AT&T and Verizon's future plans

The American telecom market has been through interesting phases recently most of which has been a direct result of T-Mobile and its slew of uncarrier initiatives.



All the American telecom operators are at the end of the day publicly listed companies. There are three points affecting the AT&T and Verizon duopoly.

1. Growing saturation of smartphone penetration ( despite growing saturation the American smartphone market is still witnessing decent growth but not for long )
2. A reinvigorated T-Mobile
3. Hefty backing of Sprint by Soft Bank

All the above three points have meant that the duopoly's i.e AT&T and Verizon's traditional revenues have come under pressure to grow and by the virtue of being publicly listed companies their goal at the end of the day is to continuously keep growing (revenue and profits) and increase value for shareholders.

Now that traditional revenue streams are drying up because of the three points mentioned above, both AT&T and Verizon have been looking for alternative revenue streams.

In this post I will discuss what are the approaches of the two telecom operators to diverge their revenue streams and whose approach is better.

To start with I would take AT&T into consideration -

1. AT&T

AT&T's future growth lies in

1.a DirecTV acquistion
1.b Connected cars and home automation
1.c Mexican market.

1.a DirecTV acquistion -

AT&T's DirecTV acquisition is going to get regulatory approval anytime soon now.

AT&T's acquistion of DirecTV will give it access to a satellite TV provider. In  Europe there is a trend of quad play offerings which is sweeping the entire continent. Operators in Europe are bundling boradband access, wireless services, Pay TV in one package and selling it to customers. The acquisition of DirecTV should in theory give AT&T similar Quad Play advantages. AT&T is already the second largest mobile operator in US. DirecTV is the second largest Pay TV provider in US and a combination of DirecTV and AT&T's U-Verse should help create the largest PayTV provider in US. When it comes to broadband AT&T again comes among top 3 ( mostly at seond position) in terms of subscriber base. AT&T can combine all these offerings in one big package and sell it at a moderate discount to existing customers as well as attract new customers.

While all this sounds good in theory its very difficult to acheive the same in US.

The first reason being that the continous rise of Netflix is making several people doubt if paying for Pay TV is worth anymore, this has increased more so now given that channels like HBO are allowing their content to be streamed over the internet without the need of a Pay TV subscription of any form. As a result we are seeing a trend in which most people are now only relying on OTT apps such as Netflix, HBO now etc and completely surrendering their Pay TV subscription a.k.a cord cutters. Hence this makes the DirecTV acquistion and subsequent Quad Play advantage redundant.

Second is the fact that not all services are the best available services everywhere. Although DirecTV being a satellite service provider should in theory have blanket coverage all over America, the same can't be said about AT&T's wireless service and its broadband offerings. Although AT&T covers around 300-310 million POPs in America, there are still areas where AT&T's coverage/performance is less than stellar or maybe someone like Sprint or T-Mobile provides better or similar service for a lesser price. Same goes for AT&T's broadband offerings which as of now is facing stiff competition from Google Fiber.

Third the US simply hasn't been a place where Quad Play or bundled offers have been successful for the most part.

 "It is very difficult for some reason in the U.S. to sell a quad play," Verizon Communications CFO Fran Shammo said.

One thing which could help with AT&T's acquistion of DirectTV is the fact that DirecTV is still facing growth in Latin America and AT&T has sent out signals in the past that it may enter Latin American markets if conditions are favourable enough.

1.b Connected cars and home automation

AT&T is very serious about connected cars. AT&T's OnStar service lets people connect their cars to the carrier's LTE network for a moderate price (around $10) every month. Apart from this AT&T has struck deals with a lot of car manufacturers in the US to make sure the cars manufactured come with AT&T OnStar service on board. As autonomous and semi-autonomous cars become more popular in the years to come, connectivity will be a key requirement and AT&T's dedication in the connected car market can help them have a first mover advantage as we move towards autonomous and semi-autonomous vehicles.

Home automation -

Home automation is another segement AT&T is working upon. Apple's HomeKit, Google's acquistion of Nest and Nest's subsequent acquistion of Dropcam and Samsung's acquistion of SmartThings have made one thing clear that IoT especially Home Automation is the future. AT&T has been agressively pursuing home automation with its Digital Life home automation service that requires users to pay around $150-$300 upfront for equipments and choose a $30/$40 base package along with add ons of $5/$10. One key advantage AT&T has over tech companies such as Google, Apple etc is the abundance of technical workers who can install the equipments. This is only going to get the stronger after AT&T's acquistion of DirecTV where the carrier will get access to even more technical persons who can visit homes and install equipments just like how they install antennas for the satellite service.

Although home automation and connected cars can help AT&T diverge its traditional service revenues, they are still nimble units which don't contribute much to the carrier's overall revenue. Apart from that the concept or tather the technology of connected cars and home automation is still in its infacy. Once the technology becomes mainstream it wouldn't be difficult to imagine competitiors like T-Mobile and Sprint mimic the same and undercut AT&T on pricing as they are doing now.

1.c Entry into the Mexican market -

This is in my opinion the best move by AT&T which will have huge returns in future if executed in a good manner.

There are three reasons because of which I feel AT&T's entry into Mexico makes sense.

