AT&T's Jeff McElfresh warns 5G iPhones may not be 'massive event,' says engineers are working on 6G

Published Mon, Sep 21 202011:37 AM EDT

Alex Sherman @in/alex-sherman @sherman4949

Key Points

AT&T Communications CEO Jeff McElfresh says 5G adoption may be muted by the recent pandemic job losses and higher costs of unlimited 5G data.
'I've always tried to soften folks' expectations around 5G,' McElresh said.
McElfresh defended DirecTV acquisition because the cash flows from the deal helped AT&T invest in fiber.

A View from the Top is a Q & A series exclusively available on CNBC Pro . Alex Sherman will regularly speak with a business leader about decision-making, investing and industry news. AT & T is focusing on three "core priorities" -- wireless, fiber broadband and next generation entertainment services, according to Jeff McElfresh, head of AT & T Communications. That's driven AT & T's push to divest assets, including potentially DirecTV and its advertising platform Xandr. Still, while AT & T is positioning its company around wireless and high-speed broadband, Apple's 5G iPhones, expected to be announced in October, may not be the major event many are expecting. Economic challenges during Covid-19 quarantines may cause fewer people to upgrade immediately, said McElfresh. If you're not in a hurry to upgrade to 5G, McElfresh shared some additional news -- AT & T engineers are already working on 6G. McElfresh also defended AT & T's decision to buy DirecTV in 2015 for $49 billion while acknowledging consumers now view satellite TV as "old technology." Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Alex Sherman, CNBC : I'll lead off with this. There are so many new executives at AT & T. What has it been like to run this company with a slew of people that are new to their new jobs? I would imagine there must be pluses and minuses to that. Jeff McElfresh, AT & T : I think the short answer is the quality of our products and services outlive any organizational change or any leader. We are now a corporation that is so much more oriented around three core priorities. It's about wireless, it's about broadband, served up with wireless and 5G -- a best in class fiber network in the marketplace -- and about the next generation of entertainment services. The business is quite durable. New leaders, new faces and new roles have proven to be very invigorating. We're getting new perspectives and new action-oriented plays to drive improvement in the business. For me, there was maybe a little bit of concern or hesitation as a new leader a year ago thinking, wow, we have placed new folks in the big jobs. I can tell you, they are stepping up. They are rallying around the mission. I never expected Covid to happen. But that is a great rallying cry for a company like AT & T that has honed its skills and its reputation over 100-plus years of being there when it matters the most, especially with natural disasters. So, oddly enough, the challenges of Covid actually helped us really gel tightly together with the customer being at the center of everything that we do. I think a lot of CNBC readers and viewers want to understand how AT & T's 5G network differs from Verizon's and T-Mobile. So can you briefly describe why you think AT & T strategy is best positioned here? Certainly. 5G is the next generation of our wireless networks. We've been through 1G, 2G, 3G, 4G, and 5G currently. It really began about three years ago when we started deploying all of our spectrum into the network. As we are augmenting each of our cell sites across the nation, we were readying that infrastructure for 5G. Why does this position us a little differently than our competitors? Each competitor has got their own unique strategy for how they're going to bring 5G to the market. I think a lot of readers and a lot of my friends and family, they're trying to ask the question, so what is this 5G? What does this mean? What are the new revenues that are going to come from it? How is this going to change the world? And I've always tried to soften folks' expectations around 5G. It is just the evolution of the wireless technology that gets closer to kind of this dream state of ubiquitous, high speed, high quality broadband services across the nation. For AT & T, our strategy was very specific. First, we wanted to be the first to launch a standards-based 5G mobile network. We lit up the very first cell site and placed the very first call. While we were doing that, our product strategy and the customers that we wanted to serve first were the enterprise customers, because we felt like the capabilities that 5G brings to a wireless infrastructure offering is more tuned in during the early days to the needs of our enterprise customers. There's plenty of examples as to how corporations, factories, schools and hospitals leverage the capabilities of 5G to benefit their businesses. While we were doing that, we were hard at work deploying the spectrum and turning up the 5G signal for consumers more broadly. And you've seen how that strategy for deploying our 5G capabilities improved AT & T's network to be the best network three straight years running, according to GWS . We've seen our speed profiles increase to where we are running faster than our competitors are, on an average basis, across the nation. So, 5G capability for consumers, on average, will be home