AT&T (NYSE:T) is expected to announce its Q3 2013 earnings on October 23rd. During the earnings call, we will take a close look at the net subscriber additions to see how much of an impact Sprint’s (NYSE:S) iDEN shutdown has had on the carrier amid an industry-wide saturation in wireless growth. Increasing smartphone penetration should enable the company to post a sequential increase in postpaid ARPU levels bolstered by data ARPU. The company’s wireless margins will be of particular interest now that opportunities to grow subscribers are limited and competition has increased, with Sprint and T-Mobile emerging as stronger rivals following a flurry of recent M&A activity. In addition to the company’s financials, we will be taking special interest in AT&T’s LTE adoption rate and the uptake in its shared data plans, which are crucial to the carrier’s long-term growth in ARPU levels.
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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 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 a major differentiating factor. While Verizon is nearly done with its initial nation-wide LTE deployment, AT&T has managed to cover about 240 million Americans with its LTE network and expects the initial roll-out to be complete in 2014.
Last year, Verizon added over 5 million postpaid subscribers, more than three and a half times of AT&T. More recently in Q2, Verizon’s postpaid net adds outnumbered AT&T’s 1.7:1 despite AT&T doing much better due to aggressive promotions. Sprint’s recent shutdown of the outdated Nextel iDEN network, which was a steady source of subscriber defections for rivals, could make acquiring new subscribers even tougher from now on.
It was in a bid to counter Verizon’s early LTE lead that AT&T spent aggressively in Q2, taking a margin hit to add new smartphone users and increase ARPU levels. The move paid off as the carrier added as many as 1.2 million new smartphone users – subscribers that consume more data and pay on average two times more than non-smartphone subscribers. As the wireless industry gets more saturated, AT&T’s focus has shifted from acquiring new subscribers to converting more of their existing base to smartphones and increasing profitability. Aside from controlling subsidies, AT&T is also trying to lengthen the handset replacement cycle by levying additional upgrade fees. (see AT&T Shows Focus On Profitability As Data Demand Surges) Its new no-contract Next plans that allow subscribers to trade-in their existing handsets so as to be able to upgrade every year is also likely to increase AT&T’s margins given that the carrier isn’t decreasing the price of its service plans and has the option of selling the refurbished phones back in the market.
ARPU increase to be driven by data demand
Going forward, one of the big drivers of postpaid ARPU will be the increasing adoption of AT&T’s Mobile Share plans, which allow users to share a bucket of data across mobile devices, and therefore make them less inclined to switch. As of last quarter, AT&T had about 13 million subscribers under the Mobile Share program, up by 30% since the end of Q1. More importantly, AT&T is seeing more of its unlimited subscriber base transition to one of its shared data plans, thereby enabling it to better monetize its subscriber base. More than 15% of AT&T’s shared data plan users had switched over from unlimited plans by the end of Q2. As a result, the share of unlimited data plans as a proportion of AT&T’s postpaid smartphone base has decreased from about 55% to 30% in two years. With a view to lock in users with its shared data plans, AT&T has now decided to stop its older data plans altogether for new subscribers.
As the adoption of Mobile Share plans increases and data usage goes up, subscribers are moving up to the higher tiers of their data plans. More than 25% of AT&T’s shared data plan users had subscribed to the higher data tiers as of last quarter – a trend that will only increase going forward as LTE adoption grows. An increased adoption of 4G in the long term will also reduce dependence on AT&T’s 3G networks, which are under great strain due to heavy data usage of smartphones such as the iPhone. Further, LTE as a network technology not only supports higher speeds, but is also more efficient than current 3G networks at handling data, reducing maintenance and handling costs. In the near term, limited LTE coverage may be a deterrent for some, but a fallback option in the form of the carrier’s HSPA+ network, which provides higher speeds than 3G and has a wider coverage area than its LTE network, should offer an interim solution.
It is also likely that at some point AT&T, which has been a vocal critic of unlimited plans in the past, will follow in Verizon’s footsteps and prohibit its unlimited plan users from availing smartphone subsidies in case they want to continue using their plans. This should help AT&T more efficiently manage its limited network resources and better monetize its data traffic (see AT&T Looks To Fuel Data Demand With Mobile Share Plans).