AT&T (T, Financial), Verizon (VZ, Financial), T-Mobile (TMUS, Financial), Sprint (S, Financial) and US Cellular (USM, Financial), the top five wireless carriers, had 394.8 million subscribers by the end of fourth quarter 2015. That number has grown strongly in the last two quarters, surpassing the total population of the United States, which currently stands at 324 million.
The number of wireless subscribers is higher than the population because of users taking multiple connections for multiple devices. But that is not going to grow forever. Strategy Analytics, a research and analytics company, predicts the US wireless market to add 100 million subscribers between 2015 and 2020, a 4% compound annual growth in retail subscriptions. There is not much room for these big name players, as most of their top line growth to date has been coming from subscriber additions.
Verizon has doubled down on the content side and is building a digital advertising network via AOL (AOL, Financial) that is already competing with Facebook (FB, Financial) and Google (GOOGL, Financial) in the global ad market. AT&T, on the other hand, has been moving in an entirely opposite direction, digging deeper and wider into wireless and fiber internet markets.
The Europe Expansion Plan
Getting into any developed market is not an easy task. The market will already be saturated by existing players, and when you operate in the kind of capital-intensive industry that wireless carriers do, starting at third or fourth place would mean that you plough billions of dollars and years of effort before you can even think of counting your returns. Look at how much time T-Mobile and Sprint have spent as the third and fourth players in the US market. AT&T will have to take a huge risk to even take a shot at entering Europe, and it is not a surprise that the company still remains extremely cautious about the move.
“Phone companies have tried and failed to reap benefits from global networks," Craig Moffett, founder of researcher MoffettNathanson LLC said. "In Europe, AT&T would have to contend with a fragmented, price-sensitive market, with a patchwork of governments hampering efforts to create a regional network."
“There simply aren’t sufficient economic benefits to global scale,” said Moffett, who was Bloomberg Markets magazine’s top-ranked U.S. telecommunications analyst last year. “Anyone who has tried it has learned the hard way that the economic benefits never materialize.”” - Bloomberg
More Revenue per User - More Device per User
With that option looking extremely daunting, increasing revenue per user will be one key area that AT&T is already looking at. With the growth of devices in our world, data consumption will only grow. Internet of Things, which basically needs countless numbers of devices interacting with each other, will only increase the data transfer rate, and this in turn increases total data consumption. Cars are on the verge of seeing this connected revolution, electronic devices such as our refrigerators and washing machines are getting smart and fifth generation mobile networks or 5G is already in field trials.
On the one end, technology is getting better so that data transfer rates can go higher and higher, and on the other end data consumption is also on the rise. Though I do expect this to provide a short-term benefit to large carriers such as Verizon and AT&T - increasing their average revenue per user while subscriptions show stable growth for the next five years - this growth will only be beneficial in the short to medium term.
Giga Power
As far as fiber internet technology is concerned, a new technology can easily disrupt this someday. But nothing has come out yet and we are still using wireline connections to access high speed internet. The recent announcement by Google that cutting down staff from their Google Fiber unit only validates the importance of companies like AT&T. This is not a game for hip technology companies flush with cash and tech experts. It needs patience and the ability to stay for the long haul.
The DirecTV
At the time of announcement, the DirecTV (DTV, Financial) acquisition by AT&T looked like one with short term financial benefits as its focal point.
“This acquisition of DirecTV is going to add $3 billion in annual profits immediately, and estimated cost savings of $1.5 billion per year for the next four years could make AT&T a company making $20 billion per year in profits by 2020. For a company that was making $13 billion per year in profits between 2010 and 2014, this is quite the uptick.”- Incomeinvestor
But thankfully, DirecTV is now stepping into the video streaming world. The problem with the way we watch TV now is that the world has moved so far away from needing a satellite to transmit channels. As internet speeds keep rising around the world, it is obvious that TVs of the future are going to be part of the internet connection that is already in our homes. It just makes sense to do that, and nothing is going to stop that from happening.
“The fast-growing world of over-the-top video services is about to get a lot larger. By Nov. 1, AT&T's (T) DirectTV satellite service is expected to launch a video streaming service, DirecTV Now, with more than 100 channels in a bid to replicate its satellite offerings for online customers.” - Street
AT&T has made several moves to secure its future, and the company seems to be on stable ground for the short term, while there are a few initiatives that they have taken, such as the DirecTV/Video streaming, that can help them in the long run.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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