broadband-like speeds available wherever they go. I think some consumers are going to want that on day one. I think other consumers are probably going to feel like the current network that AT & T offers is as strong as they need today. Those people may be a little bit more cautious about upgrading to 5G. And I have said before when I've met with folks, 5G won't be a one-and-done. This is going to be an evolution over multiple years as the technology gets fully deployed and adopted by by the customer base. You mentioned having home broadband-like speeds. How long do you expect it will take for 5G to actually be a competitive product with home cable broadband? Yeah, that question depends on, as an investor, what kind of return profile you're looking for. We know that fiber and fiber to the home is the absolute superior technology for a home broadband connection. This is an important point. 5G starts to open up the wireless network to help get close to this capability. But what we've really learned here in the last six months with Covid is folks like you and me and everybody else in the US are really testing the limits of a broadband network's upload capacity. Download speeds are great for streaming, and they're great for downloading content, but having to broadcast or work from home or learn from home, you need to be able to broadcast video. That reverse upload capability is the best with our AT & T fiber. It's a superior technology to other terrestrial broadband services. 5G gives the ability for us to carve spectrum in a certain way where we can match that kind of upload capability as well. And then the densification of the network -- if you wanted to replicate or replace terrestrial wire broadband, you would have to have a significant highly densified network in a neighborhood with wireless to compete with that. For us, as we look at the return profiles of both choices of investment, we believe that fiber to the home remains a superior product. And that's why we are focused in many parts of our network architecture to increase the deployment of fiber technology. So, that is a very different answer than what T-Mobile and Verizon give to this question, who say their 5G products will compete and replace cable broadband in many areas of the country. Are they fooling themselves that their networks are actually going to compete with fiber? No, I don't think there's any one use case, Alex, or any one segment of subscriber. Just speaking from an industry perspective, you've got some consumers who don't require that kind of throughput or speed to be productive or what they're looking for in a broadband provider. And for that segment of customers, our wireless 5G broadband network is completely adequate to serve their needs. But if you are in a home or an environment where you've got multiple sessions alive in the home, and they're taxing in terms of bandwidth, you get down to physics. I mean, all cell sites, no matter if they're 5G or 4G, whether they're tall or small, all require a lot of fiber because you've got to connect that spectrum and those radios back to the network. And so our investment thesis around fiber and 5G go hand-in-hand. They're part of the same investment strategy. I asked Verizon CEO Hans Vestberg this question , so I'll ask you the same question. Do you think cable and wireless in this country will eventually consolidate? That it's inevitable, just like we've seen in Europe? Hans didn't say no, by the way. I would never bet against or do anything as declarative as saying 'no.' You've got to pay attention to where the consumers and the demands are going and how individuals want to consume their services. There's a lot of different capabilities that broadband offers. We've talked about remote working from home, or remote learning. There's general entertainment -- we've got a lot of traction right now with consumers consuming general entertainment, with our HBO Max property, our offering there over wireless, and it works fabulously. I can say the same about our AT & T TV service served up in an over-the-top fashion with our 5G evolution network. It works superbly. I think consumers in the future are going to be less interested in what technology that they are consuming to get their broadband needs met and more about what's more ubiquitous with a seamless experience. If that leads to any kind of industry consolidation bringing assets together, then so be it. But I wouldn't say anything declarative like that would never happen. I mean, anything's possible. Is it your belief that when Apple announces its iPhones later this year, that will be sort of the inflection point where people will really start to have and use 5G technology? I think given the scale and the market share that Apple represents in this US marketplace, you could come to that conclusion. But I would also tell you that we serve a lot of consumers that are not Apple iPhone consumers, and they've already had access to upwards to 15 different 5G devices and have been participating on the 5G network for the last several months since we launched our offering in July. I do believe that you will see many of the iPhone subscribers move to upgrade to the device. But I wouldn't forecast that it's going to be a massive event. I also don't think it's going to be a nonevent. I think customers, based on the pressures of the economy that we're all