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Executives

John Stankey - Chief Executive Officer of AT&T Business Solutions and President of AT&T Business Solutions

Analysts

Michael Rollins - Citigroup Inc, Research Division

AT&T Inc. (T) Citi Global Entertainment, Media & Telecommunications Conference January 5, 2012 11:15 AM ET

Michael Rollins - Citigroup Inc, Research Division

Before we get started, please note disclosures are available at the registration desk. For those joining us via webcast, I'm Mike Rollins, telecom analyst at Citi Investment Research and Analysis, and I'd like to welcome you to our second day of our 22nd Annual EMT Conference. We're going to kick this off with our AT&T as our first company keynote this morning. John Stankey is joining us. He's the President and Chief Executive Officer of AT&T Business Solutions. John's responsibilities go even beyond the business segment to include running the networks and the operations at AT&T.

John, it's a pleasure to have you back today. John is going to give us some opening comments and a short presentation, and then we'll jump into some questions from myself, and also invite some questions from the audience.

And so with that, I'll turn it over to John. Thank you very much.

John Stankey

Thanks, Mike. Good to be with you. Happy new year, everybody. I hope you had a good holiday period, and got some rest and ready to go for 2012.

So first, let me give you our Safe Harbor statement. As you can on the screen and read it in its complete detail, please note that some of the things we're going to discuss this morning are forward-looking. They change. We may not update that, and there's of other filings you can go find in other places online, and with the SEC, to make sure you understand what's going on with all these issues.

So first, let me jump into kind of where we stand today. We're running the business. I know there's been an awful lot of noise as we exited the fourth quarter, especially with our transaction with T-Mobile and our decision to back away from that. During this period of time, I think we did a very, very good job in the third and fourth quarter as we ran the business. It's unfortunate we didn't get this done. I don't think anybody has any second guesses about having done it. I'll tell you conclusively, we have no second guesses about having done it. We sit back, and like any good business, ask ourselves if we have done something differently. And on the margin, there may have been one or 2 things, but we absolutely would have pursued this transaction had we had the opportunity to do it, and don't have any second thoughts about that. Our only regret is probably that it didn't get done, and it's unfortunate. I think, in the long run, it will be unfortunate for the industry. It's going to be unfortunate for the consumer and capacity.

But we started this transaction on a very strong position in this industry, a great balance sheet, great place in the market, a great set of assets, and we intend to carry forward from that day now and do what we're doing before. And like any business, we'll step back and ask what else is there to do? What other opportunities to innovate are there? How can we change this industry? How can we find a way to move forward and grow? And we will find those ways to do that. And I would tell you, our performance in the third and fourth quarter would indicate that there's still a lot of runway.

I'd like to maybe quickly touch on these 4 themes, if I could. First of all, I think our operational execution was very strong. Secondly, I'm going to talk a little bit about the fact that I think we've got the right kind of fundamental architecture and platforms to work from. And third, we've got good solid balance sheet, very strong margins and very strong performance over time.

So first, let me talk a little bit about execution, and focus specifically on Wireless here. I've given you a couple of data points up here on the slide that you can look at. But last year, about this time, I think we'd told you we would have about 2/3 of our Mobile data traffic on enhanced Ethernet backhaul by the end of 2011. Well, I'm happy to tell you, it's beyond 2/3. And we closed the year at 80% of our total Mobile data traffic on Ethernet backhaul.

I would also tell you, we've made some really phenomenal progress on our network quality metrics. I think the thing I would note more than anything else is it's been fairly quiet in the media and elsewhere over the last several months. I would expect that to be the case. As network performance stabilized, we've kind of gone into what I would characterize as more of a neutral state. Our job now is to turn customer perceptions from neutral to positive. And I think the trajectory we're on is exhibited by that middle panel on the slide that shows our dropped call performance in all of our major markets. It's a good indicator that we're on that path, less than 1% dropped calls in all of our markets as we exit this year.

Now we feel really good about that. We feel good about the progress, but I don't want to suggest that we're done. We know that there are areas that we still need to focus on. We know that there are geographic hot spots that still need work. I think we understand exactly where those are. There are good plans in place to get them done, and I'm very confident that our trajectory will carry into 2012. And we'll see the continued progress and improvements in those trends and lines as we move forward.

