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How Network Virtualization Is Impacting AT&T’s Capital Expenditures

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AT&T’s network virtualization

The Jefferies Technology, Media, and Telecom Conference took place on May 12, 2016. During the conference, Scott Mair, AT&T’s (T) senior vice president of technology planning and engineering, discussed the company’s virtualization efforts.

Mair noted, “The network is built up of a series of functions and what we’re doing is we’re taking those functions from hardware and custom software to just virtualizing into software.”

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He added, “We’re going to virtualize 200 different functions – you now then can begin to stitch those together or the technology term is orchestrate those into products and services in a way that scales, that allows you to add future functionality faster than you ever could before; and gives you a good cost curve because you’re running it on commodity hardware.”

AT&T’s network virtualization and capital investments

AT&T (T) noted that its virtualization and software-defined networking efforts are positively impacting its capital investments. During AT&T’s 1Q16 earnings conference call, John Stephens, the company’s senior executive vice president and CFO, noted, “Our virtualization and software-defined networks are already delivering material CapEx savings. We will be adding 2.5 times more capacity at 75% of the capital cost compared to just a few years ago.”

AT&T has planned significant expansion in its virtualization effort. As shown in the chart above, AT&T has planned to virtualize more than 75% of the network by the end of 2020. According to the company, this figure had reached 5.7% by the end of 2015. Earlier, the company had set 5% as the goal for 2015. By the end of 2016, this figure is targeted to reach 30%.

For a diversified exposure to select telecom companies in the US, you may consider investing in the SPDR S&P 500 ETF (SPY). SPY held ~2.7% in AT&T (T), Verizon (VZ), CenturyLink (CTL), Frontier Communications (FTR), and Level 3 Communications (LVLT) at the end of April 2016.

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