AT&T (T)

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See all 4 Bulls Reasons Bulls: Reasons To Buy Exciting new initiatives 100% agree Exciting new initiatives AT&T is developing new initiatives that take advantage of emerging technologies. These initiatives, especially in high-speed internet and video services, have high potential for AT&T and could help AT&T maintain its position at the top of the telecommunications industry. View or Edit Reason 1 votes 100% agree Telecom regulations have been pro-industry since 2005 0% agree Telecom regulations have been pro-industry since 2005 The telecommunications regulatory environment in which AT&T operates is constantly improving. Since 2005, the DOJ and the FCC have consistently ruled in favor of AT&T and its regulations have been pro-industry. View or Edit Reason 0 votes 0% agree Recent mergers should continue to result in synergies 0% agree Recent mergers should continue to result in synergies AT&T’s recent mergers should continue to result in synergies. Its 2005 merger with SBC has yielded $15B in savings thus far, and could produce up to $18B total. Furthermore, marketing synergies have the potential to significantly reduce costs as AT&T focuses on branding only one company instead of three. View or Edit Reason 0 votes 0% agree See all 4 Bears Reasons Bears: Reasons To Sell Innovation initiatives lack traction 0% agree Innovation initiatives lack traction While AT&T has several innovative initiatives on deck, their success is not assured. If these projects (including Project Lightspeed and video services) do not achieve their goals, AT&T could face serious competition from new entrants and new technologies. View or Edit Reason 0 votes 0% agree Long distance and fixed line drives most revenue 0% agree Long distance and fixed line drives most revenue Most of AT&T’s revenue comes from its oldest business—especially fixed-line local services and long distance. These are in a potentially precarious position because they are in increasingly competitive areas and face technology substitution. View or Edit Reason 0 votes 0% agree Serious challenges in integrating its new acquisitions 0% agree Serious challenges in integrating its new acquisitions Despite the potential upsides to its recent mergers, AT&T faces serious challenges in integrating its new acquisitions. Over the next few years, AT&T is undertaking several significant initiatives including local phone upgrades and multiple business integrations. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Could you add info with your history identifing stock for each company under which company includ... more [Dismiss] [Done] Great article - you obviously know a lot about the business. However, I want to hear more about ... more [Dismiss] [Done] See All Suggestions

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Despite its size and history, however, AT&T faces significant competition from new technologies. Over the past decade or so, AT&T's core wireline business has been fighting to retain its market share against new entrants including wireless and other alternatives (such as VoIP). Recently, 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 Project Lightspeed, AT&T’s initiative to upgrade its network by installing fiber lines to provide enhanced high-speed internet, video, and data offerings.

As the industry shifts away from traditional landlines, these projects, are gaining more attention and are becoming more important to AT&T’s efforts to remain a leader in the telecommunications sector. With few meaningful international holdings or opportunities, AT&T must grow by developing these new technologies to shore up its customer base.

[edit] Company Profile

[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.

Anti-trust rulings broke up AT&T's monopoly in 1984. Since then, the company has consolidated several significant wireline and wireless holdings, culminating in its merger with Cingular in 2004 and SBC in 2006.

[edit] Businesses and Products

AT&T’s main business units are: wireline services (including DSL and internet service), wireless services (AT&T Wireless), and its directory business.

Source: AT&T 10-K 2007 Earnings Release

[edit] Wireline Services

AT&T’s wireline unit currently serves approximately 49 million customers in 13 western and southwestern states. With its acquisition of BellSouth, AT&T will gain stronger footing in the southeast and have 33 million residential customers alone. The wireline unit has four core sources of revenue: local voice, long distance voice, data, and other services. Technology substitution (VoIP, etc.) has resulted in declining voice revenues, but the declines have slowed in recent quarters. AT&T currently provides broadband services to approximately 8 million customers.

[edit] Wireless Services

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. Despite this relatively low churn, Cingular faced customer service problems over past few years and in the most recent J.D. Power and Associates survey (September 7, 2006) did not achieve a No. 1 ranking in any category or region. 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 is rushing to complete its 3G network for the release of the new 3G iPhone. As of May 2008, about 73% of the network is complete. ^[3] Apple announced that the 3G iPhone will be released to 22 countries on July 11th and another 70 countries by the end of the year.

[edit] Directories

AT&T’s directory 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. The directory business is very profitable and contributes cash flow to AT&T Inc.

[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. This project is going on throughout AT&T’s nationwide wireline network and expects to reach 19 million homes by 2008. 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 model (where a fiber cable goes directly into each home) because it is faster and cheaper to build a network. 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 FTTP 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.

[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.

Source: Deutsche Bank, Yahoo! Finance

AT&T’s wireless unit, Cingular, faces considerable competition in the wireless sector. While it is the largest 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.

Source: Deutsche Bank

[edit] References

1. ↑ http://www.freepress.net/content/atthistory
2. ↑ AT&T 10-K 2007 Earnings Release, page 23.
3. ↑ http://techland.blogs.fortune.cnn.com/2008/05/22/att-3g-update-as-iphone-looms/ ATT 3G Update as iPhone Looms