And then finally, we set out for a very aggressive objective. While we were flying the airplane, we wanted to change the engine. While we were working to put more capacity in the HSPA network and augment backhaul and make the performance of the HSPA+ network better, we did that. And we also launched the new area in our base LTE. Our commitment, at this time last year, was 70 million POPs covered by the end of the year. And I'm happy to tell you, we not only met that but we exceeded that, so let me touch on that dynamic.

Today, I'd like to share with you that we concluded the year at 74 million POPs. And while all of you are out Christmas shopping and while you were out enjoying your holiday meals, the team was working very hard to launch 11 additional markets in December. And if you'll notice, we have the names of those markets listed up there. They include markets like San Francisco, New York, Los Angeles, San Diego, and you can go on down the list and see them. But I'm really pleased across the full spectrum of not only the LTE launch, but what was done overall in the network side and what the team was able to deliver this year. In my history working in this business, I'd say from an execution perspective of putting the infrastructure in place, it was one of the best years I've ever seen. And I'm delighted to share that with you.

I am also most pleased to read about what our customers are saying on this and what bloggers are talking about it. And I think the dynamic that we've been discussing with you leading up to this launch of LTE is, in fact, being noticed in the market. And those are things like the fact that when you're not on the LTE network because it's going to take a little bit of time before it's ubiquitous, and we don't expect to be largely complete until the end of 2013. Customers are falling back to a very, very attractive HSPA+ experience at 2 to 6 megabits per second of performance, and that's over 285 million POPs. And that's a very, very good performance, and that's a very, very good way to manage this as we're putting this new area in our phase out. So we're delighted about what folks are saying and about the overall performance of it. I will tell you this launch has gone about as well as I could have hoped for as we sat back about 2 years ago and started planning and anticipating putting it into service.

So let me just quickly flip the business services for a couple of minutes and offer a few thoughts off the top of my head. First of all, we're just delighted with where things are going in strategic services, and in particular in the data family of products and what you see. And as you can see from a third quarter representation here, what's happened on a year-to-year basis, we've got nearly 20% growth occurring in our strategic services portfolio composed of VPNs, Ethernet, what we're doing in application services. And we have high expectations that, that's going to continue as we move into 2012 here. And that's been really the growth or the engine that stabilized our overall business performance.

We, of course, are working through a dynamic. It's a blessing and a curse. We have the largest legacy voice revenue stream of any player in the market, so it takes us a little bit longer to work through that mature product set. It's about 1/3 of our total overall total revenue. But even while we're seeing that mature product set decline, we're showing that we can keep margins in check and that we can continue to get this business healthy and move it toward growth. And I expect that for total year 2012, we will actually see growth in revenue and business services. I can't promise you that every quarter is going to look fabulous or every quarter is going to show or exhibit growth, but I'm pretty confident as exit the year that we're going to show growth in overall business services. And it's largely built off these growth platforms.

So let me just quickly talk about what we're focused on to drive that growth, and it's really 3 key areas. First is our success that we've had in network sourcing. We already have some very large contracts out there where, basically, we performed outsourcing for end-to-end network solutions for large companies. We are seeing what we expected in that business. The first year or 2 of a contract, like any outsourcing agreement, are focused on rationalizing and improving the business and getting the cost structure in order. And then as you establish yourself with that business, you find opportunities to grow and then build the base of revenue in that company because you get closer to them. You're working with them day in and day out. You have better solutions for them, and you're in a better situation to sell on a solutions-oriented basis. And in fact, that is happening. And we anticipate that we're going to continue to push that. We want to move down from large companies into large midsized companies, and off of these standardized resolutions to do same things. And we expect that we'll see that nearly double in 2012 as we work through this.

We've talked to you about what we're doing in mobility applications and how we're working on a consultative basis to work with large enterprises to figure out how they bring mobile technology in their business to change their process, how they improve their supply of chain, how they improve their ability to sell directly to their customers, how do they improve A to B to C. And in doing that, we've seen great progress, not only in selling more mobile applications, but pulling through mobile services and pulling through other wireline services as well. We've signed some very large deals in the last part of this -- of 2011, over $200 million in contract value that are tied to this solution-based selling on integrating and bringing mobile solutions into the enterprise.

