AT&T (NYSE:T) is scheduled to release its Q4 2013 results after market close on January 28. The second largest wireless carrier in the U.S. has had a tough time holding on its postpaid market share in recent years, with Verizon marketing its lead in LTE coverage to good effect and T-Mobile getting aggressive with its Uncarrier promotions off late. While we expect Apple’s recent iPhone launch to have helped AT&T activate a good number of smartphones during the holiday season, T-Mobile’s first holiday quarter with the iPhone is likely have increased competition for data-hungry smartphone users. We will be looking at not only AT&T’s postpaid net adds in Q4, but also its wireless margins, which could have taken a hit from subsidizing expensive smartphones such as the iPhone. However, AT&T has put cost controls in place such as its recent decisions to lengthen the smartphone upgrade cycle from 20 to 24 months and levy a monthly administrative fee, which could offset some of the subsidy impact. We also expect the rising penetration of smartphones to help AT&T continue to post a sequential increase in its data-ARPU levels, bolstered by growing adoption of 4G LTE.
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AT&T’s lag in LTE coverage has been a concern over the past several quarters, with its postpaid net adds shrinking in comparison to industry leader Verizon. Last year, for example, Verizon added over 5 million postpaid subscribers, more than three and a half times that of AT&T. The first three quarters this year have so far seen the trend continue, with Verizon’s postpaid net adds outnumbering AT&T’s 2:1.
However, the loss of market share has been less severe for AT&T in 2013 as compared to the previous year, when its LTE coverage trailed Verizon’s by a wide margin. This time last year, for example, the difference in coverage was nearly 100 million PoPs, with Verizon’s LTE network covering about 90% of the total U.S. population. At 270 million PoPs currently, AT&T’s LTE coverage is still about 30 million behind Verizon’s, but the lag has become less of a concern with each passing quarter. While Verizon’s postpaid net adds in 2013 have declined as compared to the previous year, AT&T’s have improved. Compared to postpaid net adds of 685,000 in the first three quarters of 2012, AT&T added about 1.2 million postpaid subscribers in the same period this year. To be sure, AT&T is still lagging behind Verizon in subscriber additions (Verizon added nearly twice as many postpaid subscribers as AT&T in Q1-Q3 2013), but its subscriber patterns are showing signs of stabilizing as the LTE gap between the two heavyweights narrows.
T-Mobile’s No-Contract Plans Becoming A Force To Reckon With
On the other hand, competition from a resurgent T-Mobile has become a lot more intense in recent quarters. The carrier started an aggressive promotional ‘Uncarrier’ campaign around its no-contract service plans with which it plans to disrupt the industry, and launched the iPhone for the first time this year. It has also done well on the 4G LTE front, starting the deployment of its network much later than rivals, but rolling it out at a breakneck speed to cover more than 200 million PoPs already. T-Mobile’s aggressive posturing in the wireless market helped it add 648,000 postpaid net adds during the third quarter, more than 75% ahead of what AT&T managed in the same quarter. While AT&T did see its Q3 postpaid net adds double from the year-ago quarter, most of the new subscriber additions came from tablets and other connected devices rather than smartphones. T-Mobile revealed its porting ratios for Q4 recently, and the figures show the trend continuing in the holiday quarter as well. For every subscriber that T-Mobile is losing to AT&T, the smaller carrier seems to be gaining two. ((T-Mobile Touts Customer Gains After Party-Crashing Antics, Bloomberg, January 9th, 2013))
What could also impact AT&T’s net adds figure this quarter is Sprint’s recent shutdown of the outdated Nextel iDEN network, which was a steady source of subscriber defections for rivals. As competition increases and 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 has lengthened the handset replacement cycle from 20 to 24 months, as well as levied additional upgrade and administrative 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.
Data Growth Driven By Mobile Share Plans, LTE
Going forward, one of the big drivers of data usage will be the increasing adoption of AT&T’s Mobile Share plans, which allow users to share a bucket of data across mobile devices. This not only incentivizes subscribers to add more mobile devices to their service plan but also makes them less inclined to switch carriers. As of last quarter, AT&T had about 16 million subscribers under the Mobile Share program, up by 23% since the end of Q2. More importantly, AT&T saw 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 have switched over from unlimited plans. As a result, about 72% of AT&T’s postpaid smartphone base was on a tiered data plan (including Mobile Share) by Q3-end, up from 64% two years ago. With a view to lock in users with its shared data plans, AT&T has stopped offering 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 30% 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, thereby reducing maintenance and handling costs.
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).