AT&T Tacks On Additional Fee To Support Growth In A Saturated Market

With subscriber growth stalling in a saturated wireless market, AT&T (NYSE:T) is looking to drive top-line growth through higher subscriber fees. The carrier recently announced the addition of a new monthly administrative fee of 61 cents to the bills of all its postpaid contract lines, effective May 1st. The fee will be charged ‘below-the-line’, or separate from the monthly service fees that usually appear at the beginning of the phone bill, and be levied on top of the 50 cents per line regulatory cost recovery charge that AT&T already charges. Other carriers such as Verizon (NYSE:VZ) and Sprint (NYSE:S) have already been charging fees under the same heads for quite some time now. AT&T said that the new fee will help it cover the costs of interconnection, cell site rents and maintenance.

While the fee of 61 cents per month ($7.32 per year) may not sound like a lot to an individual subscriber, it adds up to a significant amount for AT&T. With about 70 million postpaid subscribers registered on its network as of Q1 2013, AT&T could generate additional revenues of more than $500 million annually assuming that it doesn’t add any more subscribers from hereon. Adjusted for the divestiture of the Yellow Pages business last year, the additional charge could contribute to around 0.3% growth in revenues this year. The carrier had guided for a 2% growth in top-line for the full year 2013, but adjusted revenues grew only 0.9% in the first quarter. It seems as though the measure to levy an additional fee was taken to counter the effect of the saturated wireless market and the lower regulatory fees that the carrier had collected last quarter.

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ARPUs In Focus In A Saturated Wireless Market

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 in the same period. Last year as well, Verizon added over 5 million postpaid subscribers, more than three and a half times of AT&T.

With the wireless industry getting more saturated, AT&T’s focus has shifted from acquiring new subscribers to converting more of its existing base to smartphones and increasing ARPU. AT&T’s smartphone users consume more data and pay on an average two times more than non-smartphone subscribers. However, smartphone penetration of AT&T’s postpaid subscriber base has already reached 70% in Q1, up from about 61% a year ago. What this means is that AT&T will find it increasingly difficult to add new smartphone users as time wears on, and ARPU growth may slow. The carrier is therefore promoting its high-speed 4G LTE data network and Mobile Share Plans that encourage users to add more mobile devices to their plans and consume more data. Adding small fees to ‘below-the-line’ items seems to be another strategy to increase ARPU levels without affecting the prices of the monthly service plans that the carriers actively market.

This strategy may not however work out in the long run, since the carrier would have to increase such fees on a regular basis to drive growth, and then potentially face a public outcry or regulatory disapproval as a result. Last year, Verizon had to withdraw plans to impose a $2 convenience charge on subscribers paying their bills online or over the phone after a public outcry. Fuelling data usage by transitioning subscribers to LTE and pushing Mobile Share Plans is what should drive long-term future growth. AT&T will therefore look to close the LTE gap with Verizona by executing on its accelerated LTE rollout plans well in order to have a majority of its LTE network ready by the end of the year.

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