More Profit, from More People
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Tech companies have had mixed results this quarter. Microsoft had its first loss as a public company, largely due to a one time write off. Apple (NASDAQ: AAPL) missed the Street's estimates but still did well. Nokia lost a billion dollars but sold more Lumia smartphones and, because of quarterly checks from Microsoft, ended with more cash on hand. Google (NASDAQ: AAPL) had a good quarter; revenue and profits were up, however most of the increase in revenue was because this was the first quarter that Google actually owned Motorola. Though Motorola contributed over a billion dollars to Google’s revenue, it lost over $200 million for the quarter.
AT&T (NYSE: T) recorded a $3.9 billion profit for the second quarter and added 320,000 contract subscribers, better than predicted. This time last year AT&T added 331,000 contract customers, but this quarter all that was expected was 224,000. AT&T activated 5.1 million smartphones in the last quarter; 3.7 million of them were iPhones and 22% were new to AT&T. AT&T also posted its lowest churn rate ever for postpaid devices like smartphones, .97%. For the second quarter of 2011, AT&T had a churn rate of 1.15% and last quarter churn was 1.1%. A third of AT&T's customers are now using 4G capable devices.
The 8.7% increase in profits that AT&T experienced this quarter was driven primarily by their wireless division. This was because more customers are converting to smartphones, which bring in more money than feature phones every month, and because fewer people upgraded their smartphones this quarter. This reduction in quarterly smartphone upgrades helped AT&T’s profitability because they subsidize every new smartphone with a two year contract, and it takes time for AT&T to make up this subsidization. If more people continue to use older smartphones instead of upgrading, AT&T gets the large monthly fees and has already recouped their subsidization cost. This also drove AT&T’s wireless division to post its highest margin, 30.3%, up from 27% a year ago. Overall, smartphones made up 62% of the phones on AT&T, up from 50% last year. This smartphone adoption rate and increase in wireless margin is also being experience by AT&T’s largest competitor, Verizon (NYSE: VZ).
One notable point in AT&T’s earnings is that Apple’s iPhone accounts for 73% of all smartphones activated in the second quarter. AT&T was the first US carrier to get the iPhone, and they enjoyed a monopoly on the iPhone in the US through four iPhone generations. However, Verizon picked it up with the iPhone 4 and Sprint joined the party after that. Even with two other carriers carrying the iPhone and a new version rumored from Apple in the coming months, AT&T is still highly reliant on the iPhone for smartphone sales. Even a wide variety of Google’s Android phones now available on AT&T iPhone activations are actually up 100,000 this quarter compared to a year ago. AT&T also activated one million more iPhones this quarter than Verizon did.
This is not to say that Verizon had a bad quarter; in fact Verizon communications, which is the parent company of Verizon wireless, reported a 13% increase in net income this quarter. Verizon’s wireless division had record profits and added 880,000 contract customers, compared to AT&T’s 330,000. Verizon has just over 94 million subscribers and reported the best profit margin ever for their wireless division.
However, like AT&T, Verizon is reporting weaker results in their wire line business. Verizon netted just 2,000 more broadband subscribers this quarter, its worst showing in four years. AT&T lost 96,000 broadband customers overall, though they had a gain of 553,000 U-Verse customers. For both companies their DSL offerings are losing out to cable in markets where their faster broadband internet technology does not exist.
On Verizon, Apple’s iPhone holds less sway; of the 5.9 million smartphones that Verizon activated in the last quarter only 45%, 2.7 million, were iPhones (compared to AT&T's 3.7 million iPhones and 5.1 million total smartphones activated). With the iPhone 5 rumored to be launching by the end of the year, iPhone sales will spike on both carriers. However, the Droid line of Android smartphones on Verizon and the potential for Windows Phone launching on Verizon will keep Verizon less reliant on the iPhone than AT&T.
Both AT&T and Verizon have announced plans to go to shared data plans. The basics on both carriers are that all plans will feature unlimited voice and texting; customers will pay more per month for the number of devices activated and the amount of data used. Though their pricing will be slightly different, they will as usual end up being similarly priced. That is the larger picture for both Verizon and AT&T; regardless of who sells more iPhones or the strength of the Droid brand these two companies have huge price control over the wireless industry. As long as they keep their phone selection similar and their networks similar they can set their prices similar and their wireless businesses will continue to perform well. Their older DSL and landline businesses will continue to fade as people jump to cable. This will continue to be offset if Verizon roles out FiOS and AT&T roles out U-Verse for more of the country.
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