AT&T (NYSE:T) which primarily competes with Verizon (NYSE:VZ) and Sprint (NYSE:S), owes about 43% of its stock value to mobile plans & phones business. The company has increased its market share and grown its revenues as a result of growing its smartphone user base. Smartphone subscribers typically spend 80% more on monthly subscription plans than basic feature phone users.
The significant value that smartphone users contribute to mobile operators like AT&T, can be attributed to large amount of data usage as a result of wide variety of data applications available for smartphones.
Growth in data ARPU (average monthly revenue per user) is essential to AT&T and other mobile operators. However, mobile operators may reduce data service prices to attract more smartphone subscribers and such a data service price competition could hurt the growth of data ARPU, adversely impact AT&T’s stock.
10% Growth in Data Revenue per Subscriber Expected
We currently forecast an annual growth rate of about 10% in data ARPU for AT&T, amounting to more than $28 per subscriber by end of our forecast period. However, if this annual growth were to decline to 7% as a result of greater price competition and ARPU were to reach $24 per subscriber by the end of our forecast period, AT&T could see more than a 4% downside to its stock. You can modify our data ARPU forecast below to see how it can impact AT&T’s stock.
Below we discuss possible reasons that could lead to competitive pricing and further price cuts in mobile service plans:
Loss of iPhone exclusivity can lead to price competition on service plans for iPhone
AT&T faces the risk that iPhone subscribers will migrate to competing networks like Verizon once AT&T’s iPhone exclusivity ends. This risk is particularly important since there is widespread perception that Verizon’s network is faster and more reliable than AT&T’s network.
About 15% of AT&T’s subscribers are estimated to be using iPhone and thus constitute a critical customer segment. We expect that there could be further pricing cuts to iPhone service plans as a result of following factors:
(1) Lower iPhone data plan pricing from AT&T
AT&T will try to restrict iPhone user base migration to other carriers like Verizon. Along with improvement in its 3G network, which is already underway, the company may resort to more competitive pricing for iPhone. This could lead to a decline in data pricing growth and further declines in voice pricing.
(2) Incentives from Verizon to win over iPhone subscribers
Verizon, or other carriers in future, will try tap into AT&T’s iPhone user base. The iPhone, being one of the most popular smartphones with high user growth in the US, offers a lucrative revenue stream for competing networks. iPhone users tend to be high data consumers and this will prove to be an incentive for Verizon to offer competitive service pricing that can win over iPhone subscribers.
Prepaid Smartphones a Long Term Threat to Data Pricing
The economic downturn has helped to drive growth in the prepaid mobile phone market. Prepaid plans tend to be cheaper than monthly subscription plans. Currently, there are very few prepaid smartphone offerings; however this is likely to change over the long run and limit growth in data revenue associated with monthly subscription plans.
For additional analysis and forecasts, here is our complete model for AT&T’s stock
