AT&T (NYSE:T) is expected to announce its Q2 2013 earnings on July 23. The second largest U.S. wireless carrier has been losing market share to Verizon (NYSE:VZ) in recent quarters owing to its lagging 4G LTE coverage, which has been a key differentiator for carriers in a saturated market. It has therefore been spending heavily on marketing and launching promotional offers to boost subscriber numbers and sustain revenue growth. As a result, the carrier has guided for a better-than-expected subscriber net adds of 500,000 for Q2, which is a good 70% higher than the previous quarter and over 50% more than the year-ago quarter. The high cost of promotions and subsidies on smartphones sold will however cause margins to shrink by about 180 basis points y-o-y.
The margin compression should not be much of a concern to investors since the carrier has in return for the subsidies locked its subscribers into two-year postpaid contracts. The near-term margin hit will therefore be more than compensated for by the regular service fees that the subscriber is obligated to pay AT&T over the term of the contractual period. Increasing smartphone penetration should continue to help the company post a sequential increase in postpaid ARPU levels, bolstered by data ARPUs. A saturated wireless market however means that AT&T’s subscriber gains this quarter are coming at the expense of its rival carriers. With Verizon slated to release its Q2 results this week, it will be interesting to know if Verizon or one of the smaller carriers has faced the brunt of AT&T’s aggressive marketing campaign. Longer term, the large-scale consolidation happening in the wireless industry, with the Sprint-Softbank deal, Sprint’s acquisition of Clearwire and the T-Mobile-MetroPCS merger, could threaten AT&T’s comfortable second position and investors will be interested in knowing if the carrier has a strategy to counter that.
- Why Is AT&T Interested In Yahoo’s Internet Assets?
- How Is AT&T’s Business Solutions Revenue Expected To Trend?
- Can AT&T’s Wireless Margins Continue To Expand?
- How Is AT&T’s International Business Expected To Trend?
- How Much Can AT&T’s Revenues Grow Over The Next 5 Years?
- How Is AT&T’s Revenue Mix Expected To Change Over The Next 5 Years?
AT&T Making Up For LTE Lag
The U.S. wireless market has become increasingly saturated recently with wireless connections having exceeded the population in mid-2011. This has made the acquisition of new subscribers, especially those that pay for the higher-margin data plans, very tough for the wireless carriers. AT&T’s dismal postpaid net adds in recent quarters is to an extent reflective of this industry-wide phenomenon, but Verizon’s comparatively much better performance shows that LTE coverage is the differentiating factor here. While Verizon added close to 680,000 postpaid subscribers last quarter, AT&T did less than 300,000 during the same period. Last year as well, Verizon added over 5 million postpaid subscribers, more than three and a half times of AT&T.
As the first carrier in the U.S. to start 4G LTE deployment, Verizon has raced ahead of rivals with LTE coverage in about 500 markets currently – more than 95% of its 3G footprint. With its initial LTE deployment phase nearly done, the carrier is gearing for a second round of LTE deployment that will see it use its recently acquired AWS airwaves from the cable companies. In comparison, AT&T expects to complete its initial LTE deployment only by the end of 2014 – a full year and a half after Verizon. AT&T’s LTE network is available in about 328 U.S. markets currently, and will reach about 90% of its planned total coverage of 300 million POPs by the end of 2013.
With Verizon touting its LTE lead to gain an upper hand over AT&T in recent quarters, it will be interesting to see if AT&T’s better than expected Q2 subscriber adds have come at the bigger carrier’s expense. If so, it may cause AT&T to continue its promotions and aggressive marketing strategy in the next few quarters as well, causing margins to remain compressed in the near term. We will be watching for comments in this regard during the earnings call.
Lowering Churn A Priority
In order to counter the market saturation, AT&T is coming up with strategies to increase consumer loyalty and be able to better hold on to its existing customer base. It recently launched a new program called AT&T Next which allows subscribers to upgrade their smartphones every year by paying in advance in twelve easy monthly installments. Last year, the carrier launched Mobile Share data plans that allow subscribers to add more mobile devices to their service account. Subscribers who subscribe to these initiatives get further entrenched in the AT&T ecosystem, making it tougher to switch carriers.
However, increasing adoption of the shared data plans will decrease the average revenue per device since the non-smartphone connected devices consume much less data. But AT&T’s revenues from each individual subscriber should also rise at the same time, as users connect more devices to its wireless network. Moreover, since the data consumption of these connected devices is low, it will help shore up the service margins for AT&T. Also since the shared data plans are tiered, an increasing usage of AT&T’s high-speed LTE network will cause subscribers to jump into the higher tiers, enabling the carrier to better monetize its existing subscriber base.
We will be looking at the rate at which the company’s Mobile Share data plans are being adopted in the face of heightened competition from Verizon, which has also launched similar plans and is making good progress towards increasing their penetration. (see Verizon’s LTE And Shared Data Plans Lift Results) Going forward, investors will also need to keep an eye out for rivals such as the reinvigorated Sprint, which recently received a huge cash infusion from SoftBank for acquiring Clearwire and its spectrum, as well as T-Mobile. These relatively small carriers are looking to shake the industry out of duopoly by bringing in innovative new unlimited plans and pushing prices down.