facing today, will make a calculated decision as to what they want to do. And we're going to be there to offer them any device that Apple launches here shortly. You know, Alex, we already have engineers working on 6G. Yeah. It's because it takes time, right? We still have devices on the network from 3G. Not all of our subscriber base has adopted the latest 4G device. So it will take years before things fully materialize. The big investor story around AT & T now is the pruning of assets. What role do you have with that strategy and how does it impact your job? Pruning the portfolio, it's a process that's beyond just looking at the core assets that AT & T owns. I look at it down at the product level. How it's informed our strategy as a communications company is around competitive broadband availability. This is how I would encourage you to think about it. Our investment strategy for the future is around wireless and fiber. You will see us optimize areas of the product sets that we offer. Those types of services, be it slow-speed broadband or legacy wireline-type services that we offer to our enterprise customers, you'll see us migrate subscribers over to future-state products of wireless and fiber-based services. And while we do that, it helps us reduce our cost structure. My definition of pruning is that -- it's a slight pruning of the business where the product sets are not hyper-growth mode like wireless and fiber is. Maybe I'll test your candor here, but in hindsight, do you feel like buying DirecTV was a mistake? I don't. I actually don't, because the cash flows that DirecTV brought to our business at that point in time actually helped us accelerate a very massive investment in fiber. I think if I could go back in time and tell myself, or any of my peers at AT & T, just how important fiber would be, I could go to any competitor and explain what the usage criteria over the wireless networks looks like today as compared to what it looked like back then. I think all sensible people would conclude that more fiber is needed. And so that asset and that subscriber base, which is highly valuable to us, offered us the opportunity to invest more heavily into fiber. And from that perspective, I'm grateful. But maybe you just paid too much for it? I'll leave that for others to debate. I was not involved in the acquisition process specifically, but so far, we are getting the yields that we expected out of this business since I have taken it a year ago. I have worked to improve the performance of that asset quarter over quarter. So we're pleased with the progress that we're making. Is the idea behind launching AT & T TV to eventually phase out DirecTV to the point where you guys can move on from that asset? I wouldn't say it's that clear. When you ask consumers if want satellite-based video services, they generally think of that as an old technology -- no longer current day technology. As I shared with you earlier, we are very focused on what the customer wants. And increasingly, over the last several years, customers have been flying towards streaming-based services for those that have broadband. If you think about it, serving a satellite-based TV product in a high rise apartment building where you don't have access to the satellite basically blocked us out of that market opportunity. So AT & T TV's genesis wasn't about a technology shift because we didn't like satellite. We just knew that consumers were moving in a certain direction towards software-delivered entertainment. And we could not address all of the available market afforded to us because of the lack of a direct path to the satellite. That was the the rationale behind the development of our our AT & T TV product. The second attribute to that, and it's an important attribute, is 100% of our AT & T TV subscribers have an internet connection. With the set-top box and DirecTV, not all of those were connected to the internet. As you think about expanding your advertising business, trying to maximize your return while affording better pricing for your subscribers, a higher percentage of your boxes that are connected gave you more addressable advertising opportunities. And so those were more the themes why we developed the AT & T TV product offering, and we're pleased with it so far. It's done quite well. It was almost ten years ago when AT & T tried to buy T-Mobile, and the government blocked that deal . The government decided this time around to allow T-Mobile and Sprint to merge. What do you think the impact on AT & T will be as a result of that deal? Will that merger ultimately benefit consumers? I'll let others decide if they think that the merger will benefit consumers. I will tell you that from our perspective, our operating plan and our strategy did not waver. That merger did not change them one bit. We know that consumers are looking for access to the best networks, to the fastest networks and the highest quality networks, be it wireless or terrestrial fiber-based home broadband services. That's really what the AT & T communications company strategy has been since I've been in the position. That merger has not changed our strategy. AT & T made a decision to buy Time Warner a few years ago. Verizon argues there is very little that it can't do through partnerships, like the one it did with Disney , that you guys can do by owning the asset outright. Why