Editor’s note: AT&T reports a year-to-year decline in consolidated revenue for the first time in nearly four years, reflecting its struggle to increase growth organically, says Technology Business Research analyst Steve Vachon.

HAMPTON, N.H. – AT&T on Wednesday reported a year-to-year decline in consolidated revenue for the first time in nearly four years

AT&T’s consolidated revenue declined 0.7% year-to-year to $41.8 billion in 4Q16, the first quarter the carrier has reported a year-to-year consolidated revenue decline since 1Q13. AT&T’s no longer gets the inorganic revenue lift from the DirecTV acquisition, which closed in late July 2015, and the company continues to experience declines within its core Business Solutions and Mobility segments due to market saturation and pricing pressures.

Though AT&T’s operating income dropped 770 basis points to 10.2%, which was largely affected by one-time, non-cash pension and post-employment costs, the company is cutting costs through Project Agile initiatives, DirecTV synergies and early cost-benefits from NFV/SDN.

Though AT&T’s wireless revenue declined 0.7% year-to-year, due mainly to lower ARPU and postpaid phone subscriber losses, wireless revenue is beginning to stabilize due to strong connected device and prepaid net additions. Although AT&T lost 67,000 postpaid phone customers in 4Q16, largely due to competition from the newly launched T-Mobile One and Sprint’s Unlimited Freedom unlimited data programs, AT&T’s results were a significant improvement from the 256,000 postpaid phone customers it lost in 4Q15.

Providing zero-rated access to DirecTV services offers AT&T a stronger incentive to retain premium customers as the carrier was able to improve postpaid churn amidst the pressures of the holiday season.

AT&T improved wireless EBITDA margins by 180 basis points year-to-year to 35.7% by transitioning customers to non-subsidized pricing plans and wireless profitability will continue to improve in 2017 through recent initiatives, including AT&T raising activation rates and the price of grandfathered unlimited plans.

AT&T returns to video subscriber growth though DirecTV Now will have a negative impact on ARPU and churn

AT&T (NYSE: T) garnered 200,000 subscribers through its DirecTV Now service, which launched in November, as the platform is attracting cord-cutters and consumers that prefer mobile video such as millennials. DirecTV Now is a double-edged sword for AT&T, however. Subscriber additions are coming at the expense of migrations from U-verse TV and DirecTV satellite customers, which generate significantly higher ARPU.

Though DirecTV Now enrollment is convenient, subscriptions will be more sporadic as customers can likewise easily cancel services at their leisure, which will cause an uptick in video churn. DirecTV Now also launched with a variety of technical issues, which will likely deter early subscribers and elevate video churn in 1Q17.

AT&T pursues network innovations to enhance its enterprise portfolio and benefit the broader telecom industry

Business Solutions revenue declined 1% year-to-year in 4Q16 as revenue declines in legacy services outpaced growth in strategic data business wireless service revenue. AT&T is retiring low-demand legacy assets to increase its focus on next-generation technologies that will improve Business Solutions revenue and foster innovation across the global telecom market. AT&T is focused on bringing agility and intelligence to its enterprise customers, bringing its NFV/SDN, IoT and analytics offerings to bear to help its customers transform into digitally optimized businesses.

AT&T is building upon Domain 2.0 through its latest initiative, AT&T Network 3.0 Indigo, which was introduced in January and has been in development the past two years. The Indigo platform, which is still in the concept stage, combines AT&T’s technologies in areas including SDN, security and big data to allow businesses to share data and analytics while safeguarding confidential information.

TBR believes Indigo will be particularly beneficial in advancing AT&T’s smart cities initiatives as businesses and organizations can share analytics gleaned from IoT data to help communities improve efficiency and collaboration.

(C) TBR