Even though AT&T reported a strong first quarter for wireless subscribers, some analysts think the operator may be stepping off the 5G playing field as it focuses on other parts of its business.
“It appears that management has chosen to focus its limited resources on HBO Max and on fiber deployments rather than try to keep pace with the network investments Verizon and T-Mobile are making in wireless,” wrote New Street Research analyst Jonathan Chaplin, in a Monday note to investors.
New Street has pointed out before that AT&T’s plan for mid-band 5G, including C-band deployment timelines and capital spending, trails behind that of T-Mobile and Verizon. The firm previously pegged T-Mobile as likely to retain its “fast 5G” lead.
But last week AT&T continued to flex subscriber results from its customer retention and promotional strategy, with 595,000 net wireless phone additions in Q1. Still, the amount of money it’s pulling in per user, or ARPU (average revenue per user) declined almost 3%. And Wells Fargo analysts question how long it can last.
“This volume-oriented strategy has worked the past few quarters for T, but is it sustainable?” wrote the Wells Fargo team led by Eric Luebchow in a Monday research note. “We have serious doubts…”
The firm cited a comparatively slow-going mid-band buildout as one of the reasons why.
“While it may not have as much importance to consumers quite yet, T is in a distant third-place in building out a compelling mid-band 5G network,” wrote Luebchow.
As for competitive challenges at AT&T, Wells Fargo also pointed to new promotions from Verizon; Comcast’s new Xfinity Mobile 5G unlimited plans that are cheaper than Verizon and AT&T; Dish entering the scene next year on the value front; Verizon likely taking share from AT&T on prepaid with its pending Tracfone acquisition; and T-Mobile moving in on certain customer segments like rural locations and enterprise.
While AT&T added to its customer base in Q1, the analysts warned of too much excitement early on.
“There are still a lot of innings left to play in the proverbial 5G wars, and there are a lot of forces working against AT&T,” the team wrote.
Three businesses vying for investment
Part of the problem for AT&T, according to New Street, is that its wireline, HBO Max and wireless segments all need investment at a time when the carrier is trying to reduce debt and has limited cash.
The carrier’s plans call for spending $6 billion to $8 billion to deploy C-band and reach 100 million POPs by 2023 – a year after Verizon and nearly two years after T-Mobile. Comparatively, Verizon is investing $10 billion over three years to cover 175 million POPs by the end of 2023, expanding to 250 million later. The Wall Street firm noted that wireless drives nearly 60% of AT&T’s EBTIDA and believes it’s sacrificing wireless for the sake of potentially creating a Disney+-like scenario with HBO Max.
“AT&T is neglecting the cash cow (they are literally treating wireless like a cow, and not the longhorn variety), while they focus investment on sexier businesses,” wrote Chaplin.
And EBTIDA could be threatened if consumers do end up caring that low-band 5G only delivers speeds similar to 4G LTE, according to New Street, compared to the hundreds of megabits per second from mid-band 5G. AT&T has nabbed top marks for 5G speeds in recent testing by RootMetrics, but the benchmarking report noted rankings could easily shift as 5G deployments march on.
“It seems incredibly risky to gamble to value of their largest and most valuable business on a bet that HBO can achieve the Disney+ valuation,” New Street said.
MoffettNathanson analysts led by Craig Moffett held a similar sentiment after AT&T’s first quarter results last week. While praising the strategic focus and mobility gains, the firm questioned if AT&T has the resources “to fight three wars at once” and whether costly handset promotions can be sustained.
Wireless, HBO Max and wireline all need spending, but AT&T is feeling pressure.
“The problem, as ever, is AT&T’s debt load,” wrote Craig Moffett in an April 22 research note. “To maintain any pretense that they will be able to pay down debt and service their $15B per year dividend, they need to sustain free cash flow at current levels, or grow it even.”
All of AT&T’s businesses could get the proper attention if the carrier suspended or cut its dividend for one or two years, New Street suggested. That would then allow the carrier to allocate an estimated additional $3 billion to $5 billion to wireless that Chaplin believes is necessary to keep up with Verizon on 5G.
Is AT&T at risk of becoming the new Sprint?
Without network investment to compete with Verizon and T-Mobile, AT&T could find itself in a position like the former Sprint where aggressive promotions don’t make up for comparatively poor network performance.
Even when Sprint offered wireless service at half the price of other carriers “they couldn’t keep subs,” New Street noted.
“If consumers decide that they aren’t happy with AT&T’s network performance as 5G gains pace, AT&T may find it very hard to arrest their flight with promotions, no matter how aggressive,” Chaplin told investors.
AT&T and Verizon historically dominated the postpaid market, but T-Mobile grabbed the No. 2 wireless carrier position by size after its Sprint merger, along with coveted 2.5 GHz spectrum assets that have become squarely in focus. T-Mobile’s mid-band rollouts, dubbed ‘Ultra Capacity’ already cover 125 million people, promising average speeds of 300 Mbps and peaks of 1 Gbps.
And if AT&T were to find itself at the far back of the pack network-wise like Sprint used to be, New Street said Verizon and T-Mobile could be in a good position.
“Wireless won’t be a duopoly ever again thanks to Cable and perhaps Dish, but a market where AT&T can’t really compete for 80% of subs would be better for all the other participants than one where AT&T is competing at full strength,” Chaplin wrote.