Analysts: AT&T will focus more on profitability and keeping churn low than on promotions

AT&T Mobility (NYSE:T) will continue to focus on maintaining profitability and keeping churn low in its wireless business at the expense of losing some subscribers, according to a report from analysts at investment bank Jefferies.

According to a research note from Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata, AT&T "remains focused on maintaining profitability and low churn versus using pricing and promotions to maintain subscriber market share." The note came after a meeting Jefferies held with AT&T CFO John Stephens, AT&T Mobility CEO Glenn Lurie and Bill Smith, AT&T's president of technology operations.

AT&T has lost several hundred thousand postpaid feature phone customers the last two quarters, and AT&T's strategy implies that it will not spend a lot of money to hold on to marginally-attached customers; it will instead focus on maintaining and winning over more lucrative postpaid smartphone customers. 

The carrier's long-term wireless strategy is centered on "providing a differentiated quad-play offer along with strong mobile video content," which it will presumably be in a much better position to offer once AT&T's $48.5 billion deal for DirecTV (NASDAQ: DTV) closes, which is expected in the coming weeks.

The note said AT&T's management "questions the profitability of certain competitor promotions" though it did not say which ones. Interestingly, the analysts say that unlike Verizon, AT&T "sees value in continuing to offer the early upgrade" to its Next equipment installment plan, "given the company's ability to sell traded-in devices to alternate channels."

AT&T executives also think the line between prepaid and postpaid service is continuing to blur, and the company's management is "upbeat" about the performance of its Cricket and GoPhone prepaid brands. "The Leap integration performance is ahead of expectations, providing stronger wireless margins," they added.

Even though AT&T's LTE network covers 308 million POPs, the company is looking to optimize it through its embrace of software-defined networking (SDN) technology and small cells. "Wireless network performance remains key with improving reliability, and incremental capacity coming from the VoLTE transition and the 2G sunset at the end of 2016," the analysts wrote. "AT&T views small cells as a tool in its arsenal in improving an already dense network, and noted that in the past LTE or dual-band small cells were not available."

In terms of SDN, AT&T is working on a Universal Service Platform to replace the voice traffic infrastructure for wireless as well as wireline consumer and business products. AT&T, which intends to virtualize 75 percent of its network by 2020, plans to reinvest the savings from that push into more network capacity.  

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