In a prelude to upcoming fourth quarter earnings release,
AT&T (
T
) announced it sold a record 10 million smartphones in 4Q12, and we
estimate around 8 million of these to be Apple's (
AAPL
) iPhone (see
AT&T's Smartphone Sales Point To A Strong
Holiday Quarter For Apple
). Before we pop the champagne, it's important to understand
what this truly means for AT&T and visit a few key drivers that
will impact the business over the next few years.
By virtue of being the oldest player in the telecommunication
industry, AT&T is considered the grandfather of the American
Telecom Sector. However, its lack of strategic planning coupled
with poor service and underestimating competition has put the
company in a tough situation. In a fast paced and constantly
changing sector, AT&T has proven to be slow to adapt and this
has hurt the company in the past.
See our complete analysis for AT&T here
EBITDA Margin Pressure
An entry level iPhone without subsidy costs around $650 while
AT&T sells the same for $200 under a 2-year contract. This
translates to $450 subsidy on an iPhone or nearly $3.6 billion for
4Q just on iPhone. Surely, AT&T hopes to recover this
investment over the 2-year contract period through higher internet
revenue per subscriber, and we feel the short term impact on the
margins in 4Q12 is what caused the stock to drop nearly 3% on the
holiday sales figure release. The pressure on margins will continue
as manufacturers continue to launch high-end smartphone models and
AT&T will be forced to subsidize it to hold its ground in a
fiercely competitive market place.
Long History of Mismanagement
Everyone remembers the time when having an iPhone on AT&T
meant borrowing your friend's non-AT&T phone to make calls.
AT&T's mismanagement of the iPhone has left consumers skeptical
of the carrier's ability to adapt to fast evolving technologies,
and its poor understanding of the industry became evident when it
bet big on HSPA while Verizon (
VZ
) made strategic investments in 4GLTE. The popularity and
superiority of the LTE network forced AT&T to make a late stage
$14 billion investment in LTE to match Verizon's data prowess (see
AT&T Speeds Up LTE Rollout With An Eye On
Mobile Data Growth
). This is a poor reflection of the management's strategic planning
and inability to gauge consumer needs. This debacle had led to a
significant spike in mobile investment, and we believe going
forward AT&T will need to maintain this level to be competitive
with Verizon.
The intense competition among the carriers mean AT&T has
little room to make mistakes and we wouldn't be surprised
going forward, AT&T will simply follow Verizon and fail to
innovate thus relinquishing its position as an industry leader.
Little Bargaining Power
Research in Motion (
RIMM
) recently announced that all the major carriers including AT&T
will be offering its Blackberry 10 handsets that are slated to be
launched later this month (See RIM To Launch Six BB10
Smartphones In Make-Or-Break Year). While this is good news for
RIM, we believe AT&T which for far too long has ridden the
success of the iPhone will not be taking any chance with future
device manufacturers to avoid the possibility of market share loss.
AT&T is backed into a corner where Verizon is quickly
closing the gap in the lucrative smartphone category. Verizon
announced it sold 9.8 million handsets (see Verizon's Q4 Smartphone
Sales Imply Another Big Holiday Season For Apple) compared to
AT&T's 10 million. The only silver lining for AT&T is
Sprint's distraction with DISH Network (
DISH
) over Clearwire (CLWR) eliminating a potential short term threat
(see How Much Pain Can Dish's Clearwire Bid Inflict On
Sprint?). While its important to provide a broader choice for
consumers, we feel AT&T is in a difficult position to negotiate
as it can't afford to lose any further market share in the
smartphone category.
See our complete analysis for Sprint here
End Of Landline Era
With increasing penetration and usage of cell phones, landlines
are undergoing a slow and painful death. AT&T's legacy business
in this segment has been steadily declining over the years. We
expect this trend to continue, adding pressure to the wireless
business to outperform. Margins have been deteriorating as the
American consumer shifts from a traditional family landline to
individual cellphones.
This trend has a far reaching impact because a large number of
AT&T landline users are also AT&T wireless customers. These
customers enjoy loyalty discounts coupled with the benefit of
shared data plans and ease of billing that has made them stick to
AT&T wireless. With landlines disconnected, these customers now
have the freedom to shop around for better wireless deals and
service. Verizon which is perceived in the market place as
technologically superior in the wireless category will gain market
share from AT&T.
With Verizon close on its heel and quickly closing the gap,
AT&T will be under immense pressure to meet market
expectations. As long as management doesn't make hasty strategic
decisions or lose focus, the company will be able to navigate the
bumpy ride ahead.
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