but it seems to me inevitable that there will be voice on airplanes.

STEPHANIE MEHTA:  A question here in the center.

Sorry to bring up some unpleasant recent history, but going back to the T-Mobile merger, it was — when you guys agreed to the merger originally the termination agreement you guys put in was the largest in history by magnitudes, 3 billion to 6 billion depending on how you do the math, and obviously you lost.   So, I guess my question is, why did you create such a huge termination fee in the first place?

QUESTION:  Why did you sign a $3 billion deal when that was so much higher than what a market standard would have been?

So, I understood why they had to have a significant breakup fee.  They were losing strategic value by doing it.  So, it’s one of those you evaluate the risk of regulatory approval, you evaluate the upside.

Keep in mind that was a deal that the synergies of the deal alone were $40 billion to get the deal approved.  There was $40 billion of synergies, we felt very conservatively.

It also accomplished something else very important, and it was the main thing we were after.  As I said, we see no line of sight to any significant new spectrum coming onto the market.  And so by putting the two companies together we would get an immediate 30 to 40 percent lift in capacity out of the existing spectrum the two companies had.

STEPHANIE MEHTA:  I just want to give Randall an opportunity to ask one last question and then they’re going to boot us because there are some people with a security detail back there.  They’re looking very ominous.

A lot of this conversation that we’ve been having at the conference over the last couple of days has been about disruptors.  What are the potential disruptors to your business, and how are you trying to combat them?

RANDALL STEPHENSON:  Oh God.  Our business, I mean, we just live in a world of potential disruption, and it’s been this way.  I’ve been in this business 30 years, and there are just chronic, consistent disruptors.  When we were no the fixed line business the big disruptor, would wireless cannibalize the fixed line business, and we said yeah, so you’d better get into wireless and you’d better go in a big way.

Data business, the faster you go with mobile Internet and mobile broadband, the more disruptive those IP services will be to your core voice and your core messaging business.

So, our greatest opportunity is to get IP deployed, Internet protocol deployed, get mobile Internet deployed as fast and as broadly as we can.  We’re going at that as fast as we can.  The faster we go, the greater risk it puts on a lot of your core legacy businesses.

STEPHANIE MEHTA:  One technology cycle is all it takes.

RANDALL STEPHENSON:  Yeah.

STEPHANIE MEHTA:  Randall, thank you for being a good sport, for answering our questions.

STEPHANIE MEHTA:  If anybody has any intelligence for Randall, you know where to find him.

RANDALL STEPHENSON:  Come see me.

STEPHANIE MEHTA:  Thanks again for being here.