AT&T (T)

TOP CONTRIBUTORS

Ben Hur Gomez

Matthew Martos

Georgia

AT&T Inc. (NYSE:T) is a U.S. telecommunications company and provider of voice and data services; more specifically, it is the second largest U.S. wireless carrier and the largest U.S. broadband provider, with 87.0 million wireless customers as of 1Q10^[1]. To resist the secular trend away from landlines (AT&T lost over 1 million home phone lines in 3Q09^[2]), which has traditionally been its core business, AT&T has invested heavily in emerging technologies. At the forefront of these efforts is "U-verse", which offers high-speed internet, phone, and television services in one package using one protocol. This initiative is also an attempt to retain market share against competitors such as Verizon Wireless, which replaced AT&T as the largest U.S. wireless carrier late in 2008.^[3]

AT&T has also invested heavily in mobile devices, entering the smartphone industry through a lucrative partnership with Apple in 2007. As of September 2009, 50 million iPhone have been sold and over 20 billion application have been downloaded, granting AT&T a substantial recurring revenue stream, and according to comScore, 43% of all U.S. smartphone customers as of early 2010^[4][5]. The success of the iPhone sales through its distribution channels has also given AT&T the opportunity to enter the high margin data services business, which includes Web surfing and email use^[2]. According to tech research firm Trefis, 3% of IPhone users account for 40% of the AT&T network's data traffic^[6].

In March 2010, it was announced that Apple's next iPhone, to be released in the summer of 2010, was being programmed to work with CDMA, a wireless network that make the iPhone compatible with other wireless carriers, instead of GSM, AT&T and most other carriers' network of choice^[4]. As a result, many believe its exclusive contract with the iPhone is set to expire in 2010. Other indications include AT&T's released plans to launch a slew of smartphones from Dell and Motorola running on Google's Android-operating system to maintain market share once iPhone users migrate to other networks. In 2010, AT&T will look to drive data revenue by investing heavily in mobile application development for Android and increasing the core fiber optic capacity of its network^[7][8].

Company Overview

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.

Business and Financial Metrics

Revenue totaled $124 billion in FY2008, a 4.3 percent increase from its previous year while net income increased 7.7 percent to $12.8 billion.^[10]. This meager growth could be attributed to ongoing weakness in its landline business. In comparison, AT&T’s revenue increased about 89 percent in 2007 to $118.9 billion, compared to $63 billion in 2006.^[11] 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 $4.6 billion, compared to the previous year.^[11]

AT&T currently stands as the nation’s second largest wireless subscriber, with nearly 80 million subscribers as of June 2009 (a 63% increase since 2004)^[12]. It is the number one U.S. broadband provider, servicing over 16 million broadband subscribers^[12]. Its partnership with Apple (AAPL) has resulted in an increase in brand loyalty (record low total subscriber churn rate of 1.43% in 3Q09) and an increased focus on data services, which has resulted in rising YoY ARPU (average revenue per subscriber) the past seven fiscal quarters^[2]. Once its contract with Apple comes to an end, it will have to form other partnerships to maintain its low churn rate and high ARPU^[7].

Business Segments

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

Wireline Services (50% of revenues in 3Q09^[2])

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. U-Verse is an extension of the fiber-to-the-node (FTTN) model, providing fiber connections to a neighborhood and then uses a traditional copper connection to go into each house. The infrastructure to support FTTN has significantly higher long-term costs than the fiber-to-the-home (FTTH) model used by Verizon Communications.

As of June 2009, AT&T provides broadband services to approximately 16 million customers, keeping its rank as the largest U.S. broadband provider^[12]. Its U-verse TV service, a Project Lightspeed initiative, reaches 2 million subscribers as of December 2009^[13]. Although this is significantly less than Verizon's FiOS, which reported 3.4 million customers in their 3Q09 earnings release, U-Verse is growing at a much faster pace. In terms of pricing, FiOs is a more attractively priced bundle, available at $99.99 in comparison to U-Verse's $132^[14].

Wireless Services (44% of revenues in 3Q09^[2])

AT&T provides local and long-distance wireless communication voice and data services. With over 81.6 million wireless subscribers as of the end of 3Q09, it is the second largest U.S. wireless carrier by subscribers, following Verizon^[2]. In January 2010, AT&T announced the upgrade of its High-Speed Packet Access (HSPA) 7.2 technology, which will increase its network speed and efficiency as well as make data sessions more accessible^[15].

Advertising & Publishing (6% of revenues in 3Q09^[2])

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.

Trends and Forces

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. Increased regulation or a break-up of the industry like what happened to AT&T in the mid-1980s would be very harmful to all wireless carriers as it would reduce margins considerably.

In early July 2009, both the FCC and DOJ were asked by Senator Herb Kohl of Wisconsin to investigate anti-competitive practices in the cell phone industry, given its dominance by four companies: AT&T, Sprint, T-Mobile USA, and Verizon Wireless^[16]. According to the FCC, industry concentration, as measured by the Herfindahl-Hirschman Index, has increased 32% since 2003 primarily as a result of consolidation in the space^[17].

Additionally, AT&T and other broadband network providers have been under scrutiny by the FCC for what may be preferential treatment to their own subscribers. For example, AT&T could offer video services at high speeds to subscribers, and make those of its competitors unavailable or slower^[18]. With strong support from the U.S. Congress, the FCC may regulate these networks to enforce net neutrality, a decision that could drive up consumer prices^[19].

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. 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.

Furthermore, AT&T is betting heavily on being able to provide high-quality video services to its customers. AT&T was involved in a bundling agreement with Echostar Communications 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.

"ObamaCare" and Government Investments in Telehealth

In an effort to help lower costs and improve the quality of medical care, many telecommunication companies are partnering up with tech companies to spur their remote client monitoring businesses and take advantage of the $6 billion government spending in telehealth^[20]. AT&T research scientists have embedded pressure sensors in the soles of "smart slippers" that detect if a patient's gait is unusual or offbeat, notifying a doctor via e-mail and potentially preventing injury or future costly medical care. Consultancy firm PriceWaterhouseCoopers expects significant growth in this sector, amounting to $1.8 billion by 2013 from $77 million in 1995, as well as significant cost-cutting potential, with potential savings of 20-40%^[20].

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.^[3]

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.

References

1. ↑ "Wireless Broadband Growth, Further Advances in IP-Based Services, Strong Margins and Cash Flow Highlight AT&T's First-Quarter Results," AT&T News Room, 04/21/2010
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6} "AT&T Quarterly Earnings Dip on Landline Loss" 10/22/09
3. ↑ ^{3.0 3.1} FCC Approves Two Big Wireless Mergers, November 5, 2008
4. ↑ ^{4.0 4.1} "New iPhone Could End AT&T's U.S. Monopoly," Wall Street Journal, 03/30/10
5. ↑ "Apple passes 2 billion app downloads" Reuters, 9/28/2009
6. ↑ "What Loss of iPhone Exclusivity Could Mean for AT&T’s Stock," Trefis, 02/26/10
7. ↑ ^{7.0 7.1} "AT&T Launches Android Attack," Red Herring, 01/06/2010
8. ↑ "U.S. Telecom Providers to Purchase and Innovate More in 2010" Seeking Alpha, 1/12/10
9. ↑ "AT&T," Morningstar Investment Research
10. ↑ AT&T Financial Reports, 2007-2008
11. ↑ ^{11.0 11.1}
12. ↑ ^{12.0 12.1 12.2} 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
13. ↑ [http://www.prnewswire.com/news-releases/att-u-verse-tv-marks-2-million-customer-milestone-78857492.html "AT&T U-verse TV Marks 2 Million Customer Milestone," PR Newswire, 12/09/09
14. ↑ "Telecom Stocks: Verizon or AT&T? Seeking Alpha 01/17/10
15. ↑ "AT&T Upgrades 3G Technology at Cell Sites Across Nation" AT&T Newsroom, 01/05/10
16. ↑ Fawn Johnson (July 8, 2009). AT&T Disputes Antitrust Allegations Against Cell Phone Cos. Dow Jones.
17. ↑ "FCC Concerned by Domination of Wireless Industry by AT&T and Verizon," Trefis Investment Research, 06/11/2009
18. ↑ "AT&T Takes on Google Over 'Terrifying' Internet Rules", Bloomberg, 10/21/09
19. ↑ "AT&T Asks Employees to Deter Net Neutrality" The Consumerist, 10/20/2009
20. ↑ ^{20.0 20.1} "AT&T Sets its Sights on the 'Telehealth' Industry" New Jersey Business News, 12/06/09