AT&T’s iPhone Addiction and Potential Withdrawal
Written by Kieng Iv
Date: Monday, April 11, 2011
Randall Stephenson, CEO of AT&T, sat in his office looking at AT&T’s 2009 financial statements. He said to himself, “Record sales, record number of customers, industry leader, record net income, and record operating cash flow…why am I so worried?” Then he looked at the only other file open on his laptop – ‘Apple Exclusivity Contract’.
In 2006, AT&T[1](Cingular back then) had spent 18 months having secret meetings with Steve Jobs, Apple’s CEO, or better known as their ‘savior’. AT&T back then made many unprecedented agreements with Apple, including losing control of the design, cost and features offered on the iPhone. Essentially, Apple owned the user experience, and for the first time, the carrier was the pawn in the relationship.
The Apple partnership has been a key driver in the growth of AT&T’s over the last five years. With voice wireless plans facing extreme price wars and margins being slashed right and left, the iPhone was an opportunity to grow the lucrative wireless data services market. In 2009, smartphones and data were “key factors driving wireless revenue growth of nearly 9 percent”.[2] The iPhone has become so important that in the last quarter of 2008, the iPhone made up 36% of new customers to AT&T, or $60 Million a month in additional revenue.[3]
With just one more year left on the contract and rumours that Apple will expand to rival telecommunication giant Verizon, Randall thought to himself, “Something must be done or else our long-term growth will be in jeopardy”. At that moment his iPhone reminded him that he had a meeting with a consulting firm to discuss the strategic direction of AT&T.
The following comes from minutes of the meeting:
Salim Ponniah: Hi Mr Stephenson, my name is Salim, I am here to talk about the scope of my firm’s consulting engagement.
Randall Stephenson: Thank you Salim for coming. As you likely know, 2009 was another great year for AT&T but we are concerned about maintaining our market leadership and more importantly, our growth.
Salim Ponniah: Yes, the telecommunication has become very fierce with new entrants and constant mergers and acquisitions have made other competitors stronger.
Randall Stephenson: That is why I need you to understand AT&T’s business through analyzing our strategy. Then assess whether or not we are creating and capturing value and review the different opportunities my internal team has developed. Provide me with recommendations on what AT&T should do. Also identify any barriers or resources we will need to overcome or acquire to make these recommendations successful. List any assumptions you need to make when performing your analysis.
Salim Ponniah: Okay, we will provide a memo and will prepare a presentation for you by next week.
Verizon
Verizon Communications Inc. (Verizon) is a broadband and telecommunications company. Its origins can be found from the case, United States v. AT&T, where the company that is now known as Verizon was one of the seven AT&T spinoffs, known as “Baby Bells”. Verizon has grown organically and through mergers and acquisitions to become one of the industry leaders in the telecommunications market.
Verizon mainly competes in the wireless, wireline, internet, and telephone industries. Within the wireless industry, Verizon is the market leader with 32% market share.[4] Also Verizon is known for its call quality with its slogan, “Can you still hear me now?”, repeatedly said in its commercials. Verizon is planning to launch one of the first 4G Networks in 2010 which is set to take the wireless market to new levels. At its peak, 4G ranges from 9 to 20 times faster than 3G network peaks.[5]
One of Verizon’s competitive advantages is the long, unsolved rumour that Verizon’s network is the most reliable and fast.[6] This was further supported by studies performed by Wired.com and PCWorld.com. In the study performed by PCWorld, it was found that Verizon was the fastest out of the three largest 3G networks: Verizon, AT&T, and Sprint. It clocked in a speed 19% and 50% faster than Sprint and AT&T, respectfully.[7]
AT&T
History and Current Position
The original American Telephone & Telegraph Company (AT&T Corp.) started in 1886. In the early and mid 20th century, AT&T was regarded as a national monopoly, and was closely watched by anti-trust government regulators. In 1984, government regulators forced AT&T to divest itself into seven smaller companies.
In 2005, SBC Communications purchased AT&T Corp. for $16 billion and the merged organizations became AT&T Inc. and maintained AT&T’s branding. Prior to their merger, SBC and AT&T grew individually through acquisitions and mergers, such as the purchase of Comcast Cellular for $1.7 billion. Even after post merger, AT&T continued to purchase Cellular One, Centennial Communications Corp and many other companies.
