AT&T's Death by a Thousand (Service) Cuts

In 2007, AT&T (NYSE: T  ) negotiated exclusive U.S. distribution rights for the iPhone, perhaps the telecom's only intelligent decision in decades. Much to the dismay of those who wanted iPhones and good wireless service, AT&T paid up to retain that exclusive deal until January 2011, when Verizon (NYSE: VZ  ) began offering the iPhone. Sprint Nextel (NYSE: S  ) may join the fray as early as October.

iPhone to the rescue
Let's take a look at AT&T's revenue and profits since the iPhone was introduced in June 2007:

AT&T Segment Financials

2007

2008

2009

2010

Revenue

 

 

 

 

Wireless

$42,684

$49,174

$53,504

$58,500

Total

$118,928

$123,443

$122,513

$124,280

Wireless % of Total

36%

40%

44%

47%

Operating Profit Before Tax

       

Wireless

$7,020

$11,619

$13,830

$15,257

Total

$20,404

($1,690)

$21,000

$19,573

Wireless % of Total

34%

NM

66%

78%

Net Profit Before Tax

       

Wireless

$7,036

$11,625

$13,839

$15,266

Total

$18,399

($4,572)

$18,518

$18,238

Wireless % of Total

38%

NM

75%

84%

Source: Capital IQ.

In less than four years, wireless went from 34% to 78% of the company's operating profit, and from 38% to a whopping 84% of pre-tax profit. That owes only partially to rising revenue and profit in the wireless division. The other divisions have experienced a steady decline in revenue and net income, dragging down total company profits.

AT&T Segment Financials

2007

2010

Change

Revenue

 

 

 

Wireless

$42,684

$58,500

37%

Wireline

$71,583

$61,202

(15%)

Advertising Solutions

$5,851

$3,935

(33%)

Other

$2,229

$643

(71%)

Corporate

($3,419)

-

-

Total Revenues

$118,928

$124,280

5%

Operating Profit Before Tax

     

Wireless

$7,020

$15,257

117%

Wireline

$11,990

$7,823

(35%)

Advertising Solutions

$1,861

$855

(54%)

Other

$189

($1,841)

NM

Corporate

($656)

($2,521)

NM

Total Operating Profit Before Tax

$20,404

$19,573

(4%)

Net Profit Before Tax

     

Wireless

$7,036

$15,266

117%

Wireline

$12,021

$7,834

(35%)

Advertising Solutions

$1,861

$855

(54%)

Other

$834

($1,099)

NM

Corporate

($3,353)

($4,618)

NM

Total Net Profit Before Tax

$18,399

$18,238

(1%)

Source: Capital IQ.

Can AT&T continue to rely on the iPhone to make up for its declining businesses, now that the coveted smartphone is available elsewhere? Only time will tell. It can't help that ChangeWave research attributed AT&T's notorious dropped calls to the carrier, not the phone.

U-verse to the rescue?
In pursuit of other growth opportunities, AT&T is investing heavily in expensive fiber optic networks to support its U-verse business, offering digital TV, high-speed Internet access and voice. That may have slowed its revenue and profit decline outside of wireless, but the trend is not AT&T's friend.

Anecdotal evidence suggests  a service issue lurking at the heart of the telecom's woes. AT&T's customer service, or lack thereof, inspires the kind of passionate hatred I haven't seen since ticked-off consumers abandoned Dell in the years after the dot-com bust. Dell's consumer business never recovered.

Earlier this year, I signed up for AT&T's high-speed Internet and voice (U-Verse) service. Big, big mistake. It took more than five days after service was scheduled to start to get even one line working. That service call lasted from about noon until past 9 p.m. I needed a second service call, lasting about an hour and a half, just to get a second line working. I spent hours on hold trying to set up those appointments. That would have taken even longer if I hadn't persuaded one AT&T rep to share the secret of speeding through the company's systems.

Less than four months later, the new router provided by AT&T failed. Two phone calls to AT&T, lasting more than an hour, resulted in tech support promising to deliver a new router within two days. Four service-less days later, no router had arrived. At that point, the company's customer service said its records showed that my earlier call was to ask how to get faster service (pure hogwash) and made no mention of service being down. The representative suggested I call Cisco (Nasdaq: CSCO  ) , the maker of the "broken" router. Less than 15 minutes and one reboot later, Cisco had me back online.

If I want a refund for the days I haven't had service -- about 7.5% of the time -- I have to call another number and waste more time. I think my time is better spent switching service providers and complaining to the Public Utilities Commission.

When I mention AT&T customer service to friends and family, the response is often either a passionate I-had-an-even-worse-experience rant, or a quiet what-did-you-expect-it's-AT&T. Thankfully, the what-did-you-expect group doesn't call me a dunce (to my face) for signing up with AT&T.

Bad management
Perhaps the most surprising lesson from my experience with AT&T service is what the dedicated technician that made the nine-plus hour service call said. To get information necessary to do his job, he has to use the same 800 number that customers call and wait on hold with the rest of us poor souls. That's got to be costing the company -- and shareholders -- a bundle. It's just bad management.

What's more, the company's computer systems are so disjointed that its personnel spend excessive time bouncing customers from one rep to another trying to get the right person. That creates not only unhappy customers, but also more needless costs.

Great dividend ... for now
According to my Foolish colleague Eric Bleeker, the consistent cash flow that comes from legacy telephony services such as wireline helps AT&T pay its hefty dividend. AT&T has increased that payout at an average annual rate of less than 4% since the iPhone's introduction, even though it had an exclusive on the coveted smartphone for most of that period.

It currently has a dividend yield of 5.9% and a P/E ratio of 8.5. But Eric has suggested dividend investors might be better off owning Frontier Communications (NYSE: FTR  ) , CenturyLink (NYSE: CTL  ) , or Windstream (Nasdaq: WIN  ) .