And then finally, the relevance of cloud. Mobile and cloud go hand-in-hand. And as you're selling applications and solutions into the mobile space, the best way to deliver them is through cloud services. The best way to make that happen is to virtualize those applications and bring a solution to the customer and run it on our infrastructure, knitted together by our VPN and our robust data capabilities in the mobile space. And that is our third platform for growth, and it's the one that probably has the most upward headroom. We've made some good progress this last year, but we have more to do as we move through '12.

So finally, where are we putting your money? How are we investing our capital? And I would tell you that the story for '12 is very much the story that we shared with you in '11. We continue to increase the percentage of our spend and to dedicate it to our Mobility business. We think that's prudent and appropriate. It tracks the revenues. It tracks to where the opportunities are. We expect that we will continue to do that in 2012. We don't expect the overall investment percentages as total revenue for AT&T to change. We still expect we'll be in the mid-teens as a percentage of revenue, but we do expect that we'll be shifting. And a lot of that shift is created by the benefit of the fact that we've largely completed our U-verse build at this point and monies that we are putting toward building that platform and getting this to robust capability in our consumers markets in the most attractive market is now complete.

And we'll continue to invest aggressively in our business space, to ensure that we have the best global network available to our customers. We are pleased that this week, IDC announced once again that AT&T is viewed as the most complete global network provider for network solutions, and we don't intend to cede that. And we'll continue and invest aggressively in VPN, in the growth platforms I just mentioned to ensure that we're in a position to meet our customer needs on a global basis as they move forward.

So we feel like we're focused in the right places. We feel like that, that portfolio will bring a successful 2012, and we have a lot of optimism in this business moving forward.

And Mike, I'll sit with you and open to questions.

Question-and-Answer Session

Michael Rollins - Citigroup Inc, Research Division

Great. Thank you very much. Maybe just to get this started, just one follow-up, just close out 2011. Can you give us any additional color that you have in terms of what might have changed the company's mind about fighting the regulators in the courts to win the approval for the T-Mobile deal?

John Stankey

Well, I think, first of all, we prefer to cooperate with the regulators as opposed to fight with them. We always like it to be a discussion of objective facts and circumstances, and that's kind of our approach going into these things. And we started this transaction with that being the expectation. I will tell you that if I think about the 3 people think that were probably working this transaction the hardest, Jim and Wayne and my boss, I'm amazed at the amount of energy and creativity and force that they brought to it. And I sit back and I look at every option that they explored and everything that was done. I think the simple answer is, we gave it our best shot, pushed as hard as we could. And it became apparent to us that there were 2 agencies that weren't supportive of the deal. They weren't supportive of the deal under any circumstances or any construct. And they came to that conclusion in a way that we think is a little bit different than how it's been done in the past, maybe one that we couldn't foretell. And as a result of that, you have to assess your situation. And this is a business that has long-term investment cycles. It's a business that invests billions of dollars a year. The depth of our business is uncertainty. When you are working on investment cycles that require 2 and 3 years to realize. And it's not healthy for a business to sit in a state of limbo and go and fight a battle that ultimately has no probability of being won because people in decision-making capacities have said, "It's not going to happen under any construct or any approach." And so getting the business back and knowing what's certain, and how we can take the nearly $20 billion a year we invest and do it in a way that makes sense with some purposeful direction of where we're going, was essential for us the be healthy over the long haul. As I said, we started this transaction with a great set of assets, a really strong balance sheet. We still have that, and it's now time to go take those assets and that energy and put it towards something that's constructive that we know can complete.

Michael Rollins - Citigroup Inc, Research Division

From a network perspective, there were 2 points that were prominent that AT&T was making over the past year, that given the strong utilization of your network for mobile broadband that you wanted more spectrum. You also wanted more network density. Can you talk about what you're going to do now with respect to the spectrum that's available in your own inventory and how quickly you have to move to either seek out more spectrum or seek out more network density?

