AT&T Suffers the Cost of Being Wireless

Ask employees or even most investors and they'll tell you the company once known as Ma Bell hasn't existed for years. They're right, of course.

If it's tough to toss away the term completely, it's because of the size of AT&T's (NYSE: T  ) network. The company has acquired and integrated many of the so-called Baby Bells that once existed, leaving Verizon (NYSE: VZ  ) , Sprint Nextel (NYSE: S  ) -- and to a lesser extent -- the soon-to-be-completed merger of Qwest (NYSE: Q  ) and CenturyLink (NYSE: CTL  ) as its main rivals.

Originally, these networks were built to deliver voice service over wires, and AT&T for years has survived by reliably delivering calls in this way. No longer. In the third quarter completed on Sept. 30, AT&T's wireless revenue accounted for 48% of its overall total and came within $95 million of equaling wireline revenue.

Here's a closer look at what the Street expected and how AT&T performed:

Metric

Estimate

Actual

Year-Ago

Revenue $31.2 billion $31.6 billion $30.7 billion
Per-share earnings $0.55 $0.55* $0.54
Gross margin Not available 57.2% 58.2%
Free cash flow (YTD) Not available $11.6 billion $13.9 billion

Sources: AT&T press release, Yahoo! Finance, and Capital IQ, a division of Standard & Poor's. YTD = Year to date.
* Excludes $1.53 in one-time tax and other benefits.

The cost of being wireless
Wireless was the key supplier of growth. Overall wireless revenue improved 11.4% as AT&T gained 2.6 million net new accounts and activated 8 million integrated devices. Call it the benefit of opening up to new relationships; AT&T's data network now supports both Apple's (Nasdaq: AAPL  ) iPhone and a slew of devices using Google's (Nasdaq: GOOG  ) increasingly popular Android operating system.

But these activations came at a cost. Wireless operating expense rose by more than 15% during the quarter, wiping out all but a fraction of the segment's operating income gains.

To be fair, AT&T probably had no choice but to spend to get more of its customers under the protective shield of new two-year agreements. Why? A September survey by Credit Suisse found that 23% of iPhone owners would prefer Verizon if given the chance to switch. Press reports have since confirmed a deal to put the iPhone on Verizon's network sometime early next year. I wouldn't be at all surprised to see a deal with Sprint, as well.

Now it's your turn to weigh in. What will AT&T's business look like once it no longer owns the iPhone? Please vote in the poll below and then leave a comment to explain your thinking.

Interested in more info on AT&T? Add it to your watchlist here by clicking here.

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  • Report this Comment On October 21, 2010, at 10:14 PM, conradsands wrote:

    From ABC News …

    Verizon Wireless to Pay Back Customers for Accidental Data Fees

    More than a year ago, Teresa Dixon Murray says she started to feel something wasn't right about her family's Verizon Wireless cell phone bill.

    "I was getting $1.99 charges on usually two out of my three accounts," said Murray, a reporter with the Cleveland Plain Dealer and the mother of two teenagers with cell phones.

    She said that her family was being charged for Internet use but no one was using the Internet. The mystery charge even appeared, she said, when one of her sons' phones was locked away after he'd lost phone privileges.

    "I knew absolutely, positively for sure. No accidents. No excuses, that this was wrong," she said. "And I was absolutely livid.”

    After months of complaining to Verizon, Murray wrote a newspaper column. After that, she got the company's red carpet treatment and her money back. Her situation was settled -- but thousands wrote to her saying that they'd had the same problem.

    Now thanks to a Federal Communications Commission investigation into Verizon Wireless, some of those customers could see credits of $2 to $6 on their October or November bills.

    Last year, the FCC questioned Verizon Wireless about a $1.99-a-megabyte data access fee that had appeared on the bills of customers who didn't have data plans but who had accidentally initiated data or Web access by pressing a button on their phones.

    Verizon Wireless said that it had stopped charging such fees when a customer started using a data service and then shut it off quickly. It blamed the continued overcharging on a software glitch and has agreed to pay up to $90 million in refunds to affected consumers.

    The FCC said Sunday that it had been examining the charges after consumers' complaints.

    "We're gratified to see Verizon agree to finally repay its customers," FCC Enforcement Bureau Chief Michele Ellison said in a statement.

    "The carriers have 50 [million], 60 [million] or 90 million customers and they charge everybody every month a few extra bucks," said Ed Finegold, Validas' chief analytics officer. "That adds up to billions in profits for them, so they have every incentive in the world to do it."

  • Report this Comment On October 21, 2010, at 10:16 PM, conradsands wrote:

    In a poll that asked 4,040 smartphone users in March how many dropped calls they had experienced in the past three months, AT&T — the exclusive U.S. carrier of Apple's iPhone and iPad mobile devices — came in dead last among the country's four largest carriers.

  • Report this Comment On October 22, 2010, at 9:52 AM, georgetag wrote:

    conradsands,

    Did AT&T have the most dropped calls or the least dropped calls?

  • Report this Comment On October 22, 2010, at 10:22 AM, wolfhounds wrote:

    Does VZ have the infrastructure in place to handle a large demand for CDMA iPhones, or will take years to build out?

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