AT&T Looks To Tackle Wireless Saturation With ‘Sponsored’ ARPU Growth

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AT&T (NYSE:T) announced the launch of Sponsored Data on Monday, paving the way for businesses to increase their mobile presence by subsidizing data consumption for certain videos and applications. [1] This service allows content companies and advertisers to reach a burgeoning audience of mobile users who are wary of running huge overage charges on their limited data plans. When accessing sponsored content, wireless subscribers will be notified via a ‘sponsored’ icon in the status bar so that they know that the data usage won’t show up on their mobile bill but instead be paid for by the sponsor. AT&T has garnered the support of three partners – Aquoto, Kony Solutions and UnitedHealth Group – for the initial launch.

With the wireless market and demand for high-end smartphones reaching saturation levels, AT&T is looking to better monetize its network as high-speed 4G opens up new opportunities to bolster ARPU (average revenue per user) levels. Our $38 price estimate for AT&T is about 10% ahead of the current market price.

See our complete analysis for AT&T here


Data Caps Limit Reach of Mobile Content

The burgeoning demand for mobile Internet, due to the proliferation of smartphones and tablets, has made this market attractive for content providers and advertisers. Specifically, it is the advent of 4G LTE that has led to a marked improvement in mobile broadband speeds, making it easy to view and stream large-sized video files on the go and allowing businesses to effectively promote their content and products through video ads on mobile devices.

However, wireless data plans are costly and many carriers have capped monthly usage, causing subscribers to be wary of exceeding their limits and incurring huge overage charges. While the issue of subscribers running into data caps isn’t a big concern as of now, the problem could escalate quickly as an increasing number of subscribers transition to 4G. Wireless carriers have limited spectrum resources and incur high capital expenditures in building and maintaining mobile networks, which means that it is less likely for prices to come down or unlimited plans to make a comeback any time soon. Verizon (NYSE:VZ) and AT&T have long dropped their unlimited data plans and are now actively promoting shared tiered plans. With mobile data demand surging, we expect the smaller carriers to follow suit soon. This may artificially deflate the demand for mobile data – a big concern for content providers looking to capture a greater proportion of the mobile traffic.

AT&T Looking To Differentiate With Content

AT&T’s Sponsored Data program could therefore see quite a few takers in big media companies and advertisers looking to pick up the data tab for customers accessing their mobile content. Last year, the Wall Street Journal carried a report saying that ESPN has had talks with at least one major U.S. carrier in this regard. [2] The carrier in question could have been either Verizon and AT&T, since both had expressed hopes in the past about the content industry sharing the costs of distributing their bandwidth-hogging services to subscribers in the coming time. The new business model could be a big win for the wireless industry currently looking for additional sources of revenue in a highly saturated market that has made increasing prices tougher.

Just as carriers looked to stave off commoditization of their services by offering smartphones at subsidized prices, content could bring the next wave of differentiation. AT&T’s exclusive deal with Apple had helped it compete more effectively with industry behemoth Verizon, and a similar content deal with one of the media companies could be in the offing. For its part,Verizon has already launched its video streaming service in a joint venture with Redbox, in a bid to build content relationships that could prove very valuable down the road.

AT&T Eyeing ARPU Growth Through Sponsored Data

Having content deals with media companies, possibly even exclusive ones, will not only allow carriers to differentiate from the rest, but also give them an opportunity to drive data usage and increase ARPU levels. Wireless ARPU is currently growing at a fair clip due to growing data usage, but the upside potential is limited in a market as developed as the U.S., where more than half the population (and almost all affluent users) already owns smartphones. Moreover, AT&T has found it especially tough to grow its postpaid subscriber base, with the carrier incurring market share losses over the last couple of years.

In a bid to offset the impact of wireless saturation, AT&T is also looking to bring advertisers on board as well and increase its exposure to the fast-growing mobile advertising market. Mobile advertising in the U.S. grew 178% in 2012, and is expected to grow by another 101% to about $9.6 billion this year, according to market research firm eMarketer. [3] [4] With the mobile ad market exploding, advertisers will be incentivized to take advantage of the Sponsored Data program to entice subscribers to watch ads that they would otherwise have avoided so as not to run into data caps. By getting businesses to subsidize wireless data connectivity, AT&T will be able to better monetize its subscriber base without having to increase service plan prices.

However, this could raise concerns that the carrier may throttle the speeds of certain content in favor of others. The net neutrality rules, which dictate that all Internet traffic be treated equally, do not apply to wireless networks currently due to the scarcity of wireless spectrum, but such revenue sharing deals with content providers could cause the FCC to revisit the contentious topic. There is also the bigger concern floated by consumer advocates that such deals would limit competition in the content market and have huge implications for the free market of the Internet economy.

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Notes:
  1. AT&T Allows Advertisers to Sponsor Mobile Data, NYTimes, January 6th, 2014 []
  2. ESPN Eyes Subsidizing Wireless-Data Plans, WSJ, May 9th, 2012 []
  3. Facebook to See Three in 10 Mobile Display Dollars This Year, eMarketer, April 4th, 2013 []
  4. Mobile Growth Pushes Facebook to Become No. 2 US Digital Ad Seller, eMarketer, December 19th, 2013 []
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