Foolish takeaway
Back in the days when the phone company was a regulated monopoly, it boosted profits by boosting revenue. With no competition, customer service didn't matter. At AT&T (NYSE: T  ) , it seems that customers still don't matter. In my view, lousy management, dropped calls, shameful tech support, and DSL customer downtime will slowly erode AT&T's customer base, profits, and dividend.

What do you think? Will AT&T pull out of its downward spiral? An easy way to stay on top of these market developments is the Motley Fool's free new My Watchlist feature. You can get up-to-date news and analysis by adding these stocks to your Watchlist now:

Fool contributor Cindy Johnson does not own shares of any company in this story. She does not own an iPhone, but will probably get a Verizon iPhone 5 later this year. The Motley Fool owns shares of Apple. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Dell, AT&T, Apple, and Cisco Systems. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2011, at 12:45 PM, robwg wrote:

    The only thin T has going for it is that the competition is not much better in the service arena. UVerse competes mostly against cable, and cable providers are notorious for lousy service. Wireline is a dying business, but Verizon is similarly impacted, so things are no worse for T than VZ. Sprint is trying very hard to die, and will probably succeed within a couple of years.

    I own a good bit of T stock, but have begun looking for opportunities to take profits and move to better long term dividend stocks.

  • Report this Comment On August 30, 2011, at 1:12 PM, justsumguy wrote:

    I worked for att for 13 years. The customer svc is awful . They are hiring less and less qualified people and giving them more and more to accomplish without any real support. The computers are a nightmare and the management is probably the most incompetent group of folks you will ever meet. I had finally had enough and left 5 years ago. Cant imagine it has gotten any better.

  • Report this Comment On August 30, 2011, at 1:19 PM, mnosense wrote:

    Keep ignoring the growing debts.

  • Report this Comment On August 30, 2011, at 3:55 PM, SWATDaddy wrote:

    Ms. Johnson clearly has an ax to grind with AT&T and her bias has clouded her journalistic integrity and objectivity here. She may not own any T stock but she clearly is not an impartial analyst. Her piece falls short on many fronts, including her failure to consider the long track record AT&T has had in adapting to the market. Thirty out of the thirty top independent analysts rank T as a Strong Buy, Moderate Buy, or Hold. None of them rated the stock a Moderate Sell or a Strong Sell. I'd rather listen to impartial observers like them than petulant whining dressed up as "analysis" from the likes of Ms. Johnson.

    Disclosure: I have never been employed by AT&T. I am a very satisfied long-time AT&T customer. I am a long-time T shareholder. I have made a lot of money owning and trading T stock.

  • Report this Comment On August 31, 2011, at 8:37 PM, sdouglas77 wrote:

    Everything Cindy reports is exactly my experience, except her experience was shorter than mine.

    I spent three weeks while AT&T tried to install Uverse. The 800-288-2020 number that requires an extensive conversation with a robot BEFORE it puts you on hold for at times 15-20 minutes. Then when a person finally answers, they have to transfer you because "we don't handle Uverse." Then WHY is this the Uverse number?

    I made probably 25 calls and spent probably 9 to 12 hours on the phone with AT&T.

    When the installation tech came out, he started and found there was a problem. He called maintenance, and told me they'd be out "within two days." Five days later, I'd heard nothing and called AT&T. They said maintenance came out and found it couldn't be done and cancelled the order WITHOUT TELLING ME!

    The story goes on, but I get tired telling it. SureWest came out with an army and had everything running at super-speed within 4 hours.

    I would never go with AT&T.

  • Report this Comment On September 01, 2011, at 8:00 PM, mabellemployee wrote:

    The trouble with T is entirely caused by 3 factors:

    The first downfall of T is it's "diversity policy", I don't in any way mean to say anything negative about any group, only about T's hiring and promoting policy that the amount of qualification entirely depends on who can check more boxes on an application.. The trouble with this quota system is two-fold, first, it completely by-passes many many qualified people for only one reason, how many boxes can they check. And unfortunately, with this policy comes the reality that since I was hired because of checked boxes that I can never be let go, because ,after all, no matter how incompetent I am, I can still check all of those same boxes.

    The second trouble with T is the attitude of it's union. The trouble is definitely NOT that it has a union, NO, a union is a good thing when it actually works to improve the employee and the company but T's union is only there to represent the worst, they actively support the "Race To The Bottom" syndrome. It seems like these days the union should be actively involved in their members being actually the best employees the company could ever find, and the union should ride herd on their members and proudly represent the best people anywhere, not so here, the union only represents the worst. You should earn your membership (and keep your membership standing) in the union by your work ethic and experience and work quality, not by just paying money and only doing the minimun. I know that this might be a popular opinion of all unions, I can not say that, but I can verify this is true at T.

    The third and final downfall of T is it's management, recently so much has changed in the management of T that no one would actually believe it. I guess it has to do with the new CEO. He has only been an accountant for T and never in any "service" role. I guess some people respect that but after all, his only job is to tell the share holders that we are making money hand over fist so as to encourage investment while at the same time filling out tax forms showing that we are not making a dime (to avoid taxes) and all the while telling employees there is not any money anywhere so we can't afford to still pay for health care and we're so broke we don't know what to do. Almost all the management now has been shuffled around so most of them are not even qualified to perform the jobs they are supposed to be supervising and they all run from any responsibility so that they can't be blamed for anything. They are trying to do the absolute least so that they can never be blamed for anything.

    This is unfortunate to have happened to a company that was once truly GREAT but many factors played into this outcome and most of the public is still very loyal to the name AT&T, it used to symbolize american greatness but belive me, that is NO MORE....

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