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AT&T INC.

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AT&T : at J.P. Morgan Conference Transcript

05/14/2019 | 11:08am EDT

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EDITED TRANSCRIPT

T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

EVENT DATE/TIME: MAY 14, 2019 / 12:00PM GMT

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Client Id: 77

MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

C O R P O R A T E P A R T I C I P A N T S

Randall L. StephensonAT&T Inc. - Chairman, CEO & President

C O N F E R E N C E C A L L P A R T I C I P A N T S

Philip A. CusickJP Morgan Chase & Co, Research Division - MD and Senior Analyst

P R E S E N T A T I O N

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

(technical difficulty)

high-speed distribution network, predominantly conducive for mobile and specifically hopeful for mobile video. And we began a little over 10 years ago acquiring a rather robust portfolio of just wireless airwaves. We spent a lot of money. We put over $40 billion over that time into accumulating a big portfolio of wireless spectrum.

And so we began putting that spectrum to work very methodically. And in 2016 something happened and it's really, really important to this whole thing because it was something that was going to allow us to put the strategy on steroids and really accelerate it. That was the government brought to market a bid to build out the nation's First Responder Network. And it's really important because the requirements, if you won this bid, were that you build out of all of America, including rural America, and the government would give you a really premium slice of spectrum to build this network into do.

Why is that so important? We won the bid. To build this network, we have to expand the footprint and we have to climb every cell tower in the United States to put up this spectrum that the government has given us.

Our view was, if you're going to have to climb every cell tower in the United States, could you accelerate everything you're trying to do on your own? And that was particularly, hang up all of the spectrum that we now own because it costs a lot of money to go climb all these cell towers. And so we have been doing this. We've deployed the First Responder Network. We're 50% of the way through and way ahead of the government's schedule. We're deploying all of the spectrum that we own. In fact between '17, '18 and '19, we're going to increase the capacity of the AT&T mobile network by 50%. That's dramatic. I've never witnessed anything like this in my career --36-year career, increasing the capacity by 50%. So halfway through, we have the spectrum deployed. And just halfway through, we're beginning to separate ourselves from the pack in terms of the ability to deliver high-speed connectivity to our mobile customers. We are now unquestionably the fastest, highest performing network in the United States, only 50% over the way through. So that process is going well and we still have more to go.

The second -- the third thing that you do while you're on that tower is you deploy all the hardware necessary to turn on 5G, fifth-generation networks. So while we're on the cell tower, putting up the FirstNet capability, lighting up all of our spectrum and putting up all the hardware for 5G deployment so that when the standards-based software is available, turning up 5G will be literally a software upgrade. And we are on path to have a nationwide 5G footprint by next year about this time. And so all 3 of these were going on and we've kind of stepped back, we say, okay, you just heard the discussion about what's in place from a distribution standpoint. Nationwide mobile video delivery platform, satellite delivery for the U.S., Mexico and all of Latin America and a significant broadband footprint. We now have 14 million homes passed by next month with fiber. You add all that together, it's 170 million physical distribution points for premium video. And with 170 million physical distribution points, our thesis has always been that if you owned media assets and you attached premium media assets to that distribution, could you make those media assets more valuable? If you could acquire them at a reasonable price, could you make the media assets more valuable? And that's actually playing out. We're in the process now with Time Warner, which is now named WarnerMedia, standing up a direct-to-consumer product that we're actually quite excited about. This is going to be a very unique premium SVOD service and having the ability to distribute to 170 million distribution points we think is a huge advantage and gives us scale in an SVOD product in a very quick fashion. And obviously we want to distribute it not just to our 170 million, but to all of them, wherever we are in the U.S., Mexico, Latin America and we have some work to do in Europe. But you put it all together and you surround it with advertising technology, we've made an investment here that we're using the data from those 170 million physical points

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

of distribution to create a unique advertising model to sell into all these media capabilities. And so you put that together, that's the business we're creating. I actually feel really good about it right now.

Q U E S T I O N S A N D A N S W E R S

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Okay. So let's dig in a little bit. You were talking about 5G and how you're near a nationwide network. What's the potential 5G -- for 5G? Where do you see the opportunity in the next few years?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

When you think about 5G, what most people go immediately to is fast, that it's a faster network, and it is. It will be much more efficient and so there'll be faster throughputs. And so the ability to stream video will be significantly enhanced. But the thing people miss about 5G is this idea of a couple of things. No latency. I mean when you put it -- pair it with distributed compute and distributed storage, the idea that you have a network that begins to approach 0 latency, sub-20 millisecond latency, meaning instantaneous always on, always connected networks, these are new opportunities. They're new opportunities beyond just faster access on a smartphone. This is -- the people that are coming to us and wanting to engage in 5G right now, manufacturing. You can imagine how manufacturers see the opportunity here. Obviously, we've all talked about autonomous cars, both virtual reality and augmented reality, I mean all of these become really, truly potential when you have a no-latency capability.

