Consistent erosion in the U.S. wireless market prompted AT&T to move aggressively into digital media and advertising, according to a new research note from MoffettNathanson.
“Before 2011, the U.S. wireless industry competed on three separate axes: handset selection, network quality, and price,” Craig Moffett wrote in a research note to investors this morning. “Starting in 2011, however, when the iPhone became available first from Verizon, and later from Sprint and T-Mobile, the axis of handset selection disappeared. By definition the market had become less differentiated.”
Meanwhile, the network gap between Verizon and the other three major carriers was already beginning to narrow, Moffett wrote. And by 2013 the U.S. smartphone market reached saturation, significantly slowing what had been rapid growth of the industry. All those factors led AT&T to agree to spend $49 billion to acquire DirecTV in May 2014.
AT&T’s wireless business has continued to decline since the DirecTV deal closed in July 2015, Moffett observed. The nation’s second-largest carrier has lost “a shocking” 1.4 million postpaid phone subscribers over the last year, although those losses have been offset by 2 million net prepaid additions. Postpaid ARPU continue to slide, and AT&T’s service revenue growth “has remained stubbornly weak.”
“What AT&T saw in the wireless business was a steady deterioration in both its own market position and the industry itself,” Moffett wrote. “DirecTV’s free cash flow was a welcome stopgap for the dividend. But since AT&T announced its agreement to acquire DirecTV in 2014, results in both wireless and AT&T’s Pay TV segment have weakened considerably. It is reasonable to assume that the decision to buy Time Warner would otherwise have come only years after a deal the size of DirecTV. Instead, AT&T was forced to go back to the well just fifteen months after the DirecTV deal had closed.”
The crucial question, of course, is whether AT&T can effectively expand beyond its traditional telecom business to leverage digital media and advertising. Analysts question whether the carrier’s network is up to the task of delivering significantly more video to wireless users, and its pricing model for DirecTV Now has come under the scrutiny of federal regulators even before it has launched. AT&T may have needed to do something to expand beyond wireless, but whether digital video was the right move has yet to be determined.