Author(s): Raghu Gopal
Last week, AT&T reported its results for the third quarter of 2018. The numbers were mixed, with the wireless business generally delivering a better-than-expected performance.
The carrier added 69,000 post-paid phone subscribers, an improvement over a loss of 145,000 a year ago and over a gain of 51,000 in the previous quarter. AT&T has been losing phone subscribers since sunsetting its GSM network but is picking up smartphone users to make up the difference. Total post-paid smartphone customers stand at 63.5 million.
AT&T's performance in prepaid wireless services was notably strong, with net prepaid additions of 570,000 during the quarter, which compared with a gain of 324,000 a year ago and 453,000 in the second quarter of 2018. AT&T now has almost 17 million prepaid subscriptions in the US and has been the fastest-growing prepaid service provider among the top carriers. Thanks to keen marketing campaigns, its Cricket prepaid sub-brand has enjoyed strong growth, in particular. In its results disclosure, it was interesting to hear AT&T suggest that its prepaid customers generate similar value to its post-paid subscribers; about 60 percent of the Cricket total shows similar characteristics, the carrier said.
Despite competitive deals from rivals, AT&T's mobile business posted revenue from mobile services that reached $17.9 billion for the quarter, a 3 percent rise from a year ago and 4 percent over the previous quarter. Using consistent accounting methods, mobility revenue rose 5 percent year-on-year. The unit's operating profit came to $5.6 billion, among the strongest results in the company's history.
But of particular interest now is AT&T's wider strategy. The carrier has been working — and spending — hard on building an end-to-end portfolio of products and services, bringing together fixed and wireless connectivity with content, creating exclusive bundles and Internet-delivered service packages.
It's been about three years since AT&T acquired DirecTV and around half a year since it officially bought Time Warner, and its results now give us some indication of how fruitful its vertical strategy has been. In fairness, this is a play that's still developing, and AT&T will certainly make the necessary adjustments.
AT&T's entertainment group division, which includes DirecTV and home video and connectivity services, saw revenue fall 7 percent year-on-year to $11.6 billion (in consistent accounting terms, revenue dropped 5 percent). WarnerMedia results are reported as a separate line item.
AT&T posted a loss of 346,000 traditional video subscribers. This is an industry trend, as subscribers forgo linear TV subscriptions and replace them with online services. But AT&T was preparing for this shift in consumer behaviour when it launched its DirecTV Now service in 2016.
DirecTV Now is a content streaming platform intended to act as a replacement for customers cutting their traditional video service. Thanks to heavy promotions, the service won about 1 million subscribers after a year. But now, as introductory promotions have ended, DirecTV Now isn't keeping pace with losses of traditional video subscriptions through fixed-line and satellite connections.
DirecTV Now attracted only 49,000 subscribers during the third quarter of 2018, its smallest gain since its debut. AT&T indicated this was partially by design, as customers who signed on early to get a deal are leaving as prices rise. AT&T also bundled its DirecTV Now platform with its wireless service by zero-rating data for the video offering, but in the age of unlimited data, this is less of an incentive.
AT&T remains in a strong position, and to its credit, the carrier's wide portfolio of assets and services really does set it apart from Verizon and the potential combination of T-Mobile US and Sprint. The ink is barely dry on AT&T's purchase of Time Warner, and AT&T is likely to exploit content to a greater degree after regulatory scrutiny subsides during the coming years. AT&T's market valuation has taken a direct hit in recent quarters, but the company remains in a solid position.