The other thing is as you get hyper localized with 5G, and what I mean by that, in a 4G world, you can put simultaneously on any square-mile thousands of devices. I -- you and I could be riding in a car together, we have a watch connected, a smartphone connected, the car is connected, thousands of simultaneous connections. In the world of 5G, the thousands becomes millions. Millions of simultaneous connections it will accommodate. And so think about really low-cost sensors distributed all over the place, millions upon millions of devices. This changes how you think about utility management, pipeline management, traffic management. I mean it produces all kinds of new business opportunities into our world, more than just speed.

So the business side is where we're spending most of our time. And in fact, the early applications, we've turned up 19 markets on the millimeter wave 5G, they're up and running today. And the early applications, interestingly enough, are all business. Businesses want basically a LAN substitute. We don't need a LAN in our office anymore. We give them the 5G router and they have high-speed connectivity into their business with just a single router. And that's really, really significant. And one of the markets where we turned this up, for whatever reason, is Waco.

And in Waco, on the millimeter wave spectrum, we're getting 2 gig through put. Now you load the network up, you're not going to get 2 gig. But it gives you an understanding as to the potential. So there are a lot of opportunities with 5G, and it's going to be just like 4G. We identify a lot of use cases. We're pursuing a lot of use cases. We're all going to be surprised at what use cases actually materialize and take advantage of this.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Now assuming that the administration doesn't actually nationalize the 5G network, what can they do to help you build this out and to encourage this instead?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Yes, I -- the President and Ajit Pai, the Head of the FCC, came out recently and said, look, this is -- 5G is a private sector-led deployment. And so I believe we're past that. Things the government can do, and I give Ajit Pai and the FCC a lot of credit. First and foremost, get spectrum out into the marketplace. And so I can't talk much about it, but they've obviously -- we're in the process of a second auction, getting this millimeter wave

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

spectrum into the hands of the private sector. So that process is going. We're in the middle of our second auction right now. So that is the #1 thing that the government can do. And I actually give them high marks on getting this to market and making the process move.

The other thing and there are some efforts going on here and that is what can you do to accelerate the permitting process? Because we'll be able to have a nationwide 5G footprint, like I said, by this time next year by deploying it on our macro cells, the big cell sites throughout the United States. But to get this 1 gig throughput using millimeter wave spectrum, very high-frequency spectrum, requires a lot of really small cell deployments. And these are going everywhere from light post to buildings and so forth, getting the permitting and the approvals for that takes a lot of time. And when you're talking tens and hundreds of thousands of permits for these things across multiple municipalities in every single state, that will be the longest pole in the tent to getting this done. And people oftentimes talk about the competition with China and can we compete with China's deployment? I'm quite confident, in China, you don't have a lot of municipal approvals to get 5G deployed and small cells deployed, and so that's what we're competing against in this race to 5G.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

So capital spending to do this has been fairly high. How long should we expect you to stay at this level?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

So we at a gross level spent just under $25 billion last year. We'll be at around $23 billion this year. Actually, we're expecting our capital spending rate to come down over the next couple of years, and for the simple reason that there are a lot of projects that are not 5G that are coming off the table. We're taking things off the table. So we've been investing heavily in deploying networks throughout Mexico. We largely completed that in December of last year. So there's a very significant amount of capital deployment that's really ratcheting down to maintenance levels in some coverage in Mexico. That's not inconsequential. This fiber build we have been engaged in, I'm quite confident it was probably the most significant fiber build in the U.S. over the last 4 years. And that fiber build is coming to completion in June of this year. So the fiber build comes down significantly. We're getting to 75% of our network functions being virtualized, meaning software-driven network functions. The capital efficiency of this technology is significant as you think about now building capacity and capability into the future. So we're going to be at 75% deployed, I think, by end of 2020. So those capital requirements continue to come down. And so 5G, we're continuing to work. But the beauty of what we've done, the FirstNet thing I went through, and I was laborious in going through it, but it's important to understand, FirstNet, deploy spectrum and 5G, we're doing 3 things with 1 cell site climb. That's where the capital intensity for this is. So getting the manual, the physical element of this done in a very efficient fashion is giving us a unique opportunity to actually be very efficient with capital spend. And I'm actually quite optimistic over the next couple of years capital spending actually works its way down.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