As of 2009, AT&T competes in the wireline, wireless, data and online advertising. Historically, the wireline market has been AT&T’s bread and butter. However, the focus now to proceed forward will be competing in the wireless and the high speed internet. AT&T is also focusing on strengthening communities; investing in people; leading with integrity; minimizing our environmental impact; connecting people and business; and leading innovation and technology.[8] In addition, AT&T aims to become the market leader in every market it enters.
Majority of AT&T revenues are derived from wireless services. AT&T competes almost exclusively within the United States. Following wireless, voice and data services are the next largest components. However, voice services have been on a downward decline since the market has been replaced largely with cell phones and voice over IP services. The growth rates for the wireless, wireline, online-advertising and data services industries are 18.5%[9], -0.3%[10], 12%[11] and 5%[12] respectively.
Wireless Division and Market
AT&T has 30% of the market share of carrier subscribers behind only Verizon, its biggest competitor in the wireless market. But unlike Verizon, AT&T owns 100% of its wireless division. Within the smartphone market, it is the leader by adding twice as many smartphone users in 2009 when compared to its next competitor.[13] In the last three years, only data and wireless divisions have been able to achieve any significant growth in revenue. The number of wireless customers has increased 10.5% and 9.9% in 2009 and 2008 respectfully. As well, churn, which is defined as the number of customers who leave AT&T for a direct competitor, has been on a downward trend (please see appendix E). This is a trend that AT&T hopes to continue.
AT&T delivers its wireless services through its 3G network. However, its network is much slower than Verizon according to test performed by Wired.com and PCworld.com. Its availability was listed as long 68%, which is far lower than its main competitors AT&T and Sprint.[14] However, AT&T is planning to upgrade its 3G network to High Speed Packet Access (HSPA) 7.2 technology by 2011.[15]
Other Divisions
U-verse is a product that offers Internet Protocol Television (IPTV) which was launched three years ago. It was awarded “Highest in Residential Television Service Satisfaction in the South and West Regions Two Years in a Row” by J.D. Power and Associates. One of the major features of AT&T is the ability to bundle products. In fact more than 90 percent of U-verse TV customers bundle high speed Internet, and nearly 70 percent add IP voice which provides high level of convenience for consumers since they deal with less service providers and save money through bundling. It is expected that IPTV subscriptions will exceed 131 million globally by 2015, a cumulative annual growth rate of 23%.[16]
AT&T is also helping customers work more efficiently and effectively. AT&T’s goal is to heighten network security and protect the network from unauthorized access; the same technology used to protect AT&T’s own networks. “AT&T has an outstanding reputation in the security services business.” AT&T’s network solution is a one stop shop for end to end security.[17]
Marketing is a vital component of AT&T’s strategy. It has corporate marketing partnerships with USA Swimming[18], and also sponsors the stadium where the National Basketball Association team, The San Antonio Spurs, play in. As well, it has been able to maintain a strong social media brand through the strong use of its Facebook and Twitter pages.[19]
Recently, the telecommunications industry has seen fierce mergers and acquisitions by big players within the market, especially AT&T and Verizon. A major factor that determines a company’s ability to acquire others is its leverage; the proportion of its assets that are financed by debt. AT&T currently has a debt to equity ratio 1.63 which is favourable when compared to Verizon which has a debt to equity ratio of 1.69. But both companies are mainly financed through their debt as opposed to their equity. AT&T’s discount rate is approximately 6.5% as of the end of 2009.
Please see appendix G for AT&T’s financial information.
