Editor’s note: Analysis: AT&T is revamping its mobility strategies to improve organic revenue growth, writes Steve Vachon, an analyst with Technology Business Research. The communications giant reported its latest earnings on Tuesday, and Vachon offers in-depth analysis.
HAMPTON, N.H. – AT&T’s (NYSE: T) revenue growth remains predominantly inorganic as traditional businesses struggle to regain momentum.
AT&T’s increased consolidated revenue by 24.4% year-to-year in 1Q16 but growth was mainly contingent on the DIRECTV acquisition and the company’s new International businesses. AT&T is facing the greatest pressure within its Mobility segments, due to the company’s inability to gain postpaid phone subscribers as well as declining equipment revenue due to customers holding unto their smartphones for a longer duration instead of buying new unsubsidized devices. AT&T is generating high connected device and prepaid subscriber additions, however, which is helping to stabilize wireless service revenue.
AT&T’s Business Solutions revenue rose 0.3% year-to-year, which was driven by higher Fixed Strategic Services revenue from solutions such as cloud, Ethernet and VPNs. AT&T is investing $10 billion in 2016 to enhance its enterprise networks and portfolio, which will help to bolster Business Solutions revenue for the remainder of the year.
AT&T’s Entertainment Group revenue rose 123.6% year-to-year due to the inclusion of DIRECTV but competitive pressures from OTT resulted in the net loss of 54,000 video subscribers in 1Q16. AT&T was able to report 5,000 total broadband net additions in 1Q16 though U-verse Internet additions were mostly offset by DSL customer losses.
AT&T is eager to rebuild its postpaid wireless base but will continue to lose phone subscribers in 2016
The wireless pricing war has made it difficult for AT&T to retain postpaid phone customers as the company has remained conservative in its pricing strategies while Sprint and T-Mobile focused on undercutting competitors to poach subscribers. Due to these trends, AT&T has lost postpaid phone subscribers since 3Q14. While the carrier has been successful in gaining prepaid phone subscribers through Cricket Wireless, revenue growth from these customers is limited by the lack of ability they have to integrate their cellular services with AT&T’s other mobile offerings such as connected car and Digital Life services.
AT&T has recently become more determined to rebuild its postpaid wireless base, even if it means offering more aggressive promotions. This is demonstrated by tactics including recent BOGO (buy one, get one) smartphone promotions as well as AT&T beginning to offer to pay off new customers’ early termination fees up to $650, becoming the last Tier 1 U.S. carrier to offer this incentive.
AT&T’s pricing strategies will struggle to standout from Sprint’s more aggressive promotions as well as T-Mobile’s innovative Un-Carrier offerings such as Binge On. Additionally, AT&T’s LTE network is no longer the differentiator it once was to attract wireless subscribers as competitors have narrowed the gap in LTE POP coverage. TBR believes AT&T will experience the greatest success attracting postpaid subscribers through integrated offerings such as the company’s unlimited wireless data plans offered to DIRECTV and U-verse TV customers.
Mobility will become the centerpiece of DIRECTV
TBR anticipates mobile devices, as well as other IP-based platforms such as Roku and gaming consoles, will replace satellites as the predominant delivery platforms to experience DIRECTV over the next several years. AT&T announced by the end of 2016 it will launch several DIRECTV streaming packages, which will provide low-cost options to access live and on-demand mobile programming without requiring an existing DIRECTV subscription.
Though these programs will cause a negative impact on video ARPU they will be essential for AT&T to combat OTT providers such as Netflix that have prevented the carrier from gaining traditional video customers over the past year. The DIRECTV streaming services will also provide AT&T the opportunity to increase wireless revenue by attracting new mobile subscribers as well as migrating existing customers to higher data tiers or more expensive unlimited data plans to take advantage of the offerings.