AT&T, Inc. (NYSE:T) Goldman Sachs 28th Annual Communacopia Conference Call September 17, 2019 8:00 AM ET
Company Participants
Randall Stephenson - Chairman & CEO
Conference Call Participants
Brett Feldman - Goldman Sachs
John Waldron - President & COO, Goldman Sachs
Brett Feldman
The presentation is going to be moderated by John Waldron, the President and COO of Goldman Sachs. So Randall, John, welcome to Communacopia.
Randall Stephenson
Thank you, Brett. I would like to thank you for inviting me this year. So Brett told me last night, it’s my 11th year just to speak at this event, so.
John Waldron
It’s great. We appreciate. A lot of continuity.
Randall Stephenson
Yes…
John Waldron
We expect that to continue. I guess I am supposed to prompt you for some Safe Harbor language. So I'm going to prompt you for Safe Harbor language…
Randall Stephenson
So before we begin, I would draw your attention. There should be a Safe Harbor statement up here. Some of our comments may be forward-looking subject to risk and uncertainties, and results may differ materially. And you can find further information out on our Web site.
Question-And-Answer Session
Q - John Waldron
Thank you. All right. So let's start with the big question around Elliott. And you’ve obviously given your perspective on what they think, what’s going on with the company. Just give us your perspective and what would you say to audience about where you're on the Elliott announcement?
Randall Stephenson
We -- obviously, you probably have seen the comments that we made publicly Monday after receiving a letter. And we've shared the letter with the Board, and the Board has discussed it in depth, obviously, and look it out from our view. So it's a mixed bag. There are some things in the letter that we look at and see, and it makes a lot of sense. And we need to push further and talk about it. There's some other areas, you look at it. And as you would guess, it's not quite as clear in terms of how that would make sense for us. But I mean look, these are smart guys, right? And these are smart guys, and they put a lot of ideas into the paper that we need to sit down, engage with them on. And at the end of the day, we're going to evaluate it and talk to them and see what makes sense for all of our shareholders. So that's kind of where we are.
John Waldron
Okay, good. All right. Let's talk -- let’s get into strategy and what's going on inside AT&T. You recently reorganized, which has been a subject of some of the press. Some of the focus in the Elliott letter and more broadly, is around the strategy of owning a media company and a network company, and really trying to put those together. And you've been on the forefront of really trying to integrate those two models. Can you just give a sense for why you think that's the right strategy and how you've been thinking about pursuing in that direction?
Randall Stephenson
Sure. In terms of the strategy, it's premised on a couple of really basic ideas or beliefs, I guess I would say. And belief one is, we believe people are going to spend more and more of their day watching premium content over the next few years. That’s been going on for the last 10 years, and we are seeing no indication that this is going to change. People are going to consume more content. As a result, we are absolutely convinced people are going to consume and expect to demand more bandwidth, more connectivity to watch that content. And if you believe those -- we kind of think those two beliefs are maybe unassailable, I mean, they’re kind of basic…
John Waldron
Pretty fundamental…
Randall Stephenson
Pretty fundamental. If you believe that, then you got to like the assets that we put together, a premium media and entertainment company with I think the best large scale distribution business in the United States. So the question is the one you asked. Does it make sense to vertically integrate, to actually own both of those? If you had asked me that question, John, five years ago, it’d probably been hard pressed to make an argument for why it made sense, in the old world.
In the new world, we think it makes all the sense in the world. In fact, we think a company that can put together premium media, content creation and production with networks would have a significant strategic advantage. And the reason is the content creation business is changing, and it's not changing by a little. It's changing rather radically. And so while the consumer is going to continue to consume more and more premium entertainment, all of the growth is happening digitally.
And so if you're a content creation company and you're making content to distribute in the old world, which cable, satellite, even movie theaters, that's probably not a very rosy picture for a content creation company. But if you're a content creation company and you have a direct line of sight, a direct path to a large set of consumers, then you have a unique competitive advantage. And that's the play we're running here, because if you just reflect on what exists within WarnerMedia, it's an amazing set of capabilities and assets, and is one of the largest scaled TV and film production houses studios in the world.
Really -- there's just a couple that might be able to compare to them. They have an intellectual property library that is as deep and as broad as anybody's, covering all genres that you can conceive of. Think about HBO, the tastemaker brands within HBO and how unique that asset is. I think unrivaled relationships with critical talent around the industry.
