AT&T and Verizon: same core, different branches
Many casual observers lump AT&T and Verizon Communications in the same category of “behemoth global telecommunications providers.” Without a doubt, their earnings show common roots, but their growth strategies are quickly diverging.
Here’s a quick summary of five common elements:
1. Verizon Wireless has 105 million postpaid retail subscribers. AT&T Mobility has 77 million (excluding connected devices). Maintaining a strong retail wireless presence in the U.S. is a top priority for both companies.
2. Both AT&T Mobility and Verizon Wireless use similar radio frequencies (although not all are used for LTE data): 700 MHz, 850 MHz, AWS (1700/2100 MHz) and PCS (1900 MHz). AT&T Mobility also is beginning to deploy the WCS spectrum band (2300 MHz), which Verizon Wireless does not own; and for traditional voice, AT&T Mobility uses the GSM standard while Verizon Wireless operates over CDMA.
3. Verizon Communications and AT&T had heavy digital subscriber line footprints, and both lost significant market share to cable in these territories as they transitioned from copper-based to fiber-based technologies. Because of cable triple-play bundle offers, both AT&T and Verizon also lost millions of very lucrative residential and small business phone customers.
4. Both companies have a meaningful presence with enterprises and maintain large global footprints. Due to the rise of cloud services and continued transitions to packet-based voice, both companies have seen secular pressures on revenue and profits.
5. Paying increasing dividends is also important to the shareholders of each company (as of Oct. 23, Verizon Communication’s dividend yielded 4.9% on a trailing basis, while AT&T yielded 5.6%). Based on current trends, Verizon Communications should pay out about $8.5 billion in dividends this year (compared to capital spending of about $17 billion) and AT&T should pay out around $9.8 billion (compared to capital spending of $20 billion).
The bottom line is that Verizon Communications and AT&T are big and broad. They got there through a combination of disciplined consolidations of both the wireless and wireline industries, and through consistent marketing messages (AT&T Mobility: iPhone exclusivity; Verizon Wireless: network performance and consistency). The result of their efforts are tens of billions in capital being spent to grow and maintain wireless and fiber networks each year (on top of spectrum expenditures) and billions of dollars in free cash flow to pay shareholders and bondholders.
AT&T and Verizon are branching out in different ways
Those who only focus on changes in AT&T’s and Verizon Communications’ core businesses (using the tree analogy, their respective trunks) will miss the sources of new growth. These new branches are very different for both companies and were articulated in their third quarter earnings releases. Here are three new branches to consider:
1. Verizon Communications’ mobile-first, social-entertainment platform – Go90. Announced in February and reinforced with the acquisition of AOL and Millennial Media, Go90 is a video distribution platform offered to all mobile users with the promise of exclusive content (e.g., NFL) for Verizon Wireless subscribers. Its business model is two-fold: Deliver high-quality shows that result in viewership volumes that drive high advertising revenue, and drive data usage for existing Verizon Wireless customers in the process (or, as one Verizon employee explained to me, “get to the next data bucket faster”).
While I am not the target audience, I have watched several videos during my travels and have to admit that the quality is exceptional (even on Southwest Airlines Wi-Fi, which, as many of you know, is a challenge). Admittedly, the platform is probably underutilized today, but the content distribution quality is par excellence (even if I have nothing in common with Hayes Grier from “Dancing with the Stars”).
That said, content discovery within the app is painful. The search results are incomplete (I searched for Hayes Grier and received “no results found” for shows with Hayes Grier in them) and social media links (which would be a great way to expand Go90’s presence) are nonexistent. It’s early innings on the product, but right now Go90’s UI is minor league.
Verizon Communications’ CFO Fran Shammo addressed these concerns on the Q3 conference call:
“As far as Go90, look, Go90 is a very, very different product set. It is a mobile-first, social-entertainment platform. Let me just talk a little bit about where we are here, but this really is just a totally different perspective than linear TV and content deals. We know how to do that and we have been doing that for 10 years with FiOS. But this is a very, very different platform. Keep in mind we are 20 days into this. We actually haven’t done any advertising or promotion activity around this product. So, for early stages, we’re seeing very good platform stability. We are seeing very encouraging feedback and, of course, we are looking at some very specific metrics here of: What’s the viewership? How many times do people revisit the site? What do the new shows capture?”
It’s important to remember that Go90 is a platform, not a channel. There’s a lot of UI work remaining (something as simple as “pick up where you left off” when a user activates the app; a recommendation engine that rivals YouTube), but the framework appears to be there.
AT&T has the DirecTV app with over 5 million Android downloads. It also has “Sunday Ticket.” Could it extend the DirecTV app with some additional millennial-focused content (free for everyone) and potentially use this “hook” to grow DirecTV’s subscriber base through a “free DirecTV weekend” promotion? Yes they could. AT&T recently used this “takeover” strategy in its content sponsorship of the Major League Baseball broadcasting app during the last weekend of the season, even though T-Mobile US is the official wireless sponsor of MLB. AT&T is one notification away from driving millions of eyeballs to content. So is Verizon Communications.
