Randall Stephenson, Chairman, President, and Chief Executive Officer, AT&T

Thank you, Abby. Good to see you. Good to be in Boston.

We've hit a little speed bump, but we, as you heard discussed in the opening, we're trying to acquire Time Warner. And they are the parent company of Warner Brothers Studios and HBO and Turner networks, so CNN and TBS, TNT, and so forth. And we really thought it'd be a good idea. We've been working over the last few years to build the capability to distribute video, premium video, over wireless technology. And we're investing a lot, where'd you say, two hundred billion dollars? And you guys are investing too much, but we've been investing a lot to make this happen. And as we think about building out these kind of capabilities, invariably we will build out these kind of capabilities and somebody will make a lot of money, you know, taking advantage of these capabilities. Apple did quite well off the mobile internet when we made the internet mobile, right, and the iPhone came along. And we really believed as you begin to build the capability to distribute premium video and people will consume premium video, there's going to be a whole new distribution avenue for media companies. And we were kind of the naysayers that media companies were in decline. We actually thought if you create this kind of distribution, media companies will probably become more valuable over time. We thought we should own some premium video. And so we worked with Time Warner, Jeff Bewkes and I reached an agreement to acquire it. And I won't go into the legal dogma, but it was a vertical merger. And we looked at this and no competitors would be taken out of the market. We did our analysis and for 50 years there has not been one of these really challenged and successfully challenged in the courts. And so we entered into the deal. And after a year of review, the United States government decided that this has antitrust, they contend that it has antitrust implications. And so they have filed to sue AT&T and Time Warner to block the merger. And so we are in the middle of that process. And we have a court date set for March 19th. A judge has been selected. We're in the DC Circuit Court and we'll be going to trial on March 19th. And the government will have to put on their case. That's the interesting part about a vertical merger, burden of proof is on the government. They will have to demonstrate in a court of law that this does have antitrust implications and will substantially reduce competition and increase prices. And so the burden of proof is on them. And so we'll be defending that three-week trial and hopefully we'll get a verdict and an order early in the spring, late spring, excuse me.

Actually, we do feel good about our case for all the reasons I said. And you've probably been reading a lot in the papers over the last few days about some of the court maneuvering that's going on. And there's a lot of noise around this particular deal. As you probably know, we announced this deal back in the fall of 2016. And shortly thereafter, Makan Delrahim was a professor at Pepperdine University and he was asked in the media his views on the deal. And he clearly articulated it'd probably get a close review, it's a big deal. He did say it'd get close review, but he didn't see any antitrust issues with it. And then you probably saw the president is not the biggest fan of CNN and expressed his objections to the deal very publicly, said it was a kind of deal his administration would not approve. And then the Pepperdine University professor, Mr. Delrahim, was then hired into the White House after President Trump was put in office to work as his counsel for a few months and then was nominated to run the Antitrust Division, was confirmed, and came out after his confirmation and promptly filed suit to block the deal. And so, you know, I have said that's an elephant in the room and it's probably gonna have to be dealt with in some context. So that's kind of where we are. And you've been reading about that in the papers over the last few days.

Somebody probably will. It won't be me. I'm not doing a book.