John Stankey

So those facts haven't changed, and the fastest way for us to solve those problems or improve the circumstances was clearly through this transaction. And as I said earlier, it's unfortunate that, that won't happen because I believe that was the fastest way to put more capacity in the market. I believe that was the fastest way for us to improve service. Nobody who functions in a role like mine or any other position running the business comes in the morning and says, "Gee, I want to think about how I ration services to customers." And we all -- if somebody wants to use it, we want to think about how do we grow and how do we make it the most robust set of capabilities possible. And we felt this was the best way to do that. Now we have to go back to running a different set of plays, and it's a set of plays that will not yield as much capacity as quickly or as inexpensively. But there are set of plays to run, and it's going to require us to do a variety of things, the same things that we were doing prior to announcing this transaction. We constantly evaluate spectrum markets and whether or not there's more spectrum than we can go after and get, and we will continue to do that. We've been very aggressive in stating that we think federal policy in this country needs to get more aggressive around making more spectrum, not just for AT&T, but for the industry as a whole. And we believe that there's a role of regulators to step up to, to get a coherent spectrum strategy in place. And that has to happen. We're going to do different things on infrastructure than we would have done. We're going to have to get that dense grid that we talked about more organically than doing it inorganically. And that will change our building construction programs as a result of that, our strategies around how we design networks. And we're going to have to do some things to make sure that we're more aggressive on matching demand to capacity, and that's the dynamic of ensuring that you match -- that you manage pricing and you manage plans and you manage your network management strategies to an approach that says, this is what I can reasonably put out there that drives an economic return. And all those things are going to have to come together. We know how to do that. We have a lot of means to do that. We have 1/3 of our total spectrum holdings that are fallowed, that are now geared up and ready for LTE deployment. We've shared with you that obviously have launched our LTE implementation. We've done very well. We're ramping that in a way that I'm delighted and pleased, and that will be a key place where we go to allow for that growth while these longer-term issues are worked out and while the government figures out how it brings more spectrum into the market.

Michael Rollins - Citigroup Inc, Research Division

You mentioned the substantial improvement in quality that from a couple of these charts, it looks like it's exceeding your baseline expectations now on a national level. How would you rate your confidence to sustain that level of performance for customers with the existing set of assets that AT&T has currently?

John Stankey

So I think there is -- the country is a big place, and there's a lot of dynamics that occur on a daily basis in there. And I'll be honest with you, there are an awful lot of innovation going on in this dynamic industry and some of which we cannot expect. I mean -- and so I look out a year from now, and I wish I could predict for you what every devices that's going to be in the market and every application that's going about there, but I need to tell you, I can't do that. I don't know that I could have guessed that Netflix was going to do what they were going to do on pricing, and change the dynamics around how their product was used overnight. And those kinds of things are going to occur. But within the context of our current progress, I feel very good about how we're executing right now, and I think that there's a lot of tools as the industry has matured, and more importantly, as the technology has matured. As we start to move into LTE, it's just a -- the first wireless technology designed for data. And as a result of that, it's just a lot easier to manage things on a data side. And I think that will help us a lot moving forward. But we're going to have to do some things that are going to require very, very aggressive and artful efforts. And it ranges all the way from just meat and potatoes, how much work can you get done to how artful you are in the public sector of permitting and getting work done. And there are solutions to these problems. They are hard. They're not easy. You're sitting in a city where we've spend a year trying to rebuild our model around how we permit and how we go about getting approvals. We've had really good success this year in San Francisco. And I applaud the Board of Supervisors and I applaud the planning commission here that have taken a much different approach than maybe they've historically taken. But a lot of that is because of the collaboration and the hard work in meeting the press, and they've bold in stepping out and trying to work with their citizenry about educating them. And we're going to have to do a lot of that in order to beat through this battle, but I can't predict how every single one of those moments comes out. There's just too many of them.

Michael Rollins - Citigroup Inc, Research Division

And when you look at LTE, one of the most common perceptions for the technology is just the throughput goes up, so the cost are going to be better. Can you talk a little bit, not just about what LTE can enable you on the cost side, but also maybe what it could enable for you on the revenue side to try to get more from customers by leveraging some of the features and technology?