So can free cash flow grow from here? And maybe talk about what your leverage targets are and how you feel about those this year? And how we should think about it going forward?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Yes. we have targets this year for free cash flow that are up considerably from last year. We set an objective back in November. I -- we did an analyst conference and I said that our objective, we're putting a stake in the ground that we want to get to 2.5x debt-to-EBITDA by end of this year. And we've made a hard pivot to make sure that we addressed that situation and get it done this year. I want it done, I want it largely behind us.

And so to get to that 2.5x range by end of year this year, couple of things. We need to do $26 billion of free cash flow, which again is up considerably from last year. And we need to do asset monetizations of $6 billion to $8 billion. If we can do those 2, then we can get to those 2.5x range by end of year this year. After first quarter results, I would tell you that we are more than confident that we'll hit the $26 billion. I'm -- it's actually feeling like we'll overachieve the $26 billion.

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

Asset monetizations. As of right now, the $6 billion to $8 billion target, we've got almost $5 billion in the bank. We sold our stake in Hulu, we sold our Hudson Yards properties and we've done a lot of working capital kind of reconfigurations, brought a lot of collateralization back. When you put it together, we've now brought in and put in the bank almost $5 billion of cash. So getting to $6 billion to $8 billion, pretty confident we'll overachieve that $6 billion to $8 billion number. So getting to 2.5x debt-to-EBITDA by year-end we feel is eminently achievable. And I'm actually beginning to get more and more confident that we'll overachieve that.

As we generate more cash than that, look, I got to be honest with you, stock trading at $30, $31 to the extent that we have path to 2.5x, we'll probably start to retire some of the stock that was issued in the Time Warner deal. And as we move to 2020, we think that cash flows continue to be very strong and we'll continue debt paydown via a very methodical pace in 2020 but allocate capital towards retiring some stock as well, we think it's -- with stock trading where it is, it's time for us to begin to take some of that stock back in as well.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Do you expect to continue the leverage reduction at this pace? Or would you sort of slow that in favor of buybacks?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

No, look, we paid down $20 billion this year, $9 billion last year. So you think about -- we issued $40 billion of debt to do the Time Warner deal.

We'll have 75% of that retired by end of year this year. So we want to continue to bring our leverage ratios down, but it will be far more methodically over the next couple of years. It won't be at this same pace. We want to continue bringing it down.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Okay. Okay. And with the CapEx sort of slowing in the next couple of years, can you maintain the wireless growth that you've started to show here? Wireless has had a growth in the first quarter, I think, for the first time in 5 years.

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Yes, I feel as good about our wireless business as I have in quite some time. And there are a couple of elements that are driving it. This is why I'm so encouraged and optimistic about it.

We're getting traction in the market because we have now claimed the network mantle. I mean we have the premium network in the United States. The speed and best networks, independent people -- everybody's got their own independent analysis. But speed and throughput, we have it; and quality, we feel very strongly that we have it and our customer metrics are showing it.

And what I love about when you have a network quality mantle, your approach to the marketplace is not promotionally driven. It's brand-driven, and our brand is around network quality and we're having success, we're starting to see this and we're going to see churn continue to improve as we move through the course of this year.

Second of all, FirstNet. We now have I think the number is 7,500 municipalities that have opted into FirstNet. They're buying FirstNet capabilities for their First Responder communities. We have now 600,000 connections on the FirstNet network. And this is a great thing. It's creating some really good momentum in the marketplace. But what we're finding is, every first responder that takes on a FirstNet device adds a couple of family devices to it as well. And as we build out FirstNet and network coverage for FirstNet into different markets, rural markets particularly, we're standing up distribution where we've never had distribution. So you're getting growth in distribution, which is driving subscriber gains, you're getting the First Responder community, this is a community where we have very low market share. And so we're making significant inroads already in the first responder community and then family of first responders coming on to the network. And so we're actually, between the brand positioning in terms

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

of network quality and FirstNet and new distribution, feel pretty good of our ability to continue growing mobility, both postpaid, which postpaid was really good in the first quarter, but Cricket, our prepaid business continues to be very strong and so we think there's a lot of good runway left in the prepaid market as well.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Okay. So wireless was very good in the first quarter but the video subscriber losses were -- continue to rise. How should we think about the pace from here of the DIRECTV and U-verse video disconnects? And what that business looks like a year from now?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Okay. If you don't mind, I'll back up just a bit because the video business has had a business unit we call the Entertainment Group, and it's video and broadband. And the other commitment we made coming into this year is that we would get that business unit, video and broadband, stable. Because last year, as everybody knows, this thing was declining 15% year-over-year all 4 quarters of last year. And so we had to basically focus this year on getting that business stabilized. And there is a lot of doubt as to whether we can get it stable, which many interpreted to be flat or slightly down. And in the first quarter, we posted 6.9% growth of EBITDA in this business unit.