Now think about taking that and standing up a digital platform, which is the play that's being run by John Stankey and his team, a digital platform, HBO Max, will be the name of it and we'll be introducing it on October 29th. It's going to be really exciting. This is going to be different. This is not Netflix. This is not Disney. This is not Hulu. This is different. Standing up a digital platform and driving fast penetration through customer relationships that you own in this distribution business. We have 170 million customer relationships, whether it's pay-TV, whether it's our broadband service or our mobility service, particularly.
And so standing this up and driving penetration through that distribution platform we think is a very powerful opportunity. We have 5,500 retail stores where we touch customers every day. And in fact, if you just go through the numbers, we touch these customers 3.2 billion times every year. Do you think you can drive penetration of this kind of product fast through that, and if you want just a couple of data points.
We really had the business and begun integrating it for about a year. We had to keep the businesses separate after the trial till we got through the appellate process. We're about a year into this and just the old traditional HBO products. In the course of a little over a year, AT&T is now already by order of magnitude the largest distributor of HBO in the United States. In fact, if you go to the number two distributor, our penetration is 67% higher than the number two distributor, driving through mobile, driving through broadband, driving through the pay-TV service. The DIRECTV penetration of HBO is an industry standard and getting better and better.
To another data point, Dish in the second quarter, did a hard drop of HBO, and they said we're not going to carry HBO anymore. There's a dispute on pricing. They dropped HBO. One of the largest distributors of HBO drops them in the second quarter. HBO grew 3% in the second quarter, how? Power of distribution. And so, look, I mean you just put this all together and we are convinced, the old saying, content is king. I am an evangelical believer in that. But we also believe distribution matters. We've always been big believers in distribution and the power of it, and that's what we're trying to pull together.
John Waldron
Talk about advertising, just as a component piece, because your history in AT&T has not been -- -- you're an advertiser not, right?
Randall Stephenson
There’s a lot of them, right?
John Waldron
Just talk about the advertising model as part and parcel to broader AT&T platform?
Randall Stephenson
Yes. So we have had a large -- not -- well, it’s -- we've had an advertising business by virtue of DIRECTV and our other TV platform for the last four or five years. And so we have advertising inventory within DIRECTV that we have been kind of, I would say, not entirely mechanized, it's a bit of a brute force approach to selling that advertising inventory. But because we have all of the viewership data from set top boxes, we have viewership data on the mobile phones we're getting an amazing premium for selling that small advertising inventory in DIRECTV. When we did though, the Time Warner deal, now WarnerMedia, what came with it was a rather large inventory of advertising by virtue of Turner Networks. So TBS and all the NBA, and TNT, and CNN. And then a huge digital inventory, CNN.com, Bleacher Report.
And so, we have been investing in technology. And we’ve made a really terrific hire, a guy named Brian Lesser, who has come in. And we made an acquisition of AppNexus. And it's just basically mechanizing this approach we've been using in DIRECTV. And we spent the last year and a half standing up the technology stack to now take the Turner ad inventory, which is orders of magnitude bigger than what we've had before. And drive the same phenomenon using the very targeting data that we have from all the viewership information, all the mobile information and drive advertising revenues off the Turner inventory. We will be going to the upfronts next spring, one face, Xandr, and representing all of the Turner inventory, we will be doing that next spring and we're pretty excited about what the possibility is here for advertising.
John Waldron
So you just promoted John Stankey, you mentioned John Stankey earlier, into a very important job in the firm. Just talk about John Stankey. Why John Stankey? Give us a little bit of perspective on him and what his background is and why…?
Randall Stephenson
Why John on this particular…?
John Waldron
No, why you chose him…?
Randall Stephenson
Yes, okay. Look, a year or plus ago, we had said we're going to go out and hire an executive to run what is now WarnerMedia. And we wanted somebody to run a very traditional legacy, let's call it, media company, a media company distributing to the old distribution channels, cable and TV. There are a lot of people, you could have gone out and gotten to run that play and to run that business. So there’s a lot of people that are equipped to do that. That's not what we were doing. When we acquired Time Warner, it was recognizing that the business was going to have to make a pivot and it changed. As I said, the viewership is growing, but it's not growing on traditional legacy kind of platforms, it's growing on digital platforms.
