How AT&T Makes Money
How AT&T Makes Money
For decades, AT&T Inc. (T)
was one of the largest corporations not just of its kind, but in all of
existence. It was as large and influential as Apple Inc. (AAPL) or Exxon Mobil Corp. (XOM)
is today. AT&T’s business of telephony, which generations of people
have since taken for granted, was at least as revolutionary a
development as the internet. The idea of being able to converse with
someone live, without having to be in each other’s physical presence,
not only transformed daily life but made the company boatloads of money.
State-Sanctioned Monopoly
In 1918, AT&T received a government-sanctioned monopoly
as the sole provider of phone service throughout almost the entire
United States. Then in the early 1970s, the federal government changed
its mind and filed an antitrust suit against the company. The case was
one of the largest and most convoluted in history and took nearly a
decade to resolve. AT&T ended up divesting itself of its monopoly,
which led to the creation of regional telephone companies. In 2005 one
of those, Southwestern Bell, ended up purchasing its erstwhile parent.
Southwestern Bell then rebranded itself as AT&T, indirectly leading
to the creation of a company that can trace its roots back to the 19th
century but that we know today mostly as a mobile phone service
provider. (For related reading, see: What Is A "Baby Bell?")
Today, with a quarter million employees and a market capitalization
of close to $200 billion, Dallas-based AT&T is as dominant in
absolute terms as it’s ever been. Still, you might be surprised to know
that your and your neighbors’ monthly cell phone bills are responsible
for only part of that domination.
The company attributes $5 of every $6 in revenues to its “growth
drivers," which is Corporatespeak for wireless, wireline data and
managed IT services. Okay, we knew that anyway. After all, AT&T is a
wireless phone company, is it not?
The Smart Business of Smartphones
Yes, but it's a little more complicated than that. If enabling people
to make mobile voice calls was all AT&T did, it would sell nothing
but cheap flip phones. The company attributes the yearly increases in
its operating revenues not merely to the sale of data plans, but to the
sale of the vehicles with which to use them. In other words,
smartphones. There’s a reason why AT&T can sell a 64GB iPhone that
normally retails at $850 for only $400, and that reason is not to be
altruistic to customers. A $450 reduction in upfront costs pays for
itself several times over during the months and years that an AT&T
customer uses such a phone to access data. Allowing more and more people
to access that data comes with negligible marginal costs to AT&T.
(For more on this topic, see The Real Cost of Owning a Smartphone)
AT&T has three official segments that comprise its business: two
of them are Wireless and Wireline, while the 3rd – the vaguely named
“Other” – accounts for less than 1% of operating revenues and can safely
be ignored. Of the remainder, Wireline accounts for 46% of AT&T
revenues and 27% of income. That means that the Wireless division is not
only AT&T’s largest and most profitable, but the one with the
highest margins.
Still Phoning from Home
As for Wireline, it includes more than just the landline phones that
assorted Luddites still maintain in their homes as some sort of
20th-century secular reliquary. Wireline operations also include
business phones, managed networking for businesses, and U-Verse
(AT&T’s digital television and high-speed internet services.)
Between voice and data, 62% of AT&T’s Wireline revenue derives from
the latter, thanks to both increased opportunity for data growth and a
moribund landline market. The ratio of said Wireline revenue
attributable to data has increased steadily over the years, from 49% as
recently as three years ago. AT&T acknowledges that “traditional”
data revenue streams (e.g. packet switching) are losing ground to
state-art-of-the-art offerings that include VPN and Ethernet, to say
nothing of U-Verse. (For related reading, see: 5 Biggest Acquisition Failures of All Time.)
But still, Wireless is AT&T’s primary business and will
presumably remain so for at least a few more years. With mobile phone
service transitioning from luxury to necessity for the average person,
and adoption of the technology now almost universal, AT&T is forced
to fight for market share with its three largest national competitors.
AT&T entered 2014 with 110.4 million subscribers, most of any
company in the nation but only slightly up from the previous year. And
the rate of increase is slowing noticeably. (For more, see: How Cell Phones Have Changed Your Budget.)
Slowing Subscriber Growth
In short, AT&T’s wireless subscriber base is close to topping
out. Raiding competitors’ subscribers seems like the most effective way
to increase the rolls, but growing the company’s market share is less
important than finding new ways to extract revenue from its existing
base. Even that’s a chore – average service revenue per user increased
by less than 2% in each of the last two years, as access and airtime
charges decrease in a competitive market. Once everyone transitions from
basic cell phones to smartphones, AT&T will continue to see its
opportunities to grow diminish. To quote the company’s own financial
review:
"Of our total postpaid phone subscriber base, 76.6% use smartphones, up from 69.6% a year earlier and 58.5% two years ago."
If you can’t get bigger organically, start acquiring. AT&T’s recently announced $49 billion purchase of DirecTV (DTV)
will not only spur growth, but immediately quintuple the size of
AT&T’s television subscriber business. For a company that seems to
be approaching the limits of how large its wireless business can get,
acquisitions such as that of DirecTV would appear to be more likely from
here on in. (For related reading, see: The Mobile Device Market is Undergoing a Seismic Shift.)
The Bottom Line
AT&T has enjoyed one of the most successful runs in the history
of American business, yet still manages to stay technologically
up-to-date, relevant and vital. That’s tough for any company to pull
off, but any one that does can assure itself of huge profits for the
foreseeable future. (For related reading,
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