AT&T's new wireless strategy: Growth at all costs
AT&T rolled out a new agenda for its wireless business that can be summed up in one word: Growth.
"The real story on service revenue is customer growth," explained CEO John Stankey during the operator's quarterly conference call Wednesday. "We're optimistic about our ability to keep growing that customer base. That's what's driving the service revenues."
The company's efforts are important considering mobility remains AT&T's largest and most important business, accounting for 44% of its consolidated revenues.
So how will AT&T pursue new customers throughout 2021?
"We're going to look at our promotion strategies and adjust them accordingly," Stankey explained, adding: "I think it's really important that we continue to have a growing business.
"We like the momentum. We'd like to be a little more efficient with the momentum."
But the company's executives are aware that such growth comes at a price.
"Our successful retention approach does require some upfront investment, but the lower churn levels and improved subscriber counts make this the right economic trade," explained AT&T's outgoing CFO John Stephens.
A different path than Verizon
AT&T's strategy was clearly visible in its fourth quarter 2020 results: The company reported the addition of 800,000 new postpaid phone customers, double the 400,000 most financial analysts had expected. The figures stem in part from AT&T's offer of a free iPhone 12 to new and existing customers, an offer that also helped lower churn but raise expenses.
"AT&T is more levered to the iPhone than any other carrier," noted the financial analysts at MoffettNathanson in a note to investors following the release of AT&T's earnings. "With more to lose and less to gain from a new iPhone cycle, AT&T perhaps felt compelled to offer an extraordinarily rich retention offer. It worked exactly the way one would have expected. That is, it helped lower churn, boost net additions... and crush margins."
AT&T's strategy contrasts sharply with that of Verizon, which reported Tuesday that it added just 279,000 new postpaid phone customers during the fourth quarter of 2020, far below the 427,000 that most analysts had expected.
The MoffettNathanson analysts called out the diametrically opposed strategies employed by AT&T and Verizon in pursuit of the same statistic: growth in wireless service revenues. "Where Verizon missed subscriber metrics, AT&T beat them. But while Verizon beat ARPU [average revenue per unit] expectations, AT&T missed," they wrote. "The net result was more or less the same; both companies are growing wireless service revenues at about the same pace. AT&T is guiding to ~1% total revenue growth in 2021."
However, a number of financial analysts questioned whether AT&T would be able to keep up its aggressive pursuit of new wireless customers while at the same time paying down debt and investing in its expansive HBO Max video strategy.
"AT&T is investing in mobile and HBO Max, as it promised, and at great cost," wrote the financial analysts at Sanford C. Bernstein & Co. in a note to investors following the release of AT&T's earnings. "The problem is, there are not enough investment dollars to go around. We believe the share price fairly reflects the highly uncertain outlook."
Another necessary investment
And looming over AT&T is the possibility that it will soon face another massive expense: C-band spectrum license purchases. The FCC is widely expected to announce the winners of the C-band auction in late February or early March, and most analysts expect that AT&T spent at least $20 billion on spectrum licenses in the auction.
"None of this would have been truly urgent were it not for the C-band auction," argued the MoffettNathanson analysts. "The auction comes, like all capital calls, at exactly the wrong time. AT&T doesn't have any money. We don't yet know what they've spent on C-band spectrum, but, despite a balance sheet levered to something like its limit, and a portfolio stocked with nothing to sell, it is almost certainly the case that they've spent handsomely in the auction anyway."
Nonetheless, most analysts agreed that AT&T needs to purchase C-band spectrum in order to remain competitive in a 5G future. "AT&T commented today that they would revise their leverage targets after the C-band auction," wrote the financial analysts at New Street Research in a note to investors following AT&T's earnings call. "This seems to support the view that they will invest more than their current leverage thresholds permit. ... We would reiterate that AT&T is far better off with higher leverage and more spectrum than the reverse. It would have been a colossal mistake to underspend in this auction."
Fixed wireless cynics
Finally, AT&T executives offered one more look at how their strategy is different from Verizon's. While Verizon continues to target up to 30 million US households with its fixed wireless Internet service, AT&T doesn't view the technology as up to snuff.
"I don't know that the most ideal way to build a network is going to be to use fixed wireless to take on the bulk of what occurs in the four walls of the business or a home, given the consumer trends we're going to see over the next 10 years," AT&T's Stankey said during the operator's earnings call in response to a question on the topic. He explained that consumers are increasingly bypassing multicast video services for unicast ones, thus significantly increasing the amount of bandwidth that each household uses.
"I still think having a very dense and rich fiber infrastructure is going to be necessary to be an effective network provider over time," Stankey added, noting that fixed wireless will only make sense in some select areas like large, dense cities.
Not surprisingly, Stankey said AT&T plans to expand its fiber network in order to address that situation.
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