Editor’s note: AT&T’s unlimited data strategy strengthens its position as an integrated solutions provider, but did not generate postpaid net additions in 1Q17, notes Technology Business Research Analyst Steve Vachon.

HAMPTON, N.H. – AT&T had a challenging quarter in 1Q17 as consolidated revenue fell 2.9% year-to-year due to declines across all of the company’s core businesses except its International division. A record-low device upgrade rate in the quarter was the primary driver of AT&T’s lower consolidated revenue.

Equipment revenue growth will remain an issue for the carrier as bring-your-own-device (BYOD) customers account for a higher portion of gross additions, consumers hold onto their smartphones for a longer duration to avoid paying unsubsidized prices, and new device models become less appealing as technology matures. However, these trends are benefiting AT&T’s cost structure as lower equipment costs contributed to Mobility EBITDA margins increasing 100 basis points to 41.8% in 1Q17.

Despite the launch of its Unlimited Plus and Unlimited Choice plans in 1Q17, AT&T lost 348,000 postpaid phone subscribers as the programs were unable to gain traction against T-Mobile One. The launch of AT&T’s Unlimited Plus plan highlights the carrier’s ambition to advance its integrated solutions strategy rather than jockey with lower-priced competitors for postpaid net additions. Though AT&T’s introduction of Unlimited Plus was a necessary move to contend with the unlimited data plans of rivals that are now prevalent across the industry, with an entry point of $90 per month AT&T is not attempting to undercut competitors on price.

Rather, AT&T seeks to pull consumers into its broader ecosystem by offering subscribers significantly discounted DirecTV services and free access to HBO, which will likely soon become an AT&T-owned asset. Though this strategy will help retain premium customers and spur DirecTV Now adoption, TBR expects AT&T will continue to lose postpaid phone customers throughout 2017 due to pricing pressures from T-Mobile and Sprint. AT&T will continue to rely on Cricket to garner cost-conscious phone subscribers.

Pressures from the over the top (OTT) market were also magnified in 1Q17 as AT&T was unable to gain linear TV subscribers due to U-verse TV losses and flat DirecTV satellite net additions. Though DirecTV Now adoption helped partially offset video subscriber losses, the platform will face heightened competition in 2017 from new streaming services coming to market as well as Comcast’s upcoming Xfinity Mobile business. DirecTV Now also faces the threat of high churn rates as customers can more easily enroll in and cancel services at their leisure.

AT&T’s capabilities as a hybrid-IT provider create significant opportunities for Business Solutions growth

As the consumer segment becomes more challenging due to market saturation and pricing pressures, TBR believes the greatest revenue growth opportunities for AT&T exist within the company’s Business Solutions segment. AT&T’s innovations in technologies including NFV/SDN, networking, security and cloud enable the carrier to create hybrid IT environments that can be tailored to better accommodate the unique needs of enterprises.

AT&T is positioning as an early market leader within the telecom Internet of Things (IoT) space and is evolving into a full-stack IoT provider offering end-to-end secured solutions to customers. AT&T offers an integrated suite of capabilities through combining its M2X and Flow Designer IoT platforms with connectivity solutions including Network on Demand and NetBond.

Recent strategic alliances enable AT&T to strengthen its IoT capabilities in areas including analytics (IBM) and security (IoT Cyber Security Alliance) to differentiate its portfolio from competitors. AT&T’s innovative technology contributed to the company reporting 2.6 million connected device additions within its Business Solutions segment in 1Q17, the highest increase in the company’s history.

(C) TBR