That is referring to FirstNet, which is a first responder network is what it's representing. And as Abby said, after 9/11, you recall what happened in Manhattan or in downtown in New York. You know, EMS, Fire Department, police were all coming in and converging and it was a crisis and it was chaos. And none of the first responders could communicate with each other. They could all communicate with themselves, but not with each other. And it was a bad situation. And other first responders from other communities came in to try to assist and there was just no way for the agencies to interact with each other and to communicate by radio and so forth. And so legislation was passed that said we need to deal with this as a country and our first responders need to have a network that is interoperable, they can all talk to each other. And firefighters from New York can communicate with firefighters in Boston if there's a big disaster, and the police can communicate with the firefighters and EMS and so forth. And so legislation was passed for the government to contract to build a network for first responders, a wireless network for first responders. And so it's been a number of years, a lot transpired, and ultimately the government did something. They auctioned off a big block of wireless airwaves back in, I think it's 2014. This is smart and I think this is actually going to prove to be a model around the world for how you deal with these kind of communication needs. But they auctioned off a lot of these airwaves. We were the largest bidder. We spent a lot of money, billions and billions of dollars, over ten billion dollars in that auction. And of the money the government received in that auction, we actually spent 18 billion, that was in the public domain, so we spent 18 billion. The government carved out six and a half billion dollars of that money from that auction and they had another block of these airwaves and they said everybody come in and bid who wants to build out this nationwide network for the first responder community. And whoever wins the bid will get this spectrum to build that network in. So it's dedicated for our first responder community and the government will put the first six and a half billion dollars forward to build this network. And AT&T, we went hard after this. This became a must-win for AT&T. It's something we wanted to do. We thought it was just a big thing to do for the country, a public-private partnership of scale like I don't think we've seen in this country for a long time. We bid to spend 40 billion dollars to build out this network and we won it. We won it last year. And so we have a number of years to get this network built, but it requires us to cover the entire country with high-speed wireless capability. And that's really great for first responders and I'm excited about that, but it also is a big deal for our rural communities because we are now building out mobile broadband capability that will cover the entire United States. It's going to be a very pervasive build. And where we build this network here in Boston and down in Florida particularly, it will be what we call a hardened network. It's gonna have bunkering, it's gonna have serious backup power to all these cell sites and so forth to withstand hurricanes, flooding, etc. Like this past year, you saw the importance of having that kind of hardening of these networks that can withstand serious natural disasters and man-made disasters as well. And so we won this. The other thing about it is as we go around building this network, you've probably heard a lot about 5G technology, fifth-generation technology. This is taking the wireless service that you have now and putting it on steroids. This is game-changing technology. As we're building this network, we'll be equipping all of our cell sites around the country for this next wave of technology. And so it's going to help accelerate a new wave of technology that is, this is as much game-changing technology as anything I've been a part of in my career, and I've been doing this 35 years. And so there's just a very natural additive effect. First responders, check. They're gonna have a very beautiful wireless network capability, interoperable and so forth. Rural America, check. Accelerate the provisioning of fifth-generation wireless technology, check. It just has a number of elements and touch points that I think are really good for America and we think is good for AT&T as well.

So 5G, most people they hear 5G and so it'll just be even faster than 4G. It will be faster, but the speed is not what's so important. It's latency. And if you don't know what latency is, it's the moment you push the button or the moment you request information or the moment you try to transact in a mobile world, how long does it take for that to happen? And you try to download a video, you know, you've seen how long that could take. With 5G, latency by-and-large goes away. It becomes instantaneous. And instantaneous is really important as you start to think about things beyond surfing the web and email and watching your favorite movie, Game of Thrones or CNN. As you begin to think things beyond that, consider autonomous cars. And I happen to be a big believer that we will experience and live in a world with autonomous cars, cars without drivers. Now that requires extensive networking capability. The automobiles need to know where other automobiles are. They need to know where the traffic is. They need to know if there are, you know, people or elements coming out in the road in front of the automobile. I don't know about you, but if I'm going to be in one of these, I suddenly will get my head around what latency means. No, you cannot live in a world like that where an automobile is driving itself and have latency. This is why 5G is so important. It takes latency out of the game. Internet of Things, all the connected devices we think of that are driving anything from manufacturing processes. Think about manufacturing, if you need to have a high-speed drill turn off for safety reasons, you cannot afford latency. Think about the world of virtual and augmented reality. This is where the latency and these kind of services become really, really critical. And so just like 3G really opened the world for things like the iPhone and smartphone technology, 5G is going to open the door for a whole new range of services, technologies, capabilities like autonomous cars. And so I'm probably as enthusiastic about this technological move as anything I've been a part of.

