Editor’s note: Steve Vachon is an analyst with Technology Business Research.

HAMPTON, N.H. – Smartphone promotions and DirecTV Now bolster subscriber growth in 1Q18, its latest financial results released on Wednesday show.

AT&T’s consolidated revenue fell 3.4% year-to-year to $38 billion due to declines within AT&T’s Business Solutions and Entertainment Group divisions coupled with the impact of the industry’s new ASC 606 [accounting] revenue recognition standard implemented in 1Q18.

DirecTV Now mobile video bundles are helping to cement AT&T’s customer base and contributed to improved video (+125,000 vs. -161,000) and postpaid phone (-22,000 vs -348,000) net additions year-over-year, though AT&T’s pricing strategies contributed to lower Entertainment Group and Mobility EBITDA margins in 1Q18.

AT&T’s Entertainment Group EBITDA margin fell 100 basis points year-to-year to 22.8% as video entertainment revenue (-7.3% YTY) was negatively impacted by linear TV subscribers being replaced by DirecTV Now customers, which generate significantly less ARPU. TBR expects these trends will persist in 2018 as more customers cut the cord and additional OTT platforms become available, including T-Mobile’s Layer 3 TV video service. Video revenue will also be limited by linear TV customers transitioning to new AT&T programming options that will launch in 2018, including the upcoming $15 per month Watch streaming service and possible a la carte programming options that might arise from the proposed Time Warner acquisition.

AT&T’s Mobility EBITDA margin fell 40 basis points year-to-year to 41.8%, largely due to higher costs arising from smartphone activations, which increased by about 500,000 year-over-year to 6.7 million. Smartphone gross additions were spurred by AT&T offering some of the most aggressive device promotions in 1Q18, including the industry’s first BOGO deal for the iPhone X in the U.S.

AT&T will remain challenged in boosting Entertainment Group and Mobility margins in 2018 as the company’s current strategies limit revenue growth but will be vital to maintain subscriber growth amidst the challenging video and postpaid markets. TBR anticipates AT&T will introduce additional cost-cutting initiatives in 2018 to help bolster margins amidst current pricing pressures, including deeper integration of digital and automated channels and further reduction of non-essential headcount.

AT&T spurs the telecom industry towards greater adoption and interoperability of virtualized technologies

TBR ranks AT&T as the leading global operator in NFV and SDN adoption due to the company’s emphasis on internal transformation projects, such as Domain 2.0, and the company’s expanding portfolio of virtualized network solutions such as SD-WAN and FlexWare. AT&T has also been pivotal in steering other operators and technology providers towards deeper adoption of NFV and SDN.

According to TBR’s 1Q18 NFV/SDN Telecom Market Landscape, NFV and SDN adoption is being delayed across the telecom industry due to interoperability issues stemming from a lack of standardization. To confront these challenges AT&T is spearheading new open-source groups including Disaggregated Network Operating System (dNOS) and Open Radio Access Network (ORAN) to foster more seamless interoperability for virtualized solutions.

Skill set gaps are another barrier to NFV and SDN adoption, which AT&T is addressing by investing $1 billion towards its Workplace 2020 initiative that will train 100,000 employees in advanced technologies including NFV and SDN, cybersecurity and cloud.

Deploying 60,000 white-box routers at cell sites across the U.S. over the next several years will generate significant costs savings for AT&T while positioning the carrier to support 5G edge computing applications requiring ultra-low latency such as augmented realty and autonomous driving. Additionally, the expansion of AT&T’s SD-WAN platform to 150 countries will enable the carrier to more effectively attract multinational companies amidst competition from other global enterprise operators such as Verizon, NTT and Orange, which are also offering international SD-WAN solutions.