Editor’s note: AT&T’s latest earnings report shows that the communications giant is relying even more on bundled services amidst industry pressures such as cord cutting, says Technology Business Research Analyst Steve Vachon.

HAMPTON, N.H. – Decreasing demand for traditional services and recent natural disasters contribute to AT&T’s lower revenue in 3Q17

AT&T’s consolidated revenue fell 3% year-to-year to $39.7 billion in 3Q17 due to declines across all of the company’s core businesses, with the exception of its International division. Natural disasters also had a negative impact on AT&T’s 3Q17 earnings, contributing to higher operating costs and subscriber declines in the quarter.

Though AT&T lost 97,000 postpaid phone customers in 3Q17, the carrier significantly improved on the 268,000 subscribers lost in 3Q16. AT&T’s emphasis on non-subsidized device plans, coupled with growing satisfaction with the carrier’s network quality and service offerings, resulted in a record high wireless EBITDA margin of 42%, as well as best-ever third quarter postpaid phone churn of 0.84%.

Service bundles are a significant driver of AT&T’s lower postpaid phone churn as customers are less likely to change service providers if they are enrolled in multiple services. AT&T is diligently upselling its mobility customers to its video offerings by reserving its most aggressive promotions, such as BOGO (buy-one, get-one) smartphone offers, exclusively for customers also enrolling in DirecTV or U-verse TV. AT&T is also leveraging free HBO Now subscriptions to improve the value proposition of its unlimited data plans as competitive pricing pressures persist.

High-speed Internet revenue rose 1.3% year-to-year, but was offset by lower legacy data revenue stemming from DSL disconnections. High-speed Internet remains one of AT&T’s strongest growing segments and the carrier will likely exceed its goal of expanding its fiber-to-the-premises (FTTP) footprint to 12.5 million locations by mid-2019. AT&T is also leveraging other technologies such as G. fast and fixed-wireless services where it is more cost efficient than fiber, particularly in rural and underserved markets and multi-dwelling units.

Consolidated operating margin increased 40 basis points to 16.1% in 3Q17 as AT&T is beginning to generate significant cost savings from its NFV/SDN initiatives. AT&T expects it will have 55% of its network virtualized and software-controlled by the end of 2017, at which point the cost savings from transitioning to a software-mediated architecture will likely exceed that of additional investment, a milestone AT&T’s competitors will likely attempt to mimic when devising software-mediated strategies.

  • The proposed Time Warner acquisition and a new OTT video delivery platform will benefit AT&T as cord-cutting threatens the carrier’s linear-TV base

The prevalence of cord-cutting was evident in 3Q17 as AT&T lost 385,000 traditional TV customers in 3Q17 due to the plethora of OTT services now available which gives customers greater flexibility to combine multiple offerings such as Netflix, Hulu and HBO Now to view desired content at a significant cost savings compared to linear TV packages. Though AT&T partially offset this impact by gaining 296,000 DirecTV Now customers in 3Q17, the diminished ARPU from the subscriber trade-offs will likely cause video entertainment revenue to gradually decelerate in 2018.

T-Mobile’s recently launched Netflix On Us, which offers T-Mobile One family plan subscribers a standard subscription to the streaming service at no extra cost, threatens both AT&T’s mobility and video businesses and prompted AT&T to begin including HBO Now subscriptions as part of both of its unlimited data plans beginning in September. Though the popularity of HBO programming will help AT&T maintain its postpaid subscriber base, offering HBO Now at no cost will limit the revenue growth potential of one of Time Warner’s most viable properties should the acquisition gain approval.

To improve profitability amidst current video trends, AT&T is developing a new residential OTT video delivery platform expected to launch in 2018 that will run on thin-client hardware and any in-home broadband connection, which will lower costs and deliver greater scalability and convenience than satellite deployments. If the Time Warner acquisition is successful, TBR also expects AT&T will launch new a la carte programming options for Time Warner channels such as HBO, CNN and TBS.

(C) TBR