And we had to reorient the business to drive towards digital, standing up the digital platform, digital production, digital distribution, it's a hard play. It's a hard play to take a legacy company. Believe me I know we've done this a few times. But take a legacy company on legacy distribution models and business models and make a pivot into a digital distribution model. And so as you think about somebody who could run that kind of play and literally take an organization and move it like that, it's not a big list of people that you would look at.
John, I think has proven. He's taken the organization, broken down the silos very quickly, which is not easy to do. When you've had businesses that have been as successful and as productive as he's have for so long. He's done a really nice job of breaking down those silos and getting the business reoriented toward HBO Max digital distribution. If you're going to go find somebody to run a big communication company, John Stankey would have to be on your shortlist for that. I mean, he's got experiences that are long, wide and deep in the communications industry.
Now, if you're going to go find somebody who can do both, right? Take a media company that has transitioned to a digital distribution company, and pairing it with the distribution of a major communication company, you want to try to bring these two closer and closer together and monetize the advertising revenues. All the sudden that list gets really, really short. And so the Board and I’ve spent a lot of time over, who do we want to have run this play for AT&T over the next couple of years, because that's where we are in the evolution of our strategy.
We have moved now from a build timeframe. 2018 and '19 was all about building technology, all about standing up new capability and new products. 2020 is go-to-markets. Go-to-market, take HBO Max drive through your distribution channels, take the Turner inventory drive into the Xandr technology platform. So as we thought about who is going to run this play for the next couple of years, there was -- it was a very short list and John Stankey quickly rose to the top. And I've been asked a thousand times, is he the heir apparent? First of all, the Board hadn’t informed me I am retiring yet. So I could take offense to...
John Waldron
I don’t know, afterwards you would okay.
Randall Stephenson
Look, I will say, if Stankey is successful at running his play over the next year or two…
John Waldron
Well, he is well positioned.
Randall Stephenson
Yes, he's in a pretty good position if he executes his play…
John Waldron
Yes. Okay, good. Let's talk about 2019 priorities and 2020.
Randall Stephenson
Sure.
John Waldron
In terms of -- you've obviously set out a number of objectives to hit in '19 and obviously focus on '20. Just talk about how you're feeling about the '19 priorities and where -- how you would condition people for 2020, in whatever way you want to answer that?
Randall Stephenson
So coming into 2019, John, we had a little analyst conference before the year began. And I told all of the analysts and anybody listening that I had one really, really high priority for 2019, and that was get the leverage down. And just -- it was distracting. It wasn’t something internally we were worried about, but a lot of our owners were looking at it and our credit holders were looking at it. We were issuing debt. We said we just need to drive the leverage down and we want to get it down to 2.5 times debt to EBITDA as we exited 2019. I did everything at the company to get focused on that. In fact, executive compensation, go read our proxy. My folks at my table are highly incentivized to drive leverage down to 2.5 times and everything about the business this year was to get there.
We said to get there you had to do two things, generate $26 billion of free cash flow, and so monetize $6 billion to $8 billion of assets. The $26 billion, we said at our earnings call that we're raising that target to $28 billion. We will do at least $28 billion of free cash flow this year. And I'd say check that box, we feel really good. We'll deliver on the free cash flow. The $6 billion to $8 billion of asset monetizations, we are year-to-date at $9 billion. So I'm feeling pretty confident we'll hit that one. We’re past the number. You guys are numeric people, you probably recognize, the probability of that's really high now. But -- so we're at $9 billion year-to-date. We still have a number of monetizations queued up between now and year-end. You'll be seeing announcements on these.
And the team has done a phenomenal job at driving the debt down, driving asset monetizations and cash flow. It's just been a really encouraging and fun year from that regard. As we think about where we go from now, now that we see 2.5 times is achievable, and we will get there. I said last month, you should expect us to start to bring share buybacks into the mix. Now, one of the things in the Elliott letter that I thought was -- actually, I thought it was pretty thoughtful is, should you be more prescriptive about what your capital allocation strategy is as you go forward? But look, this year has been about one thing, 2.5 times. I don't want management distracted and I don't want our owners confused.
