Question

Given:

Verizon

Total cost = $23 billion

Opportunity cost of capital = 10%

Annual cost = $2.3 billion

Expected demand = q = 2,100,000 – 6P

AT&T

Total cost = $4.6 billion

Opportunity cost of capital = 10%

Annual cost = $460 million

Expected demand = q = 425,000 – 60P

1. Calculate the expected annual profit that Verizon will earn if they price at service at $30/month, $60/month or $100/month. At which price do they maximize profit?

2. Calculate the expected annual profit that AT&T will earn if they price at service at $30/month, $60/month or $100/month. At which price do they maximize profit

Answer 1

AT&T said it expects to spend up to $25 billion this year in capital expenses, a figure notably higher than most Wall Street estimates. AT&T said the increase—from around $21.6 billion in 2017—is partly due to the recently passed tax reform as well as its FirstNet efforts.

“Capital expenditures approaching $25 billion; $23 billion net of expected FirstNet reimbursements and inclusive of $1 billion incremental tax reform investment,” AT&T said of its 2018 outlook, in announcing its fourth-quarter results.

The company said its capital expenditures, including capitalized interest, totaled $21.6 billion in 2017, which was down slightly from the $22.4 billion the company spent in 2016.

AT&T’s 2018 capex estimate is notably higher than Wall Street analyst estimates. For example, prior to the release of AT&T’s fourth-quarter results, Wall Street research firm Barclays had estimated the company’s 2018 capex would hit $22.6 billion.

The analysts at Deutsche Bank Markets Research said AT&T's increased capex would likely benefit tower companies, including Crown Castle. "AT&T expects gross 2018 capex of $25bn ($23bn net of FirstNet reimbursements); this is above the $22bn it spent in 2017," the firm wrote in a note to investors. "The delta is tied to increased fiber spend (+$1bn), as well as FirstNet-related wireless builds (and associated buildouts of AWS-3/WCS spectrum). As we have noted in the past, we expect this to drive significant revenue tailwinds for the US Wireless tower companies; with 100% US exposure, Crown Castle (CCI, Buy) is our top pick."

And what exactly might AT&T spend its increased capex on? The analysts at Barclays wrote that it will likely go to FirstNet and fiber buildouts.

"First and foremost on FirstNet, the company seems primed and ready to deploy. ... Moreover management highlighted that it has placed its AWS and WCS spectrum in service and thus is no longer capitalizing the carrying costs related to owning that spectrum. Given AT&T’s propensity for tax efficient capital allocation, we believe this is the most telling sign that the carrier is moving forward with its FirstNet and FirstNet related deployments," wrote the analysts at Barclays. "Secondly, management indicated that fiber is also an area where it would expect to see increased investment following the benefits received off of corporate tax reform. Specifically, the company indicated that much of the $1.0B in incremental investment will go towards its build initiatives in this area."

The rise in AT&T’s capex isn’t a total surprise, though. Immediately after the U.S. government passed its tax reform legislation—which reduced the corporate tax rate from 35% to 21%—AT&T said it would spend an additional $1 billion in 2018 due to the action.

As for AT&T’s FirstNet deal, the carrier was selected as the wireless network partner for FirstNet, which puts the company in line to receive 20 MHz of nationwide 700 MHz spectrum alongside $6.5 billion in funding. AT&T said it has begun deploying that spectrum and updating its network.

AT&T’s capex figure for 2018 dwarfs that of rival Verizon. “We expected consolidated capital spending [in 2018] to be between $17 billion and $17.8 billion including the commercial launch of 5G,” explained Verizon CFO Matt Ellis during that carrier’s earnings call, according to a Seeking Alpha transcript.