Opportunities
Option 1: Acquisition of DISH Network
DISH Network formed in 1995 and is a pay-TV provider within the US. As of December 31st, 2009 DISH Network has 14.1 Million subscribers and is publicly traded on the NASDAQ. “Our business strategy is to be the best provider of video services in the United States by providing high-quality products, outstanding customer service, and great value.”[20]
Value Proposition
DISH Network focuses on three main aspects when delivering its value proposition:
· Quality products
· Customer service
· Price
High-Quality Products:
“We offer a wide selection of local and national programming, featuring more national and local HD channels than most pay-TV providers. We have been a technology leader in our industry, introducing award-winning DVRs, dual tuner receivers, 1080p video on demand, and external hard drives. To maintain and enhance our competitiveness over the long term, we plan to promote a suite of integrated products designed to maximize the convenience and ease of watching TV anytime and anywhere, which we refer to as, “TV Everywhere.””[21]
Outstanding Customer Service:
“We strive to provide outstanding customer service by improving the quality of the initial installation of subscriber equipment, improving the reliability of our equipment, better educating our customers about our products and services, and resolving customer problems promptly and effectively when they arise.” [22]
Great Value:
“We have historically been viewed as the low-cost provider in the pay-TV industry because we offer the lowest everyday prices available to consumers after introductory promotions expire.” [23]
Programming
“More than 280 basic video channels, 60 Sirius Satellite Radio music channels, 30 premium movie channels, 35 regional and specialty sports channels, 2,500 local channels,220 Latino and international channels, and 50 channels of pay-per-view content” [24]
Core Activities
Content Delivery
“We also use eight regional digital broadcast operations centers owned and operated by EchoStar that allow us to maximize the use of the spot beam capabilities of certain owned and leased satellites. Programming content is delivered to these centers by fiber or satellite and processed, compressed, encrypted and then uplinked to satellites for delivery to consumers” [25]
Market:
Please see Appendix F for satellite industry growth numbers
From 2004 to 2009, the average annual growth rate of the satellite market was11.7%[26] and revenue figures have exceeded 160 billion. In 2009, the industry grew at 10.3% and is expected to grow approximately 9.7% in 2010.
Acquisition
In 2007, it was rumoured that AT&T was interested in acquiring Echostar, DISH Network’s parent company at the time, for $55 per share which would have represented a premium of nearly 25% over the market price. The total purchase price was $13 Billion.[27] However, the purchase was declined as Echostar was waiting for a purchase price of $65 per share instead. Later that year, AT&T’s CFO Richard Lindner last year dismissed the rumors stating that “additional acquisitions weren't necessary, but direct ownership of a satellite operator could help them fill in the U-Verse gaps.”[28]
The acquisition of DISH Network would improve AT&T’s video efforts since its Project Lightspeed has been a disappointment and the acquisition would make AT&T’s offerings more competitive against competing cable companies.[29]
As of December 31st 2009, DISH Network’s shares are trading at $20.77 and there are 443.31M outstanding shares.[30]
Option 2: Exclusive Contract for Tablets
It is rumoured that Apple is planning to release its own tablet in 2010, rumoured to be called the iSlate or iTablet. Apple actually released its first tablet in 1993 and it was called Newton MessagePad 100. Even though it is argued that the device was advanced and had few technical problems, it failed to gain mainstream success because of its inability to attract customers. Due to this inability, it was decommissioned from production in 1997 by Steve Jobs upon his return to Apple.[31]
The Apple tablet has been talked about by industry analyst for years. The following features and benefits have been speculated for the Apple Tablet:
Screen Technology
There are two possible options available to Apple, a 7 inch screen and a 10 inch screen. An organic light emitting diode (OLED) screen will likely to be used since it would allow Apple to “construct a tablet with iPhone-esque battery life, such as 10 hours of video play or 20-30 hours for e-reading purposes”[32]
Operating System
The user interface is said to be tailored made for the Apple Tablet but some reports have stated that the user interface will have a steep learning curve. These reports conflict one of the fundamental values of Apple of having easy to use products.[33]
E-Book Reader
The Apple Tablet is stated to be entering in the growing e-book reader market where Amazon’s Kindle and Barnes and Nobles’ Nook are already in the market. As noted by Forrester, the e-book market is ready for explosive growth.[34]
Stylus
In 2009, Apple filed a patent that loosely provides evidence that the Apple Tablet will be accompanied with a stylus but this goes against previous comments by Steve Jobs that stated that “[Apple] invented a new technology called multi-touch. It works like magic, you don't need a stylus, and it's far more accurate than any interface ever shipped.”[35]
Apps and Games
Apple’s Tablet is touted to be a gaming console and Electronic Arts has signed a partnership to provide games to the tablet.[36] In addition to games, developers are set to create a whole new set of applications that will be compatible with the larger screen.[37]
Price
The price is expected to range from $500 to $800.[38]
Exclusivity Contract
In 2006, Apple and Cingular, agreed upon a deal where AT&T would receive roughly 10% of iPhone sale, a small portion of Apple’s iTune revenue and exclusivity rights to the iPhone. In return, Cingular provided network services and implemented many features on its network such as visual voicemail and reinvented the in-store signup process.[39]