Should AT&T Worry About the Unlimited Data Blitz?
Many wireless carriers phased out unlimited data plans over the past few years, as the costs of satisfying data-hungry users outweighed the benefits of new subscriptions. Yet that trend recently reversed, as Verizon (NYSE: VZ) , Sprint (NYSE: S) , T-Mobile (NASDAQ: TMUS) , and AT&T (NYSE: T) all launched new unlimited data plans in February -- setting the stage for a potential price war between the major telcos.
AT&T previously offered unlimited data plans, but only as a bundled feature for DirecTV or U-Verse subscribers. But after the other three telcos introduced their unlimited data packages, AT&T launched its own stand-alone unlimited data plan . Let's take a closer look at what AT&T is offering, and whether or not it widens the company's moat against its rivals.
What is AT&T offering?
A quick comparison between the four carriers' unlimited plans indicates that AT&T is the priciest of the bunch:
No. of lines
Source: Company web sites, prices current as of Feb. 21.
AT&T is the clear loser for those who own fewer devices, but its five-line plan includes $40 of credit, so the plan actually costs $180 -- which matches Verizon and T-Mobile's prices. However, AT&T is notably the only carrier that doesn't offer Wi-Fi hotspot tethering for its unlimited plans -- the other three offer 10GB of hotspot data.
AT&T's "Stream Saver" feature also keeps videos throttled at 480p by default -- so users must manually disable the feature to play HD videos over LTE connections. All four plans include 22-23GB of high-speed LTE data before speeds are selectively throttled during network congestion.
AT&T also added value-added services for tablets, connected cars, wearables, and feature phones. Tablets and connected cars can be added to the unlimited plan for an additional $40, or get 1GB of capped data for $10 per month. Wearables can get unlimited data for $10 per month, and feature phones can be hooked up for $25.
Is this the wrong play at the wrong time?
When AT&T bundled unlimited data plans with DirecTV last year, it seemed like a smart way to combine its strengths in wireless data and pay TV. Wireless subscribers could easily access streaming DirecTV and other sponsored content across TVs, PCs, tablets, and smartphones without worrying about data caps.
Furthermore, AT&T could "zero rate" its content for subscribers on capped plans to make its own programs more appealing than those on rival streaming services. That's why AT&T proposed to buy Time Warner (NYSE: TWX) . If AT&T can add channels like HBO and CNN to its DirecTV ecosystem, it can control both the content and the pipes -- which could make life difficult for streaming players that lack the infrastructure foundations.
AT&T needs the DirecTV ecosystem to support its wireless business, which added 6.2 million users in the U.S. and 3.3 million users in Mexico last year. That's why unbundling its unlimited data plans from DirecTV feels more like a knee-jerk reaction to Verizon, Sprint, and T-Mobile's aggression instead of a shrewd long-term strategy.
Should AT&T investors start worrying?
The high prices for AT&T's unlimited plans and the lack of hotspot tethering could certainly cause consumers to flock to rival telcos. Unbundling the plan from DirecTV also seems like a short-sighted move which could hurt both the wireless and pay TV businesses.
But investors shouldn't overlook a few key facts. First, Sprint offers the cheapest plans, but its network coverage is spottier and download speeds are slower than those of the other three telcos, according to research firm OpenSignal. Second, customers who need four or five lines will likely stick with AT&T's plan, which is competitively priced against Verizon and T-Mobile. Therefore, the fears of a price war erupting might be overblown.
Lastly, AT&T stock is still cheap at 18 times earnings, which is higher than Verizon's P/E of 14 but lower than T-Mobile's P/E of 40 and the industry average of 25. Sprint's P/E remains negative due to its lack of profitability. AT&T also pays a forward yield of 4.7% -- which matches Verizon's yield. Neither T-Mobile nor Sprint pays a dividend.
Those fundamental factors should limit AT&T's downside, even if tougher competition throttles its wireless gains, or regulators require big concessions to approve the Time Warner acquisition. Therefore, I plan to keep holding my shares of AT&T -- but I'll keep an eye out for additional challenges to its wireless and pay TV businesses.
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