John Stankey

So you clearly can manufacture a bit of data on LTE less expensively than you can on the HSPA side. But I think sometimes people want to fall back and say, "Well then, there is this solution, the capacity. There's better yield on the technology, and we don't need to worry about spectrum or we don't need to worry about how dense the cell grid is because all these great yields in the technology." We're talking about -- vendors will tell you something else, but may be effectively in a good case the situation, it's a 40% yield improvement on the technology shift. The base increase of data consumption right now is growing 40% a year, so I fail to see how suddenly deploying a new technology solves the capacity problem when the simple base is rising 40% a year. I mean, it buys 12 months of runway, maybe. Right? And that's -- we're running this business for a lot longer than 12 months. So other things have to be done than just switching out the air interface. Certainly it helps, but it -- in it of it itself is not the single solution to that problem. And you have to do other things to manage your cost. And I think we've been very aggressive around that, modernizing the backhaul infrastructure and ensuring that we manage costs around that. We've been aggressive in structuring our tower contracts. We've been pushing hard to go in and gain access to building on a neutral host basis, so that we can monetize the cost of doing that with leasing that infrastructure back to other competitors in the market so that we defray cost. All those things are intelligent things to do in managing your network moving forward. On the revenue side, I think that's where the battle has to be fought. You do your best in managing cost but let's face it, there's more utility in LTE and there's more capability. And there's capability to structure, not only quantity of service offerings, but there's an opportunity to figure out how you change payment mechanisms. And in some cases, maybe a content provider wants to pay in 0 rate traffic. Those capabilities have all been built in from a policy perspective to enable that on LTE. And when a service performs better, when a service offers higher bandwidth, when a service is able to extend the VPN in an enterprise and carry it out into a mobile environment, we've demonstrated that enterprises are willing to pay a premium for VPN-based services versus unmanaged services, those capabilities will transcend out into the mobile data space. And I do believe it will result in better yields. And I also believe, and frankly, based on current price in the market, demand is exceeding capacity and the ability of the industry to manage capacity unless there's a certain resolution to more spectrum coming in, then we're probably just going to see some general dynamics and pricing that occur from demand outstripping capacity.

Michael Rollins - Citigroup Inc, Research Division

One of the themes from some of the participants at the conference has been that 2011 was the year where delivery of video over the Internet really took off, really went from being just an innovator to now getting early adopters and moving through this adoption curve now. How do you look at it? What are you seeing in both your Wireline and Wireless networks in terms of the impact that video delivery, particularly over the top, is having?

John Stankey

So it clearly has picked up dramatically in 2011. And we've got moments of peak in our network, Wireline network, where you could probably argue that 30% of the total traffic in any given moment is a unicast video stream being delivered on-demand to somebody in some way, shape or form, and that's a lot. I don't think that, that model is sustainable on 2 fronts. First front is, if you just took all the linear broadcast video that's consumed today and assume a large percentage of it goes to unicast, the investment required for that isn't sustainable for an operator to do that and just magically have it happened without something occurring in the pricing structure of the industry. So there will be some tipping point where rational people hit these moments in time and they say, "Well, either you've got a cap or tier," or there has to be some economic remuneration that goes on if that trend continues. And I think second discontinuity is how the content owner ultimately monetizes that. And let's face it, content owners get an awful lot of money from linear offerings. And I don't think they want to kind of kill the goose that laid the golden egg. The point of the fact, I guess, I'd look at the Comcast Disney deal yesterday where probably one of the content owners that has the biggest golden egg out there, has stepped back and said, "The subscription business is an important part of our business model. We need to be careful about how we preserve that." And so I don't think you'll see a headlong rush to fragmentation. I think those that have premium content will be careful about managing the subscription model. I do believe that the longer tail stuff, the ones that maybe don't have the big golden eggs will fragment more quickly, and we're going to see that dynamic. But I think the markets will be rational. A point to support that is, look at how the peering arrangement and the peering structure in the industry has started to evolve and change, and where there's dramatically asymmetrical peering. Those have all gone to commercial-based relationships, to deal with the fact that we got so much video coming over-the-top on some of this stuff that there needs to be an economic model on that. Same thing will happen in access, if that does starts to become a breaking point on the economics.

Michael Rollins - Citigroup Inc, Research Division

Are there some point estimates that you could share with us for the average usage of the smartphone user maybe versus the average usage in the home per month in terms of meg or gig?