And as we’re issuing debt, I don’t want to people confused that we're not driving to 2.5 times. But now that we're seeing that, I think the Elliott recommendation actually makes sense, all right? So we'll have some conversations about that in terms of how we get a little more prescriptive in terms of what our asset -- what our capital allocation will be going forward. So check the box though on delevering, we will get to the objective and I feel good about that.
The other one we said we have to do is just get wireless back to good sustainable growth. And I honestly believe that this would be one of the variables that was most likely to move the share price as we came into this year. And because of the FirstNet deployment, FirstNet has gone off the charts, it's been as good as we could have ever hoped, that's building the network…
John Waldron
Talk about FirstNet for a minute.
Randall Stephenson
Yes. So I'll take a moment. If you're not familiar with it, there was a legislation passed by the government that said, United States Government, you need to put in place a process to have a network, a nationwide wireless network built for the first responder community. After 9/11, it was a disaster. The emergency responders couldn't communicate. Their systems didn’t interoperate. And so they said, build a network for the first responder community. We came into 2016 when that bid went out, and we said that's a must win for us. And I'll explain why it's a must win, because first of all, whoever won this bid, got 10 megahertz, which is a deep block of really rich wireless spectrum to use to build this network. And if the first responders weren’t using it, you could use it commercially. And that was a really, really big issue for us.
We said, this is a must win for us in 2016. The Board and I spent a lot of time on this and said, we're going to go after this. We’re going to go after it to win. And we put a very fulsome bid in place. But here's what's going on. To build this nationwide network, which we began in earnest really aggressively in 2018, you have to go out and you have to climb every cell tower where you're deploying this network nationwide. Why is that such a big deal?
We have also, over my 10-year as CEO, invested well over $40 billion at aggregating a big portfolio of wireless spectrum. And this is really important, because we believe when the world of video came and you’re distributing video over wireless networks, you're going to need an amazing amount of capacity. So we've been accumulating this wireless spectrum, $40 billion plus worth of this. So put that spectrum to work. What do you have to do? You have to go climb every cell tower and put it to work. This is an expensive stuff to do across an entire country.
Add to that, we're deploying 5G. What do you have to do to deploy 5G? You have to go climb every cell tower in the country and put up 5G antennas, and the hardware associated with it. Well guess what? By virtue of FirstNet, spectrum aggregation, 5G, we're climbing these cell towers one time and accomplishing three purposes. So we've been doing this and we're literally, over the course of about three years, are increasing the entire nationwide capacity of the AT&T wireless network by 50%. And I just don't know -- I've been doing this almost 38 years, John. Those words have never come out of my mouth to just back quickly, just boost capacity in a nationwide network by 50%. What's the byproduct to that?
AT&T in the last year and first half of this year has just surpassed the competition in terms of wireless network performance. It is unequivocally the fastest wireless network and best quality network. We've exceeded the competition and the gap is widening. It’s not getting closer. That's a beautiful place to be for a company like ours, having a high quality network claim. And it's really important when you're entering a world of distributing premium video to our consumers over wireless networks.
And so you put all this together, the wireless business got back to a nice growth profile in the first and second quarter. And we’re having nice growth. We’re having margin expansion. And we see this continuing. It's a beautiful platform for Internet of things. We will, as a result of all this work that I just talked about, we will have a nationwide 5G footprint by midyear next year, nationwide 5G by midyear next year in the really premium spectrum areas of our network. And so we're feeling really good about wireless. So as you think about the priorities; the balance sheet was number one; wireless getting into growth, number two. You see the stock moving as the wireless performance continues to move. We had a third priority, and that was our entertainment group, which is our broadband and our TV business.
And last year, look, the margins were really compressing. And the business was down on an EBITDA basis, 15% virtually all year. We said coming into this year, we're going to get that thing stable. That was one of the areas people questioned the most whether we could achieve it, or achieving it? It was up 7% in the first quarter. 3%, I think roughly in the second quarter. Third quarter is going to be a little tougher, because NFL SUNDAY TICKET comes and you got to start recognizing that cost. It gets a little harder to get to growth. But I will tell you for the year, we’re feeling highly confident, check that box, feel good about that. The other priority of standing up HBO Max, we're way down the path, October 29. Again, you'll see what the product looks like. We will be launching it next year. WarnerMedia is still continuing to execute well. Revenue is up 5% in the second quarter, nice operating income growth.
