A piece in Multichannel News this week cites Sanford Bernstein analyst Craig Moffett, saying something that appears quite dumb, ‘The very notion of an AT&T/EchoStar combination is based on a flawed premise, that AT&T needs video in order to compete with cable.’ Where has he been these last five years.
We’re not going to list the quarter by quarter losses of fixed lines by AT&T, and its acquisitions over the past few years, but suffice it to say that along with Verizon, the two are collectively losing 2 million fixed lines a year to cable, VoIP and wireless substitution. Failure to stop all of that is perhaps not important to the overall customers numbers today, since the wireless substitution is robbing Peter to pay Paul, and the business stays in the family. Also for the past three years or so there has been underlying growth at AT&T, not just growth by acquisition.
But on the other hand why just give revenues to cable rivals that want to eat your lunch. Last quarter Comcast signed 662,000 Digital Voice customers, bringing its VoIP customers up to 3.8 million homes, with annualized revenues around $2 billion up from a $1 billion run rate the previous year. If we assume half of those are from AT&T and the rest from Verizon, that’s like giving your worst enemy $500 million of your money.
Meanwhile the US cellular industry is closing in on 251 million users, growing at just over 12 million new customers a year, and has about 78% penetration today. It will gradually grind to a halt over a five year period, by which time customers will be acquired at around 2% a year, in a market where charges are falling by about the same percentage. Result: RBOC stasis.
Actually it’s worse than that. Because right now AT&T Mobility is
Growing at 14.4%, faster than the cellular market, but the entire business’ underlying growth is just 3.2%. So when mobile acquisitions tail off, AT&T will begin to rapidly shrink.
We know from looking at European markets that once a market has 100% cellular penetration, the operators in it have to spend far more to acquire customers, and the business becomes more cash intensive, through things like more and more handset subsidy.
So the idea that AT&T is doing fine with its three services (Fixed telephony, mobile telephony and internet), against an enemy that also has three, but a different three (TV, Internet and Fixed telephony) is simply na’ve and short term. Currently it is losing fixed customers when it goes three services against three. What it needs to do is go four services against three.
In fact AT&T executives thought it was important enough to spend over $5 billion upgrading the network so that it can run IPTV (although there are other benefits to a faster network in existing services). So AT&T at least acknowledges that it should try to get its TV act together. It has already come up with a low end TV option based on EchoStar called Homezone.
However given that U-Verse has taken 4 years and is very slow in uptake rates, bringing that low end alternative in-house might help considerably to get a US wide footprint with four services.
Moffett says that the real reason that AT&T is losing phone lines to cable is because cable has a marginal cost advantage. Now just why do you think it has a cost advantage? Oh that’s right, because it has three services all delivered on a single network, while AT&T has three services delivered on two separate networks, one of them wireless.
People that argue about triple play will know that AT&T needs its own fixed line triple play to preserve the fixed line customers relationships that it already has. Followers of Quad play logic know that it is not the network efficiencies that make quad play, but the massive branding hike, the discounted bundled offers and coordinated marketing spend across 4 services. And has Moffett never heard of the word convergence? What happens to AT&T as wired and wireless services converge, especially if it has neglected to retain enough of its fixed line clients to leverage this properly?