AT&T/Cingular: Monster Q4-06 and the Implications for the Industry

Implications: 1.  Growth inflection points due to prepaid/postpaid market penetration are now on the horizon.

2.  Actual Data App ARPU is growing - albeit statistically muddled due to inclusion of revenue from TXT message bundles.


Analysis: Well Done, AT&T

AT&T Wireless (Cingular) must be commended for a stellar quarter.  They truly delivered for shareholders in Q4 (and 2006, frankly) even as the final stages of reorganization and preparations for re-branding were in full swing.  Looking between the lines, however, there are two issues that have looming implications for the wireless establishment as a whole.

1.  Market Growth: Prepaid vs. Postpaid

Even as its total net adds hit record levels, AT&T announced postpaid net adds were down for the 3rd consecutive quarter.  After peaking at a bit over 1.0M in Q2, they dropped sequentially to 928K and 861K, respectively, in Q3 and Q4.  During that time, postpaid shares of net adds fell from 93% in Q2 2006 to 54% in Q4.  Is anything wrong?  Why the shift?

Analysis and Implications:

AT&T appears to merely be responding to the changing market opportunity in terms of the available prepaid vs. postpaid mix.  In response, AT&T has been quick to push GoPhone to drive subscriber growth.

According to CTIA, the wireless industry association, the US hit 230M subscribers sometime during the first three weeks of 2007.  Considering a US population of 300M that includes 40M people who are elderly, very young or severely economically challenged (by various estimates), the total possible market hovers around 260M.  While we could debate anything between 250M and 270M, this does not change  the oncoming reality.  The 230M current subscribers include just about everyone’s spouse, significant other, children over 14 and likely a few pets in zip code 90210.  What’s left?  The last 30M-or-so will be dominated by prepaid, no-credit or low-credit consumers who desperately need affordable communications and for which economic prepaid plans are the solution.

AT&T's GoPhone has been a very successful weapon in the growing fight to win these subscribers.  This will eventually be an all-out war.  Consider newcomer Metro PCS (filed S1 for IPO recently) and the key gains they have already made in this important market.  Metro is a CDMA player with its own network and licenses.  Hmm,... someone may need to wake up the Verizon M&A team.

2.  “Data” ARPU
Cingular announced Data ARPU of $7.19, an increase of nearly $2 over the $5.22 announced for Q1.  That’s nice growth.  What’s inside the $7.19 data number? 

Analysts are claiming carriers include TXT messaging packages (typically ranging from $2.99 to $4.99) in the data figures.  When that is subtracted, AT&T data ARPU without TXT packages can be assumed to have grown from around $1 in Q1 to $2.20 in Q4.  Still, that’s nice growth.  Later in this analysis clarity in reporting data revenues will be examined.

Over that same time (Q1 to Q4), total ARPU increased only $0.81 from $48.48 to $49.29.  This begs the question – where did the other $1.16 go?  Using the company’s reported figures, the easy conclusion is that voice plan erosion is the likely culprit.  At cursory glance, $39.99 rate plans appear as in most print advertising and the point of sale messaging right behind the lead message which is typically related to coverage or network capability.

Analysis and Implications

Looking to the future, overall ARPU will likely hover in the $49 range due to downward pressure from prepaid exceeding upward gains from data products that include “Cingular Video,” Games and Applications (Navigation, utilities, etc.).

- While AT&T's copious marketing budget much be focused at this post-pay / prepaid dynamic in order to hit its subscriber targets,  It must improve its marketing and sales conversion of data products to keep data ARPU growing.  For now, it is delivering a two-pronged message: AT&T re-branding and 'more-bars' coverage messages.

- AT&T could be the first carrier to "blink" and split out ARPU into Voice, TXT and Data Cards (Business Data) and Data Apps (Consumer Data).  This would force everyone to do the same and provide the financial markets with much needed clarity.  It would also establish measurable leadership metrics in the data ARPU race.

In closing, while data revenue reporting and the prepaid/postpaid mix are, indeed, looming issues for the industry, it appears that Cingular, now under the cherished AT&T brand, worked hard during 2006 to position itself as the leader in terms of subscribers and preparedness for 2007 and beyond.