John Stankey

Well, there's nothing that I want to share publicly. I can tell you some things that we have shared at a macro level. The wireline traffic growth continues to run annually somewhere between 30% to 40% a year, on backbone and aggregation. Now this year look like it was on a trend to maybe step up a little bit, then pricing issues started to work their way into the market. And suddenly, midyear, it kind of tailed off, and we finished the year between 30% and 40% again. And so I think that trend has been pretty consistent over the last decade, and I don't expect that, that's going demonstrably change right now. I would tell you that the base on wireless devices is trending in typical growth that's pretty similar to what we saw in the wireline space since there was broadband adoption. Now what's different in the mobile space is you're not fully penetrated, so you have the double whammy going on at the base, growing its average usage per year, and you have new users coming in. And then you have a group of people that are the aberrant users. It's the 5% to 10% at the top, and they're way out of whack. I mean, that's just the total the outlier that needs to be dealt with. But the bulk of the 90% that are on data and using data services today look a lot like the behavior of what we saw in the wireline space. Now you just need to accommodate the growth of the 50% or so that aren't using smartphones today, the new devices come on that generate all kinds of new opportunities and new growth as a result of that and kind of deal with that aberrant segment that's using far more than their fair share and creating misery for the rest.

Michael Rollins - Citigroup Inc, Research Division

Yes, just coming back to one other spectrum question. How does AT&T evaluate whether spectrum is good to pursue and use in the network versus spectrum that just may not fit your strategy?

John Stankey

There's -- I mean, there's a lot of considerations you have to give as you go through a spectrum evaluation. And first of all, you have to kind of start with the base and what your current holdings are. And your current holdings are obviously integrated into your serving plans. They're integrated into your road maps with the vendors that support you, base station providers, as well as handset providers. You can't just buy spectrum and say, "It's great, I got spectrum. Let's turn it up." You have to work aggressively with the industry to ensure chipset support it and that you have network infrastructure that will support it. And the more band the spectrum you put out there brings more complexity into how you manage your network because you have to manage and allocate traffic to particular bands and hand off sessions in the mobile environment between them. So you want to be very careful about how many different bands you have and where you go and how aggressively you are at expanding your spectrum portfolio. You have to work very closely with the industry. You go and sit down with the chip manufacturer and say, "Where are you?" And they're not stupid. They've got a worldwide market to support. And they look and say, "Well, if I've got millions of customers going on this particular band and going this direction, that's going to take higher priority than if I have thousands of customers going in this particular area." So those are very deliberate analytics that we walk through. We look at international harmonization. We've been very careful about staying on a global technology for a reason. We like that global technology to work around the globe. It's one thing to use the common air interface. If it's not in common spectrum bands in enough places around and the devices enable to take advantage of it, then you kind of defeat the purpose of it. So we characterize the harmonization of what we're able to do across the world. We look at a balance between low and a high band. You don't need all low-band spectrum. It would be a great world of that was what was there, but there's only physics to provide so much of it. But we want to balance, so that we can balance our traffic and the amount of it that we think is necessary to be able to play some low band for interior, getting into hard-to-penetrate areas, propagation, and then balance that with lower costs, lower propagation, high-band spectrum to ensure that, that's the case. You want to keep those ratios right. Those are kind of the major, consider it, ultimate price and who's the willing seller. Right? So those are all the things that we go through and consider as we go and build a spectrum strategy.

Michael Rollins - Citigroup Inc, Research Division

We're going to have a microphone in a couple of moments roaming around. If anyone has a question, please raise their hand.

Moving over to the business side, so the conviction and confidence that we've heard from this management team over the last 6 months on the trend of business revenue has gotten better. And it seems to be the best level it's been, I would probably expect 4 or 5 years. How much of that -- you talked about some of the growth drivers. How much of this is also just getting through the initial IP conversion for a bunch of your customers and getting through some of this sort of self-inflicted cannibalization to move the customer into IP Ethernet?