So we have announced that we will be doing the first deployment of mobile 5G. So the early deployments were all playing around with 5G are just a broadband replacement to your home. Okay, that's great. And to think about you can have a wireless broadband service to your home that gives you a gig speeds of service is a big, big deal. And we will all be pursuing that. It's going to change the competitive game. Think about cable operators. I mean, this is a new competitive opportunity against cable operators, pervasive wireless-fed home broadband. But mobile, this capability in a mobile environment, that's in our view, that's the secret sauce. And so we will be deploying in 12 cities this year the mobile version of 5G. And we have secured the spectrum, these airwaves. This will operate in a different set of airwaves than we're accustomed to. And without getting technical, these smartphones that we're all using, if you think about their operating, if you stack the airwaves that we're using right now, your mobile phone today operates in the airwaves that kind of range from the floor to about my hand. 5G is gonna operate in frequencies that are at the top of your building at Fidelity. Okay, it's in a whole different stratosphere. And that gives you, that's what gives you these much higher speeds and lower latency. And so the spectrum has been secured and now we're just building out the networks. And so you'll begin to see it turn up this year and between now and 2021 is going to become, I think, very prolific, exciting. There will be, I think it's going to be a game-changer.

Absolutely, absolutely. We, every time we conceive of new levels of bandwidth, as we like to call it in our industry, you know, higher speed internet, higher speed data transmission, you know, you always say what's going to use that? Invariably, oh, we find the extreme uses of this in a very quick period of time. It will be the same with this.

Yeah, net neutrality, I suspect if I asked at random ten people in this room what it was, I'd get 10 different answers. And so I always like to try to put it in context as we're talking about it. I think what most people would say when they talk about net neutrality, what they're representing is the idea that whatever content I want to get to on my smartphone or on the internet, I ought to be able to get to it and nobody ought to be a gatekeeper for that. So don't block my content. That's number one. And number two, depending on the content I go to, nobody should be dictating how quickly I can get to it, how fast it gets to me. Throttling is the term. So blocking and throttling, those are the two big things people talk about. And so this has been the biggest debate in our industry that I can recall. And the rules have, one FCC comes in, it says here are the rules. New president comes in, appoints a new FCC chairman, they say no, the rules over here. Then somebody comes in and files a lawsuit and the courts come in and say no, needs to be back over here. The new FCC Commissioner comes in and says no, but if we do it this way then we get the rules back over here. We're all in the industry just going, I'm getting dizzy. All right, I don't even know how to invest here. And what has happened is the FCC came along in 2015 and put, they used an approach that would withstand court challenge, they believed, we'll see if that turns out to be the case or not. But they used an approach that said we're going to take rules that were written in the 1930s that gives the FCC the authority to do what they were, this particular FCC was trying to do. Some old rules, they were rules written for the black dial telephone, seriously, in the 1930s. They said let's just take that regime and put on top of the internet and wireless technology. Now while I'm not suggesting that was the FCC's intent, what the FCC now has the authority to do was they could regulate every facet of wireless and the internet. That seemed like a really bad idea to us. And so a new FCC comes in and says no, it doesn't work, and they took that off. And so now people are saying net neutrality is gone. And I, in fact, I had a woman come up to me, I was in New York and she was 30-something years old and she asks, are you familiar with this net neutrality thing? And she said I'm scared to death. And I said what are you afraid of? That it's going to go away? And I said and then what? What is it that frightens you? She said I don't know, can you tell me? And I said nothing. Nothing will happen. What the FCC has done is basically said, look, AT&T, you have in your customer terms and services and conditions that you will not throttle and you will not block. You're legally bound to that and we will hold you to that. All right, the FTC now has authority over that. And so what's happened though is that's this one FCC now is taking the rules here. I lay awake at night and say, you know, if the Democratic Party wins in 2020, a new FCC Commissioner comes in, does he want them back over here? It's, we're gonna be in this game until Congress does its job. And my belief is Congress needs to step up and they need to take this issue on comprehensively. Thou shalt not block, thou shalt not throttle, according to statutes written by Congress. And by the way, while you're at it, you need to talk about privacy. What can companies do with customer data? What can all companies, not just ours but all companies, what can they do with the customer data? What are the rules of the road around privacy and customer privacy? Just take all of this on. Let's get one set of rules. Let's turn the industry loose. Let's say now that we have stability, we have predictability, go after it. Let's get after it. So our position has always been one, no throttling, no blocking, and let's get the rules right on privacy and you'll see investment flourish. But a world where we're just sitting here pivoting back and forth playing ping pong with really major implications to industry, I think it's just not wise for us as a country on something this important. So we're pushing hard to get Congress to do something.

