AT&T - One Good Idea, One Bad Idea
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's amazing that one company can come out and say something so smart and something so royally stupid at the same time. I'm talking specifically about an article released by Reuters about AT&T (NYSE: T). The two main points the article made were, AT&T is looking to link phone and tablet data plans (smart), and looking to reduce phone subsidies (stupid). Let me explain why one is a good idea and the other is a bad idea that looks certain to backfire.
The company wants to find a way to offer shared data plans that customers can use between smartphones and tablets. Specifically the head of AT&T mobile Ralph de la Vega said the company is looking at a solution where customers can, “share them (data plans) in a way that will drive more revenue to us but also give a good deal to customers”. This is a great idea and mirrors something that Verizon (NYSE: VZ) has been discussing as well. Both companies realize that tablets are a growing segment of the computing industry, but a lot of customers are buying wi-fi only tablets and making due. The issue most customers face is, how many data plans does a household really need? Many people already pay for high-speed Internet at home, many people also pay for a data plan on their smartphone, do they really need another data plan for their tablet as well? This is the factor that drives wi-fi only tablet sales and something that AT&T is hoping to change.
If AT&T and/or Verizon offered an add-on of say $10 extra a month, where your tablet could share the same data plan as your phone, this could work. There are two major issues AT&T would need to tackle up front. Customers don't have as good of a grasp of how much data they use. Data is not like calling minutes. You can get on a phone call and most phones have a built in clock that times how long the call lasts. There is nothing that tells the average customer how much data they've used until it's too late. The other issue is, the add-on cost can't be the same as signing up for an additional data plan. The point is to make the customer want to add this additional cost. If AT&T shoots too high there won't be a reason to sign up, if they shoot too low, this would actually cause AT&T to hurt its margins. Of the utmost importance is the network has to be able to handle the additional traffic. AT&T cannot afford to offer something that its network can't support. It already has a negative history around the iPhone and its data usage, repeating this mistake would be worse than not offering this option.
Ralph de la Vega from AT&T also said two things that are very troubling if you're an AT&T stockholder. He said first, that the company wants to “limit its 2012 smartphone sales to 2011 levels to cut down on upgrade costs.” I'm not sure what exactly the company is thinking. I've written before and laid out the numbers, about how much a company makes when it signs a customer to a two-year contract. The math is what it is, carriers don't like that they can't make as much right away because of subsidies, but what is their alternate option? If AT&T is crazy enough to step out first and cut subsidies, there will be two clear winners – Verizon and Sprint. According to an article in April by AP, in the first quarter AT&T added about 187,000 customers on contract plans. Verizon by comparison added 501,000 contract customers. This is a trend that has been ongoing. “Over the last five quarters, Verizon added nearly three times as many contract subscribers as AT&T.” In plain english, Verizon is winning the war for contract subscribers. Given that analysts are expecting AT&T to grow earnings by 9.5% and Verizon at 11% this points to more of the same in the future.
The short version is this, if AT&T wants to cut subsidies, they will help their margins, but only because less customers will sign up with a higher profit per customer. I've read that a lot of people think this would hurt the iPhone. That is not completely accurate. The company is looking to cut subsidies on all smartphones to cut costs. Across the board the price a customer pays for any smartphone would rise. Just as an example, if AT&T cut the subsidy on an iPhone by say $50 per phone, do you really think a customer looking at an iPhone 4S 16GB from AT&T at $249, and the same phone from Verizon at $199 is not going to make a choice for the cheaper cost? How about those existing AT&T customers looking at the same price differential if they upgrade with AT&T, versus switching to Verizon or Sprint? Mr. Vega says, “but you can take it to the bank our thrust is to lower that (subsidies) in every case we can.” You can try Mr. Vega, but it seems the only thing AT&T will be taking to the bank is less money from less customers. If AT&T steps up and does this first, Verizon and Sprint shareholders should be buying more shares, the defections will happen. If AT&T and Verizon both do this, then Sprint will have something to cheer about. In any case, a word of advice AT&T – don't be first to make this stupid move.
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