Can AT&T Perform without Wireless?

By Gregory S. Davis | January 25, 2006 AAA

Late last year SBC Communications merged with AT&T (T), to form the new local, long distance and data service provider AT&T. In keeping with the consolidation theme in telecom Verizon (VZ) merged with MCI in early January of 2006. The goal for both SBC and Verizon is to combine the success each has had with consumers along with the success that AT&T and MCI have had with commercial clients who spend generously for long distance and data services. Noticeably absent from AT&T is a wireless business along the lines of Verizon Wireless or the combined Sprint Nextel Wireless (S). The question is how long can AT&T compete without this growth market?

Prospects for Growth
Verizon is committed to changing the way we communicate in the future by allocating capital to focus on enterprise markets, the replacement of copper lines with fiber to the home and the crown jewel high-speed wireless data (Evolution-Data Optimized, or EV-DO).

During the third quarter ending Sept 30, 2005 Verizon derived 59% of revenues from growth areas including wireless, wireline broadband connections, including digital subscriber lines (DSL), long distance and other data services.

Currently only Verizon and Sprint Nextel offer EV-DO (wireless broadband) in the US. With EV-DO you can now access the internet from your handheld device or your laptop from wherever you would normally just make a wireless phone call.

AT&T's Vulnerability
AT&T's only foothold into wireless is their 60% stake in Cingular Wireless. From an operating basis AT&T's main operating revenue drivers continue to be voice (53%) and data (32%). AT&T recognizes that voice revenue has continued to decline over the years as customers move to alternate technologies including wireless and to a lesser degree VoIP (Voice over Internet Protocol) and cable. Although AT&T can derive some revenues from customers who choose one of their wholesale wireline service providers, it is still subject to losing all revenue from customers who choose one of the alternative technology options.

Saving Grace
AT&T is not standing still. Prior to their merger with AT&T, SBC began working on delivering IP-based services through an initiative labeled Project Lightspeed. The initiative is focused on a roll out of TV, voice and high-speed Internet access to AT&T customers beginning in mid-2006. This initiative does offer some hope of new revenue growth, but with merger related activities and declining voice revenue it may take time before Project Lightspeed can yield solid returns for AT&T investors.

The Sleeper
While watching the battle lines being drawn between Verizon and AT&T in the enterprise and voice markets both are aware of the threat poised by cable companies like Philadelphia based Comcast (CCZ) and voice-over-internet providers like Vonage and Skype (purchased by Ebay (EBAY) 2005). Comcast's Senior Vice President of Voice Services is planning on stealing 1 million customers from the Verizon's and AT&T's of the world this year. The numbers appear to be on her side with 8.5 million high-speed Internet customers, and 18.5 million cable users Comcast only needs a fraction of existing customers to try voice services.

Who Decides
It always goes back to what makes the customer happy. Whichever telecom service provider that can combine the best bundled packages along with quality service will ultimately capture customer loyalty. While AT&T will continue to be a player, the incursions of cable operators and pure VOIP providers into the voice arena, Verizon's bolstered business segment along with its growing DSL and wireless customer base appears to be the best well-rounded option in the field of data/voice/wireless service providers.

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