Now that was done largely on the back of the broadband business and particularly as a result of the fiber deployment. Broadband business grew 8% in the first quarter, and we think that's some really good momentum. But we don't see it changing because we're -- we have this great fiber footprint now, we're only 25% penetrated in that footprint. We think 50% penetration is eminently achievable over time. And so we think there's going to continue to be growth in that fiber and broadband business.

Video. Coming into this year, we said video is one of these areas we just -- we -- this is going to be a year of just cleaning up the video business. And we've been hard at work on content agreements and getting content agreements done in a way that gives us sustainability and profitability in this business. But the other element to give you sustainable profitability is cleaning up the customer base. Because we have a number of customers on our rolls that are very low-ARPU customers and we don't see any line of sight to getting them to a profitable level. And so as these customers' contracts or whatnot are coming up, there are many who are opting to just leave, and it's caused churn to spike considerably. These are really low-ARPU customers. And so you're seeing some spiked churn. And I don't think you're going to see that spike mitigate as we go through the course of this year. Second quarter is always seasonally high in terms of churn. But you're not going to see that mitigate this year. It's going to take pretty much this year to work through this customer cleanup.

What's interesting is the lion's share of this customer base are high-quality customers. This is a high-quality customer base in general.

That customer base is remarkably stable. The churn is over 100% driven by just this cleanup of the customer base. So it's going to take most of this year to work through that process. We get to 2020, we think these customer numbers can begin to improve significantly. And in fact, we will achieve the EBITDA stability of Entertainment Group this year and feeling really comfortable that we can have stable into 2020 as well.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

And that's driven by the retention of a lot of the high-quality video subscribers plus more growth in broadband?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

A few things. Broadband, broadband, broadband is a huge driver of this and it's just such a profitable product once the fiber is in the ground. So broadband is going to be a high focus working through this customer cleanup. Content cost. The content cost, making sure that we have the costs aligned with the revenue equation is really important. And then what you're going to see in the fourth quarter, and we haven't talked much about this, you're going to start to see this as we get closer to the product launch. But a -- it's called a -- we're calling it a thin client solution but it's a

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

satellite replacement product. And it is broadband-driven. And the lion's share of our video over the next couple of years will be this thin client, which has a very, very sleek user interface. It's going to take your subscriber acquisition costs, cuts them in half, and it actually changes the profitability model for this TV business. And whereas today we're doing on average $110 ARPU for a video subscriber, we can now meet a price point in the market for some of these customers that are struggling right now. We can be in a price point in the market that's actually profitable. So that will be kind of the workhorse for the video business over the next couple of years.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

So before we get to more video, I want to follow up on that fiber build. And so where are you on that fiber build? You're almost done with the rollout.

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Yes, into June, we'll be finished with the 14 million homes passed.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

And where are you on penetration in those homes? Not just with fiber but of the whole base with all your broadband products?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

So we have, what, 14 million, 15 million broadband subscribers. We have 14 million by end of next month, we'll be at 14 million locations passed with fiber. But we only have 3 million fiber subscribers, growing nicely I mean we're growing 300,000 per quarter. And so that puts us at roughly a little less than 25% penetrated. That number gets to 50%. Where we are in markets and those markets are mature, we hit 50% penetration thresholds in those markets. And so we think that's eminently achievable across that whole footprint. That's a 4-,5-year runway of really nice, sustained growth. As we move people and migrate them to fiber, ARPUs, revenue per customer actually go up considerably. People buy into higher speed and so we think we have a lot of good runway left here on broadband.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

And I imagine that fiber customers probably pay better than they used to on some type of copper?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Yes, people pay up for fiber. For a couple of reasons. First of all, just the throughput. Customers streaming video, working at home is driving greater and greater bandwidth requirements. But the other thing is, it is just a superior product. You get on a fiber product versus obviously copper, but versus coaxial cable, it is a superior product in terms of reliability, in terms of dependability, in terms of throughput. It is superior. We put people on fiber, they do not churn. And people on fiber buy our video products. People on fiber buy our wireless products. And the churn rate on all of those comes down dramatically as you penetrate with fiber. So fiber is critical in everything we're trying to do.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Obviously, the pace to get to 14 million was driven by the regulatory requirement. But beyond that, what's your appetite to build more fiber if it's such a good business?