John Stankey

I would say that we're through the worst of that. Probably 70% of our data base of customers or data-using consumers have made the conversion. And the people that are hanging on or either dealing with -- there are 2 categories. They're either slow adopters and don't have a strong need to make the shift. Or secondly, they're satellite locations off of the core that has been converted and the cost of converting those satellite locations given the applications run over just hasn't triggered it. So we're through the worse of that, right? And I think we've demonstrated through that transition of getting nearly 3/4 of our base over to the IP infrastructure, we've managed to keep margins in check. And the good news is, if you look at the sequential flow of VPN margins over the last 3 years, we continue to improve as the product scales our operations and our yields and margins are improving on and that help keep it in check. Our bigger issue, frankly, more so than the data transmission, is working through this 30% of revenue, that voice TDM revenue. And as I said, it's a blessing and a curse. We have a high share position. It takes you a little longer to work through those high share positions, but we've moved it from what was 60% to 30%. And we still have a little ways to go, and I'd say that's probably our biggest headwind to work through. And we probably have a little bigger headwind in that regard on compares to our competitors as a result of that, more so than the data transition per se. And I tell you that our confidence -- we were pretty really bullish on this segment of the business prior to '08, and the meltdown that occurred. Employment is a big driver. We love to see more growth in employment. We're not robust on that viewpoint. We're expecting a very tempered employment picture in '12, but we don't see this strong recovery coming for this year or next year. We see it being very stagnant. And our growth is coming because companies who are investing in productivity, and we have services that enable them to do that. Companies are investing in mobility because it brings productivity and it brings better distribution. And it brings an opportunity for them to change their business, and we're well positioned to do that. And companies are investing globally. And as I mentioned earlier, we are the most complete global network provider by third-party sources. And our global business outside the U.S. is growing at a much faster clip because there is opportunity in Asia and there is opportunity overseas. And there's a lot of domestic multinationals that are big customers of ours that are pushing heavily there, and we're growing with them as a result of that.

Michael Rollins - Citigroup Inc, Research Division

One of the things I think about for AT&T is that the company has described its aspirations to try to hold the line on Wireline margins, improve Wireless margins from your side of managing costs. I think that includes the one AT&T initiative. How much impact do you think you can have towards those aspirations over the next one to 3 years?

John Stankey

Well, necessity is the mother of invention, and there's always seems to be a need to lower cost every year. And we have creative people who come up with new ways to attack it every year. We haven't run out of ideas. We're integrating -- we're still integrating a lot of businesses that we acquired over years and find new ways to go at it. I think I mentioned recently when I was out publicly that we're now working really hard on how do we take our internal operations and the strength of the assets that we have internally in running AT&T that we've done a lot of work in managing cost of ensuring that we don't duplicate operational costs between Wireless and Wireline, that we have capital efficiency in how we carry traffic, that we use our asset base globally to ensure that, that occurs, that we're not being pay third parties for networks that we can run and operate more effectively than ourselves. Our new focus on that is to ensure that we're leveraging all of our operations, our own internal operations, what we do for our own IT, what we do for our own telecom services, how we do our own managed services externally for our customers and managing these outsourced agreements to do hosting and finding ways to leverage that scale and bring cost in global resourcing, full-time equivalent headcount, where we put our operational capabilities, how we hire our employee in the right centers of excellence, in the right market centers for our global operations and taking advantage of our global scale and using that to run internal operations, as well as external. And there's hundreds of millions of dollars, just as we move through this year, that we're working on a strategy like that. And we still have secondary ways that we're doing on distribution in care that we have that we're turning up this year in '12 that come out of our implementations from past mergers. So we still have runway there to do that and we'll continue to find ways to manage that cost out, and we have expectations around that. And we'll continue to keep the cost line in check as a result of that.

Michael Rollins - Citigroup Inc, Research Division

You talked about the cloud business having some real upside for you over time. Can you talk about how you're differentiating your strategy versus some of your competitors that have been more aggressive at buying assets and capabilities versus yours where it seems like you've been developing it more organically?