1.c.1 Monopoly -

Carlos Slim's America Movil's Telcel is a clear monopoly in Mexico commanding more than 70% market share. Telefonica's Movistar is a very distant second with around 20% market share. Apart from commanding such high market share, Telcel also charges Mexicans a hefty premium for its telecom services. The market conditions are present for a new competitior to become successful. One carrier has more than 50% market share ( Telcel ) and its margins are so high that even if AT&T undercuts Telcel they can still operate with positive cash flows in the near short term.

An extract from an New York Time article -

"" according to estimates
from the competition commission. Mr.
de Swaan’s agency has begun setting
them (interconnection fees) at about 40 percent of what Telcel argues it needs to cover costs.""

1.c.2 Regulations -

Although certain companies like Uber have made a mockery of several regulators around the globe, telecom is a totally different field. Telecom is one of the most regulated industries in the world. A favorable regulator plays a crucial role in the success of a telecom operator and the general growth of telecommunications in the country. The Mexican regulator and the Mexican government in general are in full mood to break Telcel's monopoly in Mexico.

The regulator is already pressing Telcel to reduce its inter-connect charges ( a key reason for the pricey tariffs ). Apart from that the government has also directed TelCel to spin off all its towers as a separate entity which competitors can lease. If the competitors and Telcel's tower entity cannot reach a price for leasing, the government has the power to fix the price themselves.

After the acquistion of Nextel and Iusacell, AT&T has one of the best spectrum holdings in Mexico, combine that with tower entitiy of TelCel and AT&T can at least have the ability to build a strong LTE network all over Mexico.

1.c.3 Synergies -

A strong LTE network in Mexico can positively impact AT&T's American wireless business. USA and Mexico are bordering countries which means there is a lot of cross border activity both legally and illegally. If one network can provide a consistent LTE experience across both US and Mexico it will be definitely valuable for a lot of people. That's exactly what AT&T plans to do as well. The company wants users to be able to access LTE both in US as well as Mexico with their standard data packs without paying any extra roaming charges. Calls and texts are also rumored to be accessible at same rates without any extra charges. This is a two way deal, meaning an AT&T Mexican user can access AT&T's US network without any extra charges and an AT&T American customer can access the Mexican network without any extra charges.

AT&T also plans to refurbish iPhones and other Android devices they receive in US from customers who upgrade and sell the same in Mexico for lower rates, this will again be very beneficial since new devices in Mexico cost a lot because of its economic structure. If AT&T can reduce the cost of buying a branded LTE device, they will in turn be able to increase adoption of its LTE network among newer users. Mexicos's market also has very low LTE penetration making it all the more ideal for AT&T.

Verizon -

In case of Verizon from what I can see,  they are betting completely on LTE broadcast of videos and ads to monetize the same. This has been the major reason behind Verizon's recent acquistion of AOL for $4.4 bn.

Verizon also seems to be focusing on wireless alone. The company has recently sought to sell its tower assets and is also selling certain parts of its Fios broadband network.

In my opinion Verizon betting all its money and future on LTE broadcast is pretty risky. 

At least in the US as far as I have seen paying for video on demand seems to be really catching up as witnessed by Netflix's amazing growth and apps such as Hulu, Amazon Video Prime and also HBO Now. In fact HBO Now is now the one of the top apps on ios in terms of revenue.

Ad supported services such as Spotify have also been popular but not profitable, if anything their losses have only been increasing quarter after quarter.

Apart from that I would like to take YouTube as an example over here. Youtube is probably 7-8 times bigger than the potential audience Verizon can capture. Yet YouTube has only been able to break even after so many years of operations. I agree that with the acquistion of AOL, Verizon has access to a company that has great speciality in targeted ads at Video. Couple that with the enormous database Verizon has on its customers such as Name, location, age, gender etc and in theory it would make sense.

But lets not forget even Google is as good as AOL if not better when it comes to targeted advertising, advertising is in the DNA of Google, that's how the company has been making most of its revenues for years now. Apart from that even Google has huge amounts of data on its users through several of its apps such as Maps, Gmail, Google + etc etc. 

So Google has as much data as Verizon on users and Google is as good as AOL at targeted advertising, not to forget that Youtube's market is 7-8 times bigger than Verizon's potential market yet YouTube is only able to breakeven, this then puts a big question mark on whether Verizon will be able to succeed (make profits) with its ad supported OTT offering.

Update :
My knowledge on Verizon's plans to buy AOL aren't adequate, I recommend reading this article by industry analyst Jan Dawson -> http://www.beyonddevic.es/2015/05/12/why-verizons-aol-deal-makes-sense/

Conclusion -

T-Mobile is back with a bang in the wireless industry. T-Mobile is literally eating away all the postpaid growth of the American wireless industry. If T-Mobile gets acquired by someone like Dish or Comcast, it would make life even tougher for AT&T and Verizon. As T-Mobile being acquired by Dish or Comcast would get it enough money to build out even stronger LTE networks and compete more fiercely in auctions. Apart from that Sprint is already having a treasure trove of valuable spectrum which Verizon and AT&T crave to have. With Sprint now being backed by Soft Bank and Claure Marcelo steering the ship even Sprint is making a gradual come back. Inevitably both AT&T and Verizon need alternate streams of revenue. When it comes to alternate revenue streams, AT&T seems more prepared than Verizon or at least AT&T has a more credible plan.