is that incorrect? Every company has its right to set its strategy, and you see that all of the players in the market have somewhat unique strategies. You referenced before differences with 5G. I'd say there's differences here as well. We like to think about the broadband networks that we build and the platforms that we build as platforms to drive engagement. The companies that learn how to measure and pay attention to the insights that you get from your customer base are likely to be in a better position in the future to serve up a set of products or services that are meaningful, that are durable, that are lasting with that customer base. Our ownership of WarnerMedia and the deployment of our HBO Max product and the upcoming deployment of our advertising-assisted HBO Max product actually offer us the opportunity to see deeper into our subscriber base and to find ways to create value that renting that would not offer. We would not get access to those insights. As you further deploy an advertising-assisted platform, that gives you the opportunity to afford a little better price-value proposition to consumers that helps you penetrate a little deeper into certain segments of the market. We pay very close attention to how engaged our customers are with all of our products. What we learn through that engagement drives how we curate our products. Renting that capability, you don't get those rights. You've got to be an owner to get those rights. You could say, for example, that you've got a subscriber that's highly engaged with HBO Max that is not an AT & T wireless customer. Based on the heuristics and the data that is offered by that platform and that consumption, you would hypothetically have the opportunity to very specifically offer private offers to grab more wireless share or more broadband share. That kind of insight is highly valuable to a high capital investment company like AT & T trying to grow our broadband connections, be it wireless or wired. Small nuances like that matter deeply. You could take that even further. Your imagination starts to run a bit about the kinds of content that attracts a certain kind of demographic and how that gets woven into how we might market our complete set of products and services to very specific market segments. It's not a ubiquitous market. I've got to ask you about the marketing and branding recently. There is AT & T TV, and AT & T TV Now, and HBO, HBO Max and HBO Go. And it's very confusing to many people. What are your thoughts on sort of how the branding has evolved and how do you make it less confusing? Well, I hope that you've seen some improvement recently. A year ago, your statement would have been spot on. We had all of those brands alive and multiple forms of our brand advertising. On the AT & T communications company side, you've seen a much narrowed or precise focus on the messages that we're placing in the market. You're seeing an emphasis on our AT & T TV product and our fiber product. You're not seeing all those brands play out in our marketing and our stores, our offers and our online channel. We've consolidated much of that, and we still have room to go. We're right on plan with where I wanted this to be. You have to remember, we've got millions of customers on those products. You have to be very thoughtful how you migrate them through the branding changes or the consolidation of brands as well. Our partners at WarnerMedia are fast at work right now, consolidating the various brands that you mentioned from the streaming products with HBO, now HBO Go and HBO Max. And you'll see improvements and simplification of that messaging that will be much more apparent than what it would have been a year ago or earlier this year. Is part of the strategy behind divesting assets not only to pay down debt but also to signal to the market that AT & T is a more focused company now? And is the motivation for that driven by Verizon's clear focus over the past year or two that they are really focused on 5G and aren't going to be distracted by buying a media company or anything else? Well, there are many questions in that question. Our strategy has nothing to do with Verizon or T-Mobile or Comcast or anybody else is doing. That's point number one. Point number two is we know what products and services provide the best return for our owners as well as our end market segments that have growth and really nice yield. Everything that we are doing -- every choice that we are making, every offer we are putting into the marketplace -- is focused in that direction. So is it to convince investors or the market that we're more focused? Yeah! We are more focused. I can tell you that 100%. Since I took this office a year ago, it has been a consistent message to the organization. It is basic fundamentals that have given us really nice progress and improvement over the last several quarters. It's got nothing to do with what our competitors are doing. It's got everything to do with what we know to be the stronger product set and the growth areas of the industry. Last question -- if you've got one goal you want to want to accomplish in the next year, what would it be? It would be to have -- and I won't disclose the number -- but a significantly larger number of fiber-passed homes and a larger wireless franchise than we do today. And we've been we've been moving in that direction.