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AT&T Inc.(NYSE:T) is one of the largest U.S. telecommunication companies providing voice and data services; it is the second largest U.S. wireless carrier and the largest U.S. broadband provider.[1] In addition to operating in an extremely competitive industry, T also faces plenty of competition from new technology. AT&T’s eminent competitor, Verizon Wireless, replaced it as the largest U.S. wireless carrier late in 2008.[2] Over the past decade or so, its core wireline business has been fighting to retain its market share against new entrants including wireless and other alternatives (such as VoIP). AT&T has increased its investments in emerging technologies to meet new challenges and take advantage of new opportunities in the telecommunications industry. At the forefront of these efforts is the "U-verse" offering, AT&T’s initiative that offers high-speed internet, phone, and television services in one package using one protocol. As the industry shifts away from traditional landlines, these projects are gaining more attention and are becoming more important to the company’s efforts to remain a leader in the telecommunications sector. With few meaningful international holdings or opportunities, AT&T is focusing on these initiatives to fuel growth and create business.
In addition to the "U-verse" offering, which focuses on the home, AT&T has begun investing more capital into mobile devices. AT&T, through a partnership with Apple, has entered into the smartphone industry, which is expected to have growth of 12-15% in 2009.[3] AT&T has already sold out the preorders of Apple's new iPhone 3G S, which was released June 19, 2009, in spite of complaints that AT&T's data plan is too expensive.[4][5] AT&T has also announced that "tethering", the ability to share an internet connection between an iPhone and a personal computer, will be made available on the iPhone 3G S, though they have not announced when.[6] AT&T CEO Randall Stephenson has also expressed interest in selling Palm's Pre in AT&T's stores, though no deal has been announced.[7] On May 25, 2009, AT&T announed plans to sell mini notebooks embedded with AT&T's 3G service throughout their nationwide stores.[8] AT&T is also investigating internet connectivity for e-reader devices, such as Amazon's Kindle, but has yet to develop pricing plans for them.[9]
[edit] Company Overview
[edit] History
AT&T traces its roots to the beginning of the telephone era in 1876. From its founding through the 1970s, it dominated the telephone industry as a monopoly. In 1974, however, the Federal Government filed an anti-trust suit and in 1984 the company was forced to break into smaller pieces. Those seven pieces were termed Regional Bell Operating Companies (RBOCs), and they conducted business autonomously for about a decade.
In the 1990s, SBC began buying former AT&T subsidiaries and in 2005 it purchased what remained of AT&T Corp. The resulting company was rebranded AT&T Inc. Finally, in December of 2006, AT&T Inc. purchased BellSouth, creating the corporation that exists today. At this point, 5 of the 8 spin offs of the original AT&T have been reunited under the new AT&T Inc brand, though competition from other companies and technologies has calmed fears of a re-emergence of the original monopoly.
[edit] Business Financials
AT&T’s revenue and net income growth slowed down in 2008, as it was weighted down by the ongoing weak landline business. Revenue totaled $124 billion in 2008, a 4.3 percent increase from its previous year while net income increased 7.7 percent to $12.8 billion.[11] In comparison, AT&T’s revenue increased about 89 percent in 2007 to $118.9 billion, compared to $63 billion in 2006.[12] The increase was primarily due to its acquisition of BellSouth and increased sales of data products. In the same period of fiscal 2007, income increased 62 percent, or $4,595 million, compared to the previous year.[12] AT&T is the nation’s second largest wireless subscriber, with nearly 75 million subscribers[1]; in under a four year period, from 2004 to 3Q 2008, it has increased its wireless subscribers by 53 percent, from 49.1 million to 74.9 million.[1] It is the number one U.S. broadband provider, servicing over 14 million broadband subscribers.[1] For the first nine months of fiscal 2008 (1Q to 3Q 2008), AT&T has increased its revenues by almost 5 percent to $92.9 billion and its net income by 18.7 percent to 10.4 billion, compare to the same nine month period from the previous year.[1]
[edit] Operating Segments
AT&T’s main business units are: wireline services (including DSL and internet service), wireless services (AT&T Wireless), and its directory business.
[edit] Wireline Services (59% of revenues, 55% of income[14])
AT&T’s wireline unit serves approximately 62 million customers.[14] The wireline unit has three core sources of revenue: voice (includes local and long-distance), data, and other services. Other services include U-verse and satellite video, network, server, data storage and other hosting services. Its U-verse TV service reached 1 million subscribers in December 2008.[15] Technology substitution (VoIP, etc.) has resulted in declining voice revenues, but the declines have slowed in recent quarters. By 3Q 2008, AT&T provided broadband services to approximately 14.8 million customers, keeping its rank as the largest U.S. broadband provider.[1]
[edit] Wireless Services (35% of revenues, 32% of income[14])
AT&T provides local and long-distance wireless communication services, both voice and data. With a total of 74.9 million wireless subscribers in 3Q 2008[16], it is the second largest U.S. wireless carrier by subscribers, following Verizon. With its takeover of BellSouth complete, AT&T now owns all of Cingular Wireless, the nation’s previously largest wireless carrier. Cingular had approximately 61 million subscribers and a low churn rate of 1.8%. Churn is the rate at which customers leave the corporation each month. Cingular recently completed an overhaul of its GSM network to increase coverage and improve reliability and in June of 2007, Apple began offering its iPhone exclusively through AT&T Wireless. AT&T built a 3G network to support Apple's 3G iPhone.
[edit] Advertising & Publishing (5% of revenues, 9% of income[14]
AT&T’s advertising & publishing business comprises all of its directory services, including traditional phone books and electronic and internet publishing. Its Yellow and White Pages continue to dominate the markets in which they operate and its internet outfits, especially YELLOWPAGES.COM, are also industry leaders.
[edit] Project Lightspeed
Project Lightspeed is a major initiative to install fiber and high-speed digital subscriber lines (DSL) to enable AT&T to offer enhanced data, video, and telephone services; as of January 2009 its only product was U-verse TV. This project is going on throughout AT&T’s nationwide wireline network and reached 14 million living units by 3Q 2008.[17] AT&T is using a fiber to the node (FTTN) model that essentially provides a fiber connection to a neighborhood and then uses a traditional copper connection to go into each house. AT&T elected to use this technology instead of the traditional fiber to the home(FTTH) model (where a fiber cable goes directly into each home) because it is faster and cheaper to build a network; however, some areas use FTTH. Still, it remains to be seen what the long-term consequences of this system will be. It is possible that it will not provide sufficient bandwidth for video and high-speed connections, which could either alienate customers or require additional investments in infrastructure. Another drawback to the model is that it requires significantly more infrastructure in the long term than the FTTH model. As a result the cost of maintenance is much higher.
[edit] Trends and Forces
[edit] Technology substitution risks and opportunities
The telecommunications industry is fast-paced and constantly innovating, so technology substitution is a common occurrence and a serious concern for AT&T. The primary point of concern for AT&T is in its wireline businesses. The industry is undergoing serious changes as people are increasingly turning to new technology—such as VoIP and wireless—as their primary mode of communication. If customers continue to shift from traditional landline services, AT&T’s core wireline business revenues will be hard hit as they lose customers and are forced to compete to retain their bases. AT&T has taken steps to shed some of its losing wireline business, as evinced by its exiting out of the payphone market after 129 years of service.
At the same time, AT&T is relatively well-positioned to hedge against this change and even exploit it. Through its DSL offerings and Cingular, AT&T provides services that complement trends in technology substitutions. Around 50% of residential line defections go to wireless and an additional 25% go to broadband (eg, VoIP)—DSL counts for almost half of the new broadband customers. AT&T Wireless is obviously in a good position to take advantage of this shift and Project Lightspeed is making AT&T increasingly competitive in the DSL arena. These other aspects of AT&T’s business have the potential to offset losses to the wireline unit and grow rapidly as the landscape changes.
[edit] Regulatory environment exposure
AT&T Inc.’s businesses are subject to many levels of complex regulation and any significant changes could have a major impact on the company as a whole. In the 1990s, the FCC began implementing policies that encouraged competition for local telephone service providers, epitomized by the Telecom Act of 1996. The new rules imposed on the industry during this period stifled growth and had a negative impact on earnings for AT&T.
More recently, however, the tides have begun to shift again in AT&T’s favor as both the FCC and DOJ have started issuing rulings that benefit the major providers. Now, regulators are far less focused on competition between local service providers because they see other non-wireline options (including VoIP and cable) as potential competitive forces. An example of the improved climate is the end of the UNE-P (Unbundled Network Elements) requirements that previously forced the incumbent local carriers to offer parts of their network on an unbundled basis. This rule, part of the 1996 act, was supposed to allow local competition to enter the field, but more often was just a burden on the incumbent. The FCC recently dropped this requirement as well as permitted more mergers and consolidation in the telecommunications industry than in recent memory.
At this point, AT&T enjoys a very favorable regulatory environment. While the relevant agencies have indicated that this trend will continue, changes in leadership, administration, or markets could affect their decisions and cause them to change course.
[edit] High-speed internet and video investments
AT&T has made significant investments in developing high-speed internet and video offerings to compete with cable companies such as Time Warner Cable and Cablevision Systems (CVC). At the core of this drive is Project Lightspeed, AT&T’s initiative to provide broadband to 19 million households. As mentioned above, AT&T has decided to pursue the FTTN model, allowing it to build its network quicker and less expensively than some of its competitors. If this model is ultimately not able to provide sufficient capacity to meet the needs of AT&T’s customers, the company might not be able to fully capitalize on upward trends in broadband use.
Furthermore, AT&T is betting heavily on being able to provide high-quality video services to its customers. So far, however, its video offerings have stumbled. As mentioned before, there are questions about the capacity of the lines delivering content to homes. Right now, one high-definition video stream can eat up more than a third of the new network’s capacity, potentially slowing other offerings and hurting the quality of the video. In addition, it is unclear what regulatory approval is necessary for AT&T to provide video offerings. Some states have suggested local approval is necessary, while others contend that AT&T is exempt from local regulation. As these issues come to the forefront, they will affect AT&T’s ability to capitalize on its broadband and video plans.
AT&T was involved in a bundling agreement with EchoStar Communications (DISH) to provide broadband and telephone services along with Echostar's satellite television. The laying of their own fiber optic wires puts the future of this relationship at risk. AT&T’s U-verse competes with Verizon’s FiOS and Docsis 3.0 which is provided by cable companies. U-verse supplies a maximum of 18Mbps, compared to FiOS which offers 50Mbps and Docsis 3.0 which can potentially reach speeds of 160Mbps. Price also vary for each service, $100/month for U-verse, $140/month for FiOS (New York $90/month), and $150/month Docsis 3.0 from Comcast.
[edit] Competitors
After completing its acquisition of BellSouth, AT&T cemented its position as the largest telecommunications company in the United States. AT&T’s wireline business dominates the regions it serves and faces only local competition for wireline service. More and more it is facing challenges from non-wireline telecommunications providers including VoIP and high-speed internet companies. AT&T also has a significant advantage over Verizon in that it owns 100% of Cingular vs. Verizon's 55% ownership of its wireless division. This is significant because Verizon faces many of the same issues as AT&T. When a Verizon customer switches from landline service to wireless, Verizon captures only 55% of resulting revenue. AT&T is able to capture 100% of the revenue. This puts AT&T in a better position to take advantage of the shift from wireline to wireless. However, in 2008 the FCC approved Alltel Corp. to be acquired by Verizon Wireless increasing Verizon’s share of the market and making it the largest U.S. wireless carrier.[2]
| AT&T | Verizon | Qwest | Vonage | |
| Operating Margin | 17.60% | 5.21%% | 12.93% | -76.24% |
| Revenue | 30.13B | 23.77B | 3.43B | 210.5M |
| #of Access lines (000s) | 62,871 | 42,316 | 13,032 | 2,200 |
Source: Deutsche Bank, Yahoo! Finance
AT&T’s wireless unit, AT&T Mobility, faces considerable competition in the wireless sector. While it is the second largest U.S. wireless provider, it does not dominate the industry and its competitors are right on its heels. Furthermore, low customer satisfaction has contributed to a slightly higher churn rate (attrition rate) than Verizon, its closest competitor.
| AT&T | Verizon | Sprint Nextel | T-Mobile | |
| Subscribers (000s) | 57,308 | 54,835 | 41,860 | 23,534 |
| Y/Y Growth | 11.4% | 15.8% | 6.8% | 22.3% |
| Churn | 1.8% | 1.1% | 2.1% | 2.8% |
Source: Deutsche Bank
[edit] References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 Strong Wireless Gains, Sound Operational Execution Highlight AT&T's Third Quarter; Results Led by 2.4 Million iPhone 3G Activations, Rapid Wireless Data Growth, October 22,2008
- ↑ 2.0 2.1 FCC Approves Two Big Wireless Mergers, November 5, 2008
- ↑ Tarmo Virki (May 19, 2009). Symbian sees smartphone market up 12-15 percent. Reuters.
- ↑ Chip Brian (June 14, 2009). AT&T Sold Out of Early iPhone 3G S Pre-Orders. SmarTrend.
- ↑ AT&T Under Pressure To Cut Price Tag On IPhone's Data Plan. Wall Street Journal (June 11, 2009).
- ↑ Chip Brian (June 8, 2009). AT&T Says "Tethering" Around The Corner. SmarTrend.
- ↑ Chip Brian (May 28, 2009). AT&T CEO Hopes To Sell Palm's Pre In The Future. SmarTrend.
- ↑ Mini Notebooks Coming to AT&T All Over U.S. (May 25, 2009).
- ↑ Stephen Lawson (June 2, 2009). AT&T Wants Kindle Rival, New Data Plans.
- ↑ AT&T History
- ↑ AT&T Financial Reports, 2007-2008
- ↑ 12.0 12.1
- ↑ AT&T 10-K 2007 Earnings Release, page 23.
- ↑ 14.0 14.1 14.2 14.3 AT&T 10-K 2007, Pg 3-5
- ↑ AT&T U-verse TV Reaches 1 Million Subscriber Milestone, December 17, 2008
- ↑ AT&T 2008 Thirds Quarter Results, October 22, 2008
- ↑ Media Kit: AT&T U-verse
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