John Stankey

So we started from different positions is the first I'd say. We started with a very robust hosting business, and it's recognized again by third parties as being probably the second largest in the U.S. And we didn't necessarily need to go acquire physical assets to have places to get into the cloud business. Our view was the work that needed to be done was on how do you bring networks and compute assets together and harmonized them? You can talk anybody about cloud, they'll say, "Well, there's 5 tiers in the cloud or 4 tiers in the cloud." And we tend to look at it as 3-tier market. There's the public cloud. That's the Amazons and the Googles and the Microsofts of the world. There's the private cloud, and you got Oracle and IBM and others going in and selling these private clouds to large companies like an AT&T, or a JP Morgan Chase, or a Citi, or whoever that have enough infrastructure where they can spread it internally and get efficiencies out of it. And then there's the virtual private cloud, and it's kind of the area between those 2. And frankly, it's the largest part of the market because a lot of midsize companies don't have the scale of a Citi, or don't have the scale of an AT&T. And they can't go build a private cloud and virtualize and get that efficiency. But they do have VPN. And those VPNs allow them to differentiate their traffic and get that traffic in a lot of different places. And it's been natural for AT&T to put compute and storage in those endpoints of their networks, distributed where they can get low latency, high reliability because of a hardened environment, high security because of our experience in the networks area, and bring that as vertical feature on top of a VPN. If you want to spin up a machine, it's available on the VPN through a dynamic interface on the website to be able to do that. And you can augment your e-commerce capability to do that. And it goes into our hosting centers, and it goes into the tails of our VPN as it uses classes of services that are available on the VPNs. And that's a very elegant, unique, scalable capability for people who need that low-latency, high-security, high-reliability solution. Some of those customers don't need to put every application in that space, and they'll also pair it with public cloud solution. And again, we want the VPN to be another place to get access to public cloud on a managed basis. Would you prefer, as you enter into that Amazon data center, to have a class of service distinction versus just an unmanaged offering? So we still play in a public cloud space and obviously, private cloud infrastructure and private clouds that need to backbone to run on. We're big with those companies. We'll provide dedicated backbone to support them. But where the value added comes is in that middle on virtual private clouds, and that's where our development is going and harmonizing that operational layer that allows customers to do that.

Michael Rollins - Citigroup Inc, Research Division

To finish up on the Wireline network, can you give us an update with where we are with the FiOS build with respect to coverage and fees, and where you see that getting to over the next 3 years?

John Stankey

I'm probably the wrong person to ask about the FiOS build, but...

Michael Rollins - Citigroup Inc, Research Division

Sorry, the U-verse code.

John Stankey

I'd be happy to give a viewpoint on it, if it helps.

Michael Rollins - Citigroup Inc, Research Division

We'll always take your viewpoint.

John Stankey

So we've essentially completed the U-verse build. We said 30 million homes, and we hit that commitment end of last year. We've got a few little things going on, cleaning up some places or at least trying to clean up some places right here in San Francisco. We continue to try to build in the city and are going through a 5-year process to get permits to do that, and still haven't quite cracked the code, but we're making progress. So we'll do a little bit of clean up here and there. But for the most the part, we're largely complete with the U-verse build, and we're really pleased with how it's gone. We, once again, for the fourth year in a row, received the J.D. Power distinction on best video service in the markets that we operate in, and we're determined to get a ring on every finger this year and get 5. And customers are very, very strong on the product, and what it does for them, and we're delighted as a result of that. We are managing the bandwidth dynamic very carefully, and many of you have heard me talk about this. Never a viewpoint that said we weren't ever going to need more bandwidth. It was -- we wanted to invest in bandwidth when it was needed and when we can monetize it to the revenues that were coming in. And as I've shared before, we have the opportunities to take the infrastructure that we've deployed, and without changing the application layer, extend the infrastructure and to layer one fabric further. And we have a nice utility that's available today. It's an extension module that allows us to a node that's been placed to serve roughly 200 homes, may be a little bit less, and split that node and extend it and take average 4,000 foot loops or average 20 -- I should say, average 2,300 foot loops, take that average down. And when you do that, obviously, you get better speeds. We now have full capability to bond. So we've got a substantial portion of our footprint. We feel very comfortable that either through bonding, through nodes splitting and extending it to the extent that it's necessary or just simply by the fact that they already have to continue and to go up in bandwidth, that we will have no problem meeting those needs, moving forward on a very, very capital-efficient basis. And I would also tell you if you look at the most impressive thing of our U-verse customer base, if you look at the satisfaction of our customers on their broadband services, it is the most impressive aspect of it. It's the consistency of the throughput and the performance that they value the most. And it's not just necessarily the speed that comes labeled on the product, but how consistent is it when they use it. And the point-to-point service is proving to be very, very consistent and customers notice it and like it. Our churn levels are fantastic, and customers are voting and saying it's a good experience. So we feel real good about it.

Michael Rollins - Citigroup Inc, Research Division

Okay. Well, thank you very much for the update.

John Stankey

Appreciate it. Thank you for being with us today.

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