And then the last priority was network, which I talked about. So what we’ve told the team and what we’ve told the owners this year is as we go through 2019, don't check most of the boxes, don't hit most of your objectives, hit every single objective. And so far we're hitting everyone and as it stands right now, I'll be really surprised if we don't hit them all for 2019.
John Waldron
That’s great, that’s great. Let's talk about mobility. There's been a fair bit of change in and around mobility and industry structure. Maybe most of it is kind of apparent at this point, and maybe there is more or maybe not. What's your perspective on where the industry is going? How you’re positioned? Do you see a lot more change in the structure of industry? How would you articulate that?
Randall Stephenson
Yes. So the industry is kind of in a interesting place right now. You have two of the competitors trying to combine and it's an interesting time for business right now looking at M&A. You do a vertical merger like AT&T and Time Warner. Government challenges it, and you go through extensive lawsuits and then you do a horizontal merger, Sprint and T-Mobile trying to come together. And the federal regulators say they're good with it, wave it through. But you see something we've never seen before. I'm not -- I can't remember it ever happening. State AG is getting together and filing a lawsuit to block it.
And so it's hard to predict what the industry structure is going to look like. There are a lot of areas where it would make sense for industry consolidation to occur. We don't intend to participate in any of that as you might guess. There are a lot of areas where it might make sense, but the uncertainty in terms of how it's going to be treated by regulators makes it really hard to predict where the industry goes.
The wireless industry, over the last year, I think some of it may be distraction and so forth. But it's been somewhat stable and it's something that’s widely competitive. There is a new promotion every day. But by enlarge it's been stable as we've seen it for quite some period of time, and people are working to put their unique value proposition together. You know what ours is, it’s premium, premium network of premium, premium content and that's our approach to the market. And everybody is talking a little different approach. Everybody is in an aggressive build cycle for 5G. So a lot of capital being deployed as well. But do we have a new player in the market in the form of Dish with a prepaid business and a lot of fallow spectrum? Does that coming into the market? And the AGs have a successful lawsuit and block it? And I honestly don't know how to predict it.
I do think of the next two or three years, doesn't get radically different. If the Sprint T-Mobile deal gets done, everybody is -- Sprint T-Mobile, we know what that play looks like to run integrations of large scale networks. They have a lot of great opportunity. They'll have a lot of spectrum to put to work. But it's a two or three year integration exercise. Dish will have a rather significant period of time to build out network. So next two to three years maybe as predictable as they have been. As soon as you say that, something will change. But it's kind of my assessment of it right now.
John Waldron
You mentioned 5G. 5G is a -- to our mind at Goldman Sachs has enormous -- an enormous impact to the economy more broadly, and not just to the wireless business and the telecom industry. What's your perspective on 5G? What -- how should we think as investors or as participant, how should we think about the impact it can have, and how are you positioned? So talk a little bit about it, just expand on it?
Randall Stephenson
Yes. 5G when -- it's interesting, when you talk to even sophisticated investors and so forth, and you ask what does 5G mean? And people talk “Well, the networks are faster.” Well, it's more than faster protocol. It is faster. And it's very low latency. Meaning the timeframe between initiating a command and actually executing and being visible to a consumer, or actually executing a command if you're in a manufacturing floor, those could be almost real time. We're talking about real time networking. And so it's faster. But what that -- what 5G facilitates goes so much beyond that.
And there are a couple of areas that are worth, or noteworthy in my opinion. And the first is you're moving into an era of connectivity, like we haven't conceived of before. This isn't just marginally better. Like when you went to LTE, 20%, 40% faster, so this is different scale. Because in a world of 4G, you can put on a cell tower in a given square mile area, thousands of simultaneous devices. This, this, your car, thousands could be simultaneously connected to these networks.
When you go to 5G, what changes is that becomes millions. Millions of simultaneous connections are now feasible within a given square mile area on this technology. That's a different business proposition for everybody who sits in this room and all the companies you invest in. So the connectivity goes to a different level. The security, this is the part we love, goes to a different level as well. You can in 4G, because you're using basically GPS technology, locate a device like this or this, or a car or whatever, within meters. In the world of 5G, you begin to locate devices within a couple of centimeters. You're measuring in centimeters.
Now think about this, from a security standpoint, somebody in banking, who might have a card with say a large scale equipment manufacturer like Apple. But what that could mean to you in terms of security, being able to locate an individual within centimeters or a particular area, being able to set up geo-fencing in a particular area. And you can only access our data if you're in that particular area measured within centimeters. That's a big game changer as well. And then the part that brings all of this together is what the speed of this network will accomplish? Does it allow us to virtualize a lot of our functions, what do I mean by that?
A lot of the capability therein all these devices, whether it's this or whether it's just a sensor or a connected device, the form factors and the size are a function of what you have to have in here, power. You have to have compute capability. All of a sudden, when you have networks this fast, you can begin to push a lot of these requirements, storage into the edge of the network. And so you're getting cloud distributed down to the edge of the network. This brings a whole different level of speed, but it also brings a whole different level of imagination in terms of what your form factor starts to look like.
Millions of devices per square mile, literally being located within centimeters of each other with a whole different form factor in terms of power, storage and compute requirements. I mean, truly the Google vision of a few years ago that everybody laughed about that this becomes a screen, that's feasible, that is truly feasible. Sensors that are microscopic, because the power requirements are so much lower and where this allows you to go as a society. I mean, traffic management capability, because of sensors that are this cheap and broadly distributed millions per square mile, pipeline management, utility. I can go on and on. Autonomous cars, what it facilitates is a whole different level of thinking.
And I have to remind people, if it goes here then think about how much of our country's infrastructure, day-to-day business activity is underpinned by this kind of technology. Then ask yourself, is it rational that the United States Government has a concern about who might be supplying that kind of infrastructure. And so you kind of try to wrap a ribbon around why all this makes sense and what you're seeing play out in the media and the press today, but it's an exciting time. Now where is AT&T in this regard?
We feel really good about where we are. You need a really good cell grid to be relevant here, check that box. You need a nice portfolio of wireless airway licenses, spectrum. Check that box plus the spectrum that gives you this really hyper speed. We call it millimeter wave, but it’s a spectrum, it’s in a whole different stratosphere. We've been very aggressive. We have a really large block of that spectrum that we've acquired, either through government auction or we acquired a company that gave us a really robust block of the spectrum. So check that box, the ability to deploy the technology, thank you FirstNet. Check that box. The antennas are going up on the cell sites today. And you have the balance sheet to deploy the capital required to do this? Check that box. So as I said earlier, midyear next year, we will have a nationwide footprint of 5G and I'm pretty excited about it.
John Waldron
Do you have a view, just incidentally, on 5G in the U.S. versus 5G outside U.S. in terms of where -- how fast the U.S. is moving competitively to deploy the technology capability versus what we're seeing in other parts of the world?
Randall Stephenson
Yes. I hear a lot of hyperventilating about the Chinese leaving us behind and the U.S. is being left behind. Look, I'll tell you, you have T-Mobile, AT&T and Verizon all going aggressively, accumulating the spectrum required to deploy this, getting the spectrum cleared and the right bands to deploy this and working the standards of the technology. And so we have been aggressive. AT&T was hyper aggressive at working the global standards for 5G so that our network equipment providers can manufacture equipment and get us in the market.
We are live commercially on the highest grade 5G standards based technology, and I think we're in 21 markets right now, Mike, I'm just -- you're shaking your head, in 21? And that number will move up as we go through the course of this year. In China, I'm not aware of any live 5G systems up and running. The Europeans, I don't even know that anybody has an RFP out yet, to be quite honest with you.
So right now as it stands, the United States is leading. But look, it's a legitimate issue. The U.S. must lead in this area. We led in 4G, we led in 3G. What was a byproduct of that? Silicon Valley went nuts with mobility and because of what the U.S. did, Silicon Valley created an amazing amount of value by developing product and capability. 5G, I think will take this to a whole different level. It's not going to be a lot of little consumer apps, these are going to be big business apps, the apps that kind of -- applications that change how society works, how manufacturing is done, the U.S. must lead in this. And that's when John Donovan, who -- you asked about the organization earlier, he retired, he is retiring next month actually. He has led our technology organization for many years.
And it's worthy of just taking a pause and reflecting on what's been done. Because John Donovan and his team drove virtualization technology as we talked about. Moving the technology in these networks, 5G particularly to what I'll call cloud based technology, for one of a better term and virtualizing it. This is a big deal, because when you virtualize these functions and then you create operating systems that manage them and you put those operating systems in the open source community, that's what we've been leading, that's what John Donovan and his team have been leading.
You now inoculate yourself, from a Chinese competitor or a Chinese manufacturer, who may try to dominate the global supply chain. You have now taken technological approaches for how you address the Chinese threat to 5G. And so leading the world in this virtualization has been huge, not only has it been huge in kind of making sure that we have a technological solution to address the Chinese situation, but what is done to our cost takeout has been stunning. It’s worth a diversion, because the biggest cost in an operator like AT&T, the biggest cost we have is the cost to run a network, cost to run an IT shop, the cost to run all of the technological shop. That's our biggest element in our P&L.
This virtualization, which we now have 75% of our network virtualized, cloud based types of architecture. We are now 17 -- roughly 17 quarters where the cost of this has been going down year-over-year 7% to 8%, year-over-year for about 17 straight quarters, that's a stunning development, for a company like ours to get yourself in a cost position like that to address pricing pressure, competition from the Chinese and so forth, it's a really powerful thing. And so just give John Donovan a shout out as he's retiring. I think the global telecom community owes him a thank you for what he has led here.
John Waldron
Terrific. You talked a bit about the video piece of your infrastructure. But I want to get your perspective on video, the profitability in video and programming costs. Because one of the things that, as an observer of this industry for a lot of years, the programming cost issue, just the inflation in that element continues apace. What's your perspective on that?
Randall Stephenson
Yes, it's -- everybody bemoans cord cutting. And it's -- obviously, it's a phenomenon that is going rampant and it's not going to change. The industry -- it is a -- it's kind of its own corporate in this regard. Because programming costs -- particularly we talked about retrans costs, taking major networks and selling over-the-air type content into the cable systems and satellite system on a re-transmitted basis, those costs are just ballooning. And they're buying all kinds of sporting rights and so forth. And so those costs are exploding. And as a result, the cost of the average multichannel cable or satellite bill just continues to grow.
Coming into this year, we said look if we're going to get this business stabilized we're going to have to make some really hard choices, as it relates to the programming costs. And we had a number of deals coming up for renewal. And we said, look, we're not -- it can't be business as usual. We can't just go out and sign these kind of price escalators and think you’re going to somehow create an environment where at a price point the consumer will stay in and a price point where you can be profitable in these businesses over the long haul.
So we made some hard choices. We had a couple of folks drop this year, CBS, Nexstar, dropped us because we couldn't come to terms, in terms of what the pricing mechanism look like. Those were painful few weeks. I think John Stephens, my CFO spoke last week. So we lost as many as, I think 300,000 subs, because we had to take those drops. But look, it was the right thing to do. And we landed in a place that I think rational and reasonable for both the content providers, as well as us as a distributor of the content. But you're going to see these things kind of play out.
And it's going to change how we think about these multichannel kind of offerings. And as retrans takes more and more of the money in this type of area, it’s going to put more and more pressure on what I'll call the fringe content. And the ability to continue to carrying fringe content in these packages and so forth. So the bundles probably gets skinnier as the retrans rights take more and more of the money. But that's just the reality of it. That's probably where we're headed.
John Waldron
Let's talk a bit about the world, as we're wrapping up here. You are an astute observer of the U.S. economy. You have a sense of the global economy. Just maybe just give us your perspective on what you're seeing out there from an economic standpoint? Then I want to shift a little bit to the China dynamic.
Randall Stephenson
Yes. So let China aside for just a moment, which is hard to do. Look, we came into this year and I thought this is going to be an unbelievable year, from just an economic expansion standpoint. Everything was queued up. Consumer confidence was really, really high. Business investments, which look, as I try to do correlations between what's good for AT&T and what are the economic indicators most relevant, business investment is the number one indicator I watch. I watch it like a hawk. It is probably the biggest predictor of economic growth and ultimately, customer attitudes than any other indicator. And for our business, it correlates with our business revenue streams, I mean, almost 1:1.
And so coming into this year that was looking good. We've been on a number of quarters of sequentially the business investment of 6%, 7%, 8%, which is huge from our standpoint. We get into 2019 and that business investment thing starts doing one of these, and that's just a little bit of a yellow flashing light. I mean, not red flashing light, but yellow flashing light. And you start trying to get your head around what is going on. This is where you can't leave China out of this conversation, because whether it's China, or whether it's USMC, the Mexico trade agreement. I mean, it's just U.S. business is so dependent upon exports and trade. And when you have your two biggest trading partners kind of frozen between the NAFTA rewrite and China trade, it shouldn't be a surprise to anybody that business investment starts slowing down. And that's exactly what we're seeing.
And I'm really hopeful that as we get into election season, there may be more motivation to get something done on these. Congress get the USMC voted out, let's get that trade deal done with Mexico and China brings some stability to this, because right now -- I try not to talk us into a recession. I don't think we're headed to a recession, but we're definitely slowing down. And you can't have that kind of slowdown in business investment and not find its way into the consumer ultimately.
John Waldron
Do you have any further comment on the China situation, just in terms of its broad impact or your concern vis-à-vis the relationship between these two critically important economies and countries?
Randall Stephenson
Yes. It's easy to be critical of the President in this. I got to tell you, fundamentally, I don't disagree with what he's trying to accomplish. It has been asymmetric. It has been asymmetric in a lot of ways. And not just in trade and tariffs and so forth, but just asymmetric in terms of technology, intellectual property, the licensing requirements of intellectual property, I mean it's not a secret that you can lose some of your intellectual properties protection when you bring it into China. And so getting aggressive on that, I actually applaud the administration for their approach and how they're thinking about that and processing. I don't think that's wrongheaded at all. It's painful, going to get through it. You'd like to see us find a path to kind of get something done.
I also think that the administration's approach on 5G -- the Entity List through the Commerce Department and so forth, I don't think it's wrongheaded. Look, there was a day when the United States, if we dictated a technology path, it dictated for the rest of the world. But when you have 1.4 billion people in China and the kind of scale that we see in China, the U.S. can no longer dictate technology paths. And it's a different world. We're operating in a different environment. And so I think what the administration is doing, trying to ensure that we shore up western supply chains from the security standpoint as it relates to 5G, it's important, it's really important. It's fair to critique the approach and so forth. But in terms of the motivation, I think the motivations are right.
John Waldron
What do you see as the biggest risk out there, just in terms of what could take the economy down? Is it just sentiment? What do you worry most about?
Randall Stephenson
What could take it down, what could slow the economy down, because I…
John Waldron
Slow it down…
Randall Stephenson
Yes. What are the things that can slow down, the things that are slowing it down right now; Number one, trade, all right, these trade issues are a burden on the economy; and there's another one that -- we're getting into the political season. And I think it's hard for somebody to argue that the Tax Reform Act that recently was enacted in '17, as it relates to corporate. I don't want to talk about the personal side, that's a whole different issue. But getting the U.S. corporate tax structure competitive with the rest of the globe, you would be hard pressed to argue that that has been anything, but really positive through the entire U.S. economy at large. And I don't mean, just the high-end of the spectrum of income earners.
We are seeing, as a result of fixed investment being up, as we talked about, unemployment being at crazy low levels. And unemployment is at crazy low levels across all demographics. I mean, the African American unemployment rate is -- I mean, we ought to be doing high 5s. The Latino unemployment rate, it's at an incredibly low levels. Put on that, we're seeing for the first time in 15 years, productivity gains. As to see the kind of productivity gains we have seen for the first time in that long is nothing but a function of stimulated capital investment as a result of tax reform. And when you see productivity gains, coming into an election cycle, we all ought to recognize only by virtue of productivity gains, are we seeing for the first time in ages wage gains.
And by the way, wage gains at the low end of the scale are higher than wage gains at the high end of the scale. These are good things. These are really great things for America. And I just hope that as we get into the campaign season, we will be thoughtful as we think about restructuring corporate taxation to recognize that there has been a lot of good and a lot of productivity that goes up and down the demographic and economic scale of the United States public. And I’d just -- that's one thing that as you think about the next two years, can we undo a lot of the benefits that have come as a result of what transpired in 2017?
John Waldron
Randall, I really appreciate your time. Thank you for coming this morning. Good luck to you.
Randall Stephenson
Good talking to you, John. Thanks so much.
John Waldron
Thanks, appreciate it.
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