Yes, that's a good point. As you think about the business we have built and the business we're trying to build, if we get through this lawsuit, we have a lot of interesting customer insights. We have the largest pay-TV business in the United States and we have 140 million customers in North America with cell phones, smartphones, and so forth. And there's a lot of interesting customer insights attached to all that. We know what our customers are watching. We know what they like to watch. We know when they like to watch it. And we know where they are, where they like to watch certain things because they're now watching it on these mobile devices. So getting the privacy rules right, we want our customers to have confidence so we're not using their information in ways that they haven't given us permission to use that information. But as you think then about owning a media company, why have media companies, why have their valuations been stressed of late? And it gets back to a core issue. Media companies, at least the older media company set, Netflix and Google and Amazon aside for a moment, the media companies don't know who their end-user customers are. They have no relationship with them. They don't know what they're watching. They don't know when they're watching it and where they are when they're watching it. They're selling their content to others who then distribute to their customers. DirecTV, we own DirecTV, we know who's watching TNT, when they're watching, etc. Time Warner does not know that. So think about pairing distribution with the media. And the media companies are in decline because they don't know who is watching their content. And as a result, what's happening to advertising revenues? People are saying it's too expensive and we don't have any way to target the advertising. So they're going to Google, they're going to Facebook. And as a result, you look at the advertising industry, roughly a hundred percent of all advertising growth is those two companies. And while traditional media advertising is in decline, but we actually happen to think that if one could pair the knowledge of the customer that a distribution company has with a media company, you could drive a lot of value to a media company. We actually think this is a very powerful opportunity. I'll give you a little example of how powerful we think this is. In DirecTV, when we distribute CNN to our customers, there are 16 minutes of commercials in every hour on CNN. As part of the arrangement, we get two minutes of that advertising. CNN gets the other 14 minutes. Our two minutes, we go to market and we sell to advertisers with the information that we have. So we have the mobile data, we have the viewership data, we have all that information. Where we use that information and go to advertisers, advertisers are paying us something in the order of $30 per impression. That's about what they pay us. You go to Turner networks and Time Warner, advertisers are paying them about $8 per impression. Now you say, well why are advertisers paying you so much more than, probably paying us less, they're just paying us higher per CPM because we're getting it only to the people that want to see their advertising, that finds it relevant. So we can get really targeted with the advertising whereas media companies are struggling to do this. And this is one of the biggest benefits, synergies of the Time Warner deal is getting to where we can actually target all of their, they've got a ton of advertising inventory, we want to use this data and analytics to target their advertising to only get to people who would be interested in seeing that advertising. And I'm actually convinced that if we're as successful as we believe we will be, we think 16 minutes of advertising may be too much. Can you then, if you can get the yields higher, can you drive the advertising load down and can you make the consumer experience actually better, less advertising load, and actually drive benefits the consumer that way.

Oh, that's a good target. I'll work towards it.

Yeah, we, I've lost track of time, it had to be six or seven years ago now, we were looking at the transformation that was going on inside our company and how technology was changing. And we're going from, you know, you come in and you drop a big box that handles all the various networking functions in it and you have people who know how to go in and do that, how to run that kind of network. And you know, we have 140, 150 thousand people who run the network and the IT side of all of this. And we're moving to a world where it's less about all that hardware, it's about software that's driving all of this. And you're kind of taking the hardware down to commodity layers and all the intelligence and all the skill is in the software. And this is happening really fast. And five or six or seven years ago we were looking at this and this is exciting, this is great, it's going to require a lot fewer people to run this kind of network. And so as we looked at how that was going to phase out over time, we said the good news was, you know, we tend to have a workforce in our telecommunications business that is aging. And so there was just a natural attrition that was going to accommodate that, that downsizing was going to need to occur. The problem was you looked at the people that were remaining, they were gonna have to run this thing and they didn't have the skill sets for the new world, software-centric skill sets. And we looked at this, this became at that moment in time for me one of the most complex logistical issues I had addressed as CEO. And we face a lot of complex logistical issues, building out FirstNet, right, first responder network, that's a huge logistical issue and feat. But how you transition a workforce, you can't just go replace them. I mean, this, it's thousands of people. And so we said we're gonna have to retool and rescale an entire workforce. And it became a multi-faceted project. And by the way, we're not finished, but we are well down the road. I am starting to sleep at night feeling like we may actually pull this off. And it took, we used a lot of technology to make this happen. And that was, you know, it's interesting how you start here. You start by creating awareness with your employees that there needs to be a change in your skills and a lot of communication. But all of you have HR systems and you have HR systems when a job opening comes up, people go and look at it. You have a process where they can go apply for that job, right? It starts, there's a job opening, person clicks on that job. First thing they see is are the number of people doing this job over the last three years, has it been doing this or has it been doing this? And if it's been doing this, you see a mitigating interest in people wanting to move into those jobs. That's doing this, you see high interest. I like this job. What's required to have this job? Here are the skill sets. Very, I mean, it's very explicit, these are the skill sets you need. How do I get those skill sets? Here are the badges or the accreditations you need to earn. How do I get those badges or accreditations? You click here, you go, you complete this coursework. It's all online. And once you've completed it, you have your badges, you come in and you can apply for this job. And we move people into these new skills and these new jobs. Millions of these courses have been completed. Thousands upon thousands of these badges have been earned. And we're having a workforce just kind of morph very naturally into a new workforce that's being repurposed for a new functionality. And I, this is probably of all the things that I've been a part of as CEO, I'm watching this and I probably take more satisfaction in this than anything I've been a part of. It's been really exciting to watch. And Tom Friedman, you know, writes the New York Times, these companies challenged me. He said you need to take this and you need to hand it to cities. This should be the workforce planning for cities and how you can actually begin to make sure you're matching skills and jobs in various communities around the country. I don't know if that's right or not, I'm doing some work in that area, but it's been interesting and fun to be a part of.

I, this was a speech made in the fall of 2016 and it was an internal organization and as a CEO it tended to be a family talk. And you knew what was going on back at that point in time. You know, we had a lot of African-American men had been shot and killed by police two blocks from my office. I mean, literally a couple of weeks before this talk that he's referring to, five police officers had been killed in Dallas just right down the street from our offices. And America was in a real state of turmoil. And people were asking a lot of questions. And with 275 thousand people, we had our own people asking a lot of questions. You know, what's going on here? And you're starting to see a lot of contention even among your employees. And I was taken that nobody in the US, I didn't see any of our leaders in the US stepping up and bringing any context to what was going on, what was happening, and how should we be thinking about this and processing this and then providing us some broader thought at least on it. And I myself was guilty as charged. And so I was going to go speak to a group of our employees, a couple thousand people. And my best friend is African-American and I had just serendipitously seen a talk he was asked to give where he talked about what he had experienced growing up as an African-American in Louisiana. And I remember watching this going, oh my god, I never knew this about this guy. And he and I are really, really close, I mean, really tight. And I had no idea what he had experienced. And I suddenly started to see some of the issues with the police officers. By the way, I respect our police officers, but I started to view some of the people's views in this area through a different lens, through different eyes. And it changed my whole perception of this. And so I shared this with our employees. And I don't know if you know it, but these phones that we sell, they have cameras on, a video camera. And so somebody captured this talk. And by the time I got home, my smartphone was blowing up with emails. And he posted this out on a YouTube site and it went viral. And it ran hot for a long time. And I was getting barraged by emails and so forth. Maybe they scanned the board, you know, from 'how dare you' to 'thank you, thank you for speaking out.' And it really, what it did was it empowered our people to go out and talk about this. All right, my point was I didn't know this about one of my best friends and it changed me to learn this about him. We need to learn this about each other. We need to understand where everybody's coming from. And I quote at the end of it, I said, I know I asked you to be tolerant. Tolerance is for cowards. To be tolerant requires nothing from you other than just to passively sit back and not be challenged by your own thoughts and understandings. Go out and understand. And so within AT&T, it initiated a process where, I mean, it's just, it's been pervasive what's gone on in terms of the dialogue within AT&T, the openness of the dialogue, the candor of the dialogue. People are being a little bit vulnerable and it's had an impact within AT&T. And I just encourage people, if you haven't done something like this, to do it within your company.

It's been overwhelmingly retraining. I mean, obviously we hire a lot of people and so over time, you know, you bring in new skill sets. But, and by the way, our arithmetic, the logistical exercise I talked about was what is going to be the natural attrition of the workforce, what is kind of the natural inflow you get from hiring new people, and then when you looked at that, how many do you still have to rescale? That number you had to rescale is just an overwhelming number. So it is the lion's share is retooling and re-skilling existing workforce. And you know, we did some other things here. You know, one of the things we all need are computer science trained people. And I don't know about you guys, but competing with Google and Facebook and so forth on this kind of talent is really, really hard. And so we said how do we grow our own? And so we initiated an effort in this area with, you probably know Udacity, Sebastian Thrun, he and I have become very close, and Georgia Tech. And this was a lot of work. This was too much work. We have a public policy problem with what I'm about to describe here, and that is we wanted to offer a master's of computer science program at a prestigious engineering school like Georgia Tech, but we wanted the price point to come way down because we wanted to pay for all of it. Our people wanted to go, we wanted to cover the cost of it. But at Georgia Tech, it's 41 thousand dollars to get that degree. Took us a couple years, a lot of work with the governor, a lot of work with the Board of Regents, a lot of work with the professionals inside of Georgia Tech. We finally got it done. And we're now offering our people, anybody who wants to go, a fully accredited master's of computer science degree from Georgia Tech, the same one you get if you go to campus and receive it. Not 41,000, but four, I think it's now 6,700 dollars. And we pay for 100% of it. And so, but that two years, that's too hard. It takes too long. Technology is here to enable this type of capability, this type of broad distribution of the highest education capabilities we have in this country. And we got to figure out a way to make this go faster. But you bet.

You're talking about just network security, I assume, but security is paramount on this. And in fact, if you were going to win the bid, you better have security, network security capabilities. And I, we all probably think this, but I'll say I think AT&T is the best when it comes to network security. I don't think anybody's as close to us. And we have the biggest brains in data science. We have algorithms that do detection of network anomalies and we think we're really, really good at this. Obviously the folks who selected us must've thought we had capabilities here as well. But security in general is everything in this world of networking. And we are investing millions of dollars in network security. And look, we have a vested interest in this. I say the moment somebody thinks that doing a financial transaction on a smartphone or a tablet is not safe, the moment somebody thinks conducting commerce with a smartphone is not safe, then our business model is at risk. We have a strong, strong incentive to make sure we get the security aspects of this right. So we put a lot of time, energy, and money into it.