What makes Verizon Communications different is that it is becoming a wireless-focused broadcaster (as opposed to content provider/producer). The company will use its base to drive viewership and, as a result, drive revenue. How much difference this will drive between whether millennials click on YouTube vs. Go90 for content remains to be seen. But it’s a different branch and one that Verizon Communications is heavily cultivating.
2. AT&T’s fiber-based strategy. We have written a lot about this in many previous columns, but AT&T has spent, and will continue to spend, a lot of money on fiber. It will connect cell towers to content for wireless customers; enterprise desktops and Wi-Fi access points to the cloud; and residences to the Internet. While AT&T’s events cannot be classified as “hog wild,” it has made fiber deployment a critical part of its long-term strategy.
The fruit of this strategy is beginning to show. Here’s some commentary on small business growth from AT&T’s Q3 conference call by CFO John Stephens:
“We also have improving year-over-year wireline small business trends the last few quarters, and that continued in the third quarter. Plus, when you include Mobility Solutions, we actually grew small business revenues. This gives you a better idea of how our Business Solutions team is competing and winning.”
Later in the Q&A, Stephens elaborated on his earlier statement:
“Our Business Solutions team is really doing well in a tough economy, particularly in the enterprise and the public sector space, but really, really well in the small business space. And that gives us optimism. As we mentioned with wireless, we’re seeing growth in that area. But we are seeing the acceptance of our Network on Demand, our NetBond, our software-defined networks all moving customers in a positive direction.”
This growth in small business revenue is not a result of some newfound agent, nor directly a result of economic growth in AT&T’s franchise territories (although having California, Florida and Texas as major local areas is important). It’s neither a result of the Mexico wireless acquisitions nor DirecTV. Small business growth emanates from Project VIP and the $1 billion commitment to connect 950,000 business locations with fiber, just as the economy picks up in the states mentioned above.
Contrast this with Verizon Communications’ nuanced FiOS strategy: Small business revenue is a drag on overall wireline earnings (while AT&T did not announce Q3 small business wireline revenue growth, the Q2 figure was a decline of 3.7% compared to a 4.5% decline at Verizon). The most profitable FiOS properties are being divested to Frontier, placing further pressure on Verizon Communications’ corporate cost structure, or, as Shammo described it on the Q3 conference call, the “allocations.” It makes we wonder what Verizon Communications’ wireline future would have been had they pursued Massachusetts and Maryland fiber builds with more vigor.
Fiber is a long-lived asset with no immediate replacement. Investing in fiber is not fail proof, but it’s a lot closer than investing in segments more dependent on the innovation cycle, such as the “Internet of Things” and broadcast/content platform development. AT&T’s fiber branch may prove to be the healthiest bough of all.
3. Cricket. I cannot imagine what the discussions surrounding “keeping Cricket alive” must have been after AT&T announced its acquisition of the company in July 2013, but no one expected the results the team has delivered. To a tee, the analyst community looked at it as a spectrum purchase (and on its own it was a terrific value).
However, AT&T Mobility ditched All in One Wireless for Cricket. It launched an extended footprint to current Cricket customers to get them to move, and used the Cricket brand to appeal to single-line voice and data users.
Here’s some Cricket commentary from Stephens included while discussing AT&T’s overall churn decline:
“We are adding premium prepaid subscribers whose [average revenue per user] is higher and subsidy costs are lower than postpaid feature phone subscribers who have the highest postpaid churn. And our success in the prepaid market is resulting in improvement in total churn. Cricket gives us a quality prepaid offering for the more value-conscious customer, same great network, quality customer service and the flexibility prepaid delivers with subscriber acquisition costs that are much lower than our postpaid voice.”
Verizon Communications does not have a Cricket. AT&T Mobility has grown 962,000 net new prepaid subscribers over the last 12 months, while Verizon Wireless has lost 316,000 prepaid subscribers over the same period. Could some of those new customers serve as a breeding ground for future postpaid customers? Maybe, but AT&T appears to have found a formula that is not dependent on that occurring – it would be equally comfortable keeping them in the Cricket family.
Neither company has a robust wholesale/mobile virtual network operator program for voice and data customers (outside of their aging TracFone relationship), which is truly lamentable. But AT&T’s Cricket growth is budding, and if it keeps churn low, the carrier will reap a bumper crop of cash fruit.
There are a few additional areas of difference (e.g., Venezuela currency risk is not in Verizon Communications’ earnings release; AT&T’s 1 million connected car additions per quarter), and it’s way too early to declare one strategy or company victorious over the other. But those who lump AT&T and Verizon Communications together simply because of their past behaviors miss the importance of their 2014 and 2015 activities. Future cash sources for these two companies will be different if they are successful.
Jim Patterson is CEO of Patterson Advisory Group, a tactical consulting and advisory services firm dedicated to the telecommunications industry. Previously, he was EVP – business development for Infotel Broadband Services Ltd., the 4G service provider for Reliance Industries Ltd. Patterson also co-founded Mobile Symmetry, an identity-focused applications platform for wireless broadband carriers that was acquired by Infotel in 2011. Prior to Mobile Symmetry, Patterson was president – wholesale services for Sprint and has a career that spans over 20 years in telecom and technology. Patterson welcomes your comments at [email protected] and you can follow him on Twitter @pattersonadvice. Also, check out more columns and insight from Jim Patterson at mysundaybrief.com.
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