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

We'll be deploying fiber until the day I retire for a number of reasons. We have a very extensive fiber capillary built, actually it's throughout the country. And obviously, 5G requires extensive fiber deployment. And so we continue to deploy fiber and as we're within 1,000 feet of a business, we'll take fiber into a business park or business location, that fiber artery can become a fiber artery to drive residential deployment as well as more 5G deployment. And so you're going to see the fiber capillary just continue to go as we go over the next 4 or 5 years.

I do think this is going to be, in my view, 3 to 5 years out. With 3 to 5 years out, there will be a crossover point. We go through this all the times in industry. But 5G will cross over performance-wise what you're seeing in home broadband. We're seeing it in business now around the millimeter wave spectrum. And there will be a place, it may be 5. I think it could be as early as 3 where 5G begins to actually have a crossover point in terms of performance with fiber. And 5G can become the deployment mechanism for a lot of the broadband that we're trying to hit today with fiber. So all things considered I, over the next 3 to 5 years, continue push on fiber, 5G begins to scale in millimeter wave. And I -- my expectation is that we have a nationwide true high-speed Internet network throughout the United States, 5G or fiber.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

In 5 years?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Five years.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

That's pretty fast. Let's return to your over-the-top sort of broader video distribution strategy. You have a lot of different pieces of the sort of direct-to-consumer and over-the-top. Can you just give us an overarching view on what that should look like over the next couple of years?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Of -- say that again, which...

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

All the different ways you sell video to consumers.

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Oh, yes. Today, you think about our video product and you immediately go to DIRECTV and it's 24 million subscribers, which is a broadcast video distribution network. As we bring WarnerMedia into the fold, our key video product will become the SVOD service that Bob Greenblatt and Stankey are standing up in WarnerMedia. And I don't think people yet have an appreciation for what this product will bring to bear. This is obviously going to be centered around HBO, which is premium of premium content. It's actually a luxury brand in terms of content. But we'll pin that and surround it with all of the content library of Warner Bros., Warner Bros. Studios and Turner. And the Warner Bros. Studios library is an amazing library. It's incredible. And not just in terms of feature theatrical-type productions that are in that library and everything from Casablanca to Aquaman and A Star is Born and so forth. But it has some incredible TV productions. I mean it's a TV production machine, produced over 70 shows this year alone. And so if you think everything from Friends, Seinfeld, you go to The Big Bang Theory, all of this TV production is also owned by Warner Bros. And we will be bringing a lot of these media rights, licensing rights back to ourselves to put on our own SVOD product, video-on-demand product. And so we will launch this product on a beta version in fourth quarter of this year. It will be full-scale launch in first quarter of next year. But this is going

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

to be a significant opportunity for us to drive video penetration and consumption. So again, that product distributed to 170 million points of distribution, our mobility business, our TV -- satellite TV and our broadband business, this will become a significant driver of our growth over the next few years as we stand this product up. And so that will be significant. And we think this is in the tens of millions of subscribers that we will have on this. We think the portfolio is that compelling. Then obviously, keeping the satellite, the U-verse customer base in check and stable is really, really important because it's going to be a major distribution platform. But the video business is going to be driven heavily by the SVOD business.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

And how much of this direct-to-consumer product is a replacement for cable subscription today? If I pay Comcast, will I get this instead? Or is this going to be something I get on top of it as part of my subscription?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

The expectation is -- in fact, we -- the MVPDs, Comcast, we think is going to be an important partner to all of this. So if you're a Comcast subscriber and you acquire HBO, you will get this capability with your HBO subscription on Comcast. And then we want to just continue to push digital distribution on top of that as well.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Okay. So last topic. Talk about the sort of overarching advertising potential here. You talked about that as part of the driver for buying Time Warner. How does all this fit together?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

So I became very energized on the potential of an advertising model surrounding this over the last 3 or 4 years as we began to monetize the very small advertising inventory that we have in DIRECTV. And so as you know when you do a deal with CNN, you'll get a couple of minutes per hour of advertising inventory to distribute it with DIRECTV. We own that inventory. So we have been doing a lot over the last few years to bring together everything we know about our subscribers, with their permission, of what are their viewing habits, information from mobile devices and so forth. Bringing all that information together and building audiences for advertisers. And we have very quickly stood up a very interesting business. It's a business that's about $2 billion of revenue. And this is a business that's attached to a subscriber business that is declining 4%, 5% a year. The advertising business on that subscriber business is growing 26% in the fourth quarter. It grew another 26% when you throw in an acquisition that we did, AppNexus, in the first quarter. And so we have a lot of conviction that if you pair this data, this information with other content, that you can actually stand up a unique advertising model for advertisers. And so now can we take that and translate it to Turner? Because Turner has an inventory of advertising that is multiples of what we have in DIRECTV. And so that's the reason for the acquisitions. We're standing up this capability to begin monetizing the Turner advertising inventory at higher yields using the information that we have from those 170 million points of distribution. And we're gaining more and more conviction that this is a significant opportunity. And in fact, we're bringing in advertising inventory from other media companies and aggregating this into a marketplace. And so we're going to have a marketplace and this will be 2020 when this thing begins to really take fruition. But Viacom is bringing some inventory into A&E. We're going to have inventory from a lot of players in here and begin to monetize that inventory over the next year or 2.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

But just to make sure I understand that, that 26% is on a like-for-like-- aside from AppNexus, like-for-like similar inventory? Just CPMs went up by that much?

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Client Id: 77

MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Yes, it's all CPM driven.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

And what's the timing of bringing that onto the Time Warner inventory?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

So putting -- using it for the Turner inventory, you'll begin to see some elements of this, this year, call it data-driven linear. Bringing those capabilities to Turner, you'll see -- start to see some of that this year. But in full-scale kind of automated, exchange-driven kind of capabilities, that will be 2020.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Okay. And is it something you sort of ease into? Or is it you flip the switch and now we can sell it at least, if not capture all that?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

It will be similar, I expect, to what we saw in DIRECTV. It will grow over time. And as advertisers begin to get familiar and comfortable with it and understand what that inventory can produce, then advertisers will come in and take advantage of it. But you've got to make sure people who will supply and demand of inventory for advertising have access to it. And the market builds as they begin to get accustomed to it and see it as a unique opportunity.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Now was that part of the synergies you quantified when you first bought Time Warner?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Oh yes, it was a significant part of the synergies when we did Time Warner. If anybody followed the trial, you would see that this was a major element of the synergies that were expected from Time Warner. Because if you think about it, the Turner inventory of advertising is at least 3x what we have on DIRECTV. And so to the extent you can get some element of the Turner inventory to have yields that look like DIRECTV, that's a sizable number to AT&T.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Okay. Last quickly, Fred mentioned Game of Thrones. As that comes off, how do you think about investing in content at HBO and at the rest of Time Warner to make sure that the quality of that product stays as high as it was when you bought it?

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

In anticipation of exactly that, Stankey and Greenblatt have stepped up the investment in HBO considerably this year. And if you're a Game of Thrones fan, you're seeing the reels come up right before Game of Thrones, that is really beginning to make the viewers aware of what's coming. And so as Game of Thrones winds down, the next season of Big Little Lies comes right on behind it. Succession, a new season of Succession comes on right behind it. There's a lot of content that is stacked up. Chernobyl comes on. And so we've got a lot of really great content coming online as

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MAY 14, 2019 / 12:00PM, T - AT&T Inc at JPMorgan Global Technology, Media and Communications Conference

Game of Thrones winds down. And that's really the key here. We're going to have to step up our investment. We're also going to have to, as I mentioned, to take a lot of the great content that we own that's been licensed elsewhere and begin to bring that content back into the fold. And the thing to keep in mind about WarnerMedia, as you look across the entire portfolio, this is a business that spends about $14 billion a year in either original content and some licensing over in the Turner side. So $14 billion a year. And what you'll see happen over time is a lot more and more of that $14 billion will be directed towards our own product, content to be put on our own product. But that's a sizable investment, as big as anybody in the industry probably right now, and it's going to cause some reallocation of capital over time.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

That's a good place to stop.

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Okay.

Philip A. Cusick- JP Morgan Chase & Co, Research Division - MD and Senior Analyst

Randall, thanks very much.

Randall L. Stephenson- AT&T Inc. - Chairman, CEO & President

Thank you, Phil. Thanks a lot.

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