All four major wireless carriers operate in both the consumer and enterprise space, but AT&T (NYSE:T) is the only company that breaks out its wireless business into two segments. At the end of the second quarter, AT&T reported 77.5 million total subscribers and connections for its business solutions segment and 54.3 million subscribers and connections for its consumer mobility division. Its 131.8 million subscribers gives it more than any of its competition including Verizon (NYSE:VZ), which has a total of 113.2 million retail connections.
But AT&T's segment reporting produces some interesting results when it comes to net additions. Last quarter, AT&T reported its consumer postpaid connections fell from 28.294 million to 27.862 million. But it somehow reported net additions of 72,000 connections.
Let's dive into AT&T's quarterly operating metrics in order to figure out what exactly is going on here.
When a subscriber loss isn't a subscriber loss
The discