Editor’s note: In the wake of government approval for the acquisition of DirecTV, investment in Internet of Things opportunities and other acquisitions, AT&T is positioning itself for growth beyond its traditional channels such as smartphone subscribers, says Steve Vachon, research analyst at Technology Business Research.
HAMPTON, N.H. – AT&T (NYSE: T) is investing in new revenue streams to ensure revenue growth persists despite continuing postpaid phone subscriber losses
AT&T was unable to gain postpaid phone net additions for the third consecutive quarter in 2Q15, primarily due to the success of T-Mobile’s Un-carrier strategies as well as More Everything promotions offered by Verizon in the quarter. Notably, AT&T did not lower the price of its Mobile Share programs in 2Q15 to contend with Verizon’s promotions, exemplifying AT&T’s reluctance to engage in the wireless pricing war.
Instead, AT&T is concentrated on retaining high-value smartphone customers and steering these customers toward connected devices to spur revenue growth. TBR believes AT&T will struggle to report postpaid net phone additions for the foreseeable future but will be able to sustain consistent postpaid subscriber growth over the next two years through tablets and other connected devices.
Tablets remain AT&T’s most significant source of wireless postpaid subscriber growth, accounting for 659,000 postpaid net additions in 2Q15. AT&T is also cementing itself as a leader in emerging Internet of Things (IoT) segments such as connected car and connected home. AT&T has been more successful in gaining LTE connectivity contracts from automakers compared to its competitors, which attributed to AT&T gaining 1 million vehicle connections in 2Q15. AT&T is also making strides to increase the appeal of connected car services through initiatives such as recently partnering with eight auto manufacturers to offer customers exclusive content passengers can access through their mobile devices, including games and videos.
The Digital Life connected home platform is becoming available in additional U.S. markets, and AT&T is considering partnering with international operators to expand the service abroad. TBR anticipates Digital Life adoption will grow at a stronger rate in 2H15 as the platform becomes compatible with more connected home solutions from third-party vendors.
Though connected devices will enable AT&T to sustain wireless revenue growth through 2016, the segment is limited by the low ARPU typically generated by these devices, which is causing AT&T to pursue new business opportunities to ensure long-term revenue growth, such as acquiring DirecTV and entering the Mexican wireless market.
Through the DirecTV acquisition AT&T will become the largest U.S. TV provider and will have the opportunity to offer bundles combining AT&T’s wireless and wireline offerings with DirecTV’s services. Potential also exists for AT&T to offer an OTT streaming service similar to Dish Network’s Sling TV service or Verizon’s upcoming OTT offering.
With the Iusacell and Nextel Mexico acquisitions finalized, AT&T announced it will invest $3 billion to provide LTE coverage to 100 million POPs in Mexico by the end of 2018. The deployments will enable AT&T to capitalize on the increasing smartphone penetration in the country, which is roughly at 50% currently, and contend as a viable competitor to América Móvil’s Telcel brand, which provides LTE coverage to 65.5% of the Mexican population as of June.
AT&T Next remains the driver of wireless revenue growth
Wireless revenue rose 2.1% year-to-year as the carrier continues to rely on higher equipment revenue generated by AT&T Next purchases to offset service revenue declines from postpaid phone subscriber losses and pricing promotions. AT&T Next accounted for 68% of smartphone activation in 2Q15, compared to 49% for Verizon Edge. TBR believes AT&T Next is gaining greater traction than Verizon Edge due to the greater number of financing options AT&T Next offers. The carrier is also attracting AT&T Next customers through incentives such as offering billing credits for purchasing certain devices.
The operator is shifting its focus toward AT&T Next over traditional contracted programs to help reduce equipment subsidies as well as to simplify its pricing structure. Recently, certain third-party retailers such as the Apple Store stopped offering the carrier’s contracted plans and are now offering AT&T Next exclusively. TBR believes the growing adoption of AT&T Next will result in the carrier discontinuing subsidized plans entirely within the next two years.