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Investment Overview for AT&T (NYSE:T)
Below are key drivers of AT&T's value that present opportunities for upside or downside to the current Trefis price estimate for AT&T.
Mobile Plans & Phones
U.S. Mobile Phones in Use: We estimate that this figure will increase from about 300 million in 2011 to around 335 million by the end of our forecast period as the U.S. mobile industry gets saturated and growth slows down. However, if the growth rate remains high and the figure reaches 390 million, there could be an upside of about 9% to our price estimate.
SMS & Internet Revenue Per Subscriber: We estimate that this figure will increase from a little under $18 in 2011 to a little over $25 by the end of our forecast period as more people upgrade to smartphones and subscribe to higher priced plans for more data usage. However, there could be a downside of around 5% to our price estimate if this figure only reaches to $22 instead. This could happen if the proportion of low data ARPU connected devices increases so much that it offsets higher ARPU smartphone customer increase. On the other hand, there could be an upside of the same magnitude if this figure hits $28 mark by end of our forecast period.
Mobile CapEx as % of Mobile EBITDA: We expect this figure to increase only slightly from around 46% in 2011 to 46.5% by the end of our forecast period. However, there could be a downside of more than 5% to our price estimate if AT&T's capital expenses increase more aggressively to 50% of mobile EBITDA by the end of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for AT&T at the top of the page.
AT&T makes money primarily through mobile phone subscription plans for consumers and businesses. The company also provides landline phone service to residences, small businesses, and large enterprises. Broadband Internet service and fiber optic TV service (U-Verse) are growth areas for AT&T.
The Mobile Plans & Phones division constitutes the majority of AT&T's value for these two reasons:
High AT&T Share in a Large Mobile Phone Market
We estimate that AT&T had a 31% market share in 2011 out of a total of about 330 million wireless connections in the U.S., implying around 103 million wireless connections subscribed on AT&T. We expect AT&T's market share to increase in future and the number of US wireless connections to grow to over 470 million by the end of the forecast period.
In comparison, the number of AT&T home landlines will decline from about 21 million in 2011 to an estimated 14.5 million by the end of the forecast period. Similarly, the number of AT&T business landlines will decline from 15.6 million to 12.5 million, by our estimates.
Mobile Phone Voice Plan Pricing Declines Offset by Data
Mobile voice plan pricing has seen a gradual decline, as competition has intensified and technology (primarily speed and reliability) and reach have improved. Increasingly, data is a significant part of usage. So, while average voice revenues have been on a downward trend, increased data revenue contribution has helped in mitigating the impact on total ARPU.
Push for 4G
Mobile operators have now started pushing for 4G networks that offer higher data speeds than 3G. AT&T and Verizon have rapidly expanded their LTE networks and Sprint has also jumped on the bandwagon. First to deploy LTE, Verizon has however maintained lead, with its LTE network covering almost thrice as many U.S. citizens as second-placed AT&T's does. AT&T's progress in LTE has been slower compared to that of Verizon as the company spent some time in improving its 3G network by deploying HSPA technology.
Scarcity of wireless spectrum
The wireless market is intensely competitive, with the number of wireless subscriber connections (327.6 million) exceeding the total population (315.5 million) in the U.S. As an ever increasing number of smartphone users demand higher speeds and congestion-free networks, wireless carriers are hard-pressed for additional spectrum in order to meet these demands. AT&T has been especially vocal about its spectrum crunch situation, even trying to acquire T-Mobile in an aggressive $39 billion bid. However, it had to eventually abandon the deal as it faced some stern opposition from the FCC, which was concerned about the duopoly it would create. Without the deal and a government auctions of TV airwaves some way off, AT&T has to find a near-term solution for its spectrum needs, else its LTE plans might suffer.
SMS usage on a decline
SMS texting rates have started declining in several advanced SMS markets such as Finland, Netherlands and Hong Kong. Since the U.S. saw a boom in text-messaging a couple of years after these countries, we expect the trend to come to U.S. shores soon. The decline in SMS usage can be attributed to the growing use of smartphones that has caused customers to migrate from traditional modes of communication such as text-messaging or SMS to the more convenient and new age messaging services of social media (Facebook & Twitter), email and other IP-based messaging systems. The erosion in SMS usage may have a negative impact on most wireless carriers' data ARPUs as carriers generally charge much more per byte of SMS data sent than any other data sent over the Internet.
Declining Phone Lines per Household
The number of phone lines per household is expected to continue to decline in line with trends in recent years, as many consumers eliminate secondary lines and mobile phones become the primary phones for many consumers. Improvements in the reliability and connection quality of cell phones will have a significant impact on residential phone lines.
Trefis Forecast Rationale for Print Yellowpages Revenues
US consumers typically use Yellow Pages to look for information on products and services in their locality and neighborhood. In the last few years, consumers have started using online Yellow Pages--as well as local search engines (like Google's local search)--to look for this information.
Print Yellowpages revenues is the amount of revenue generated from advertisers looking for space on Yellowpages.
Revenue from Print Yellowpages has declined substantially in the last few years as an increasing number of searches were performed online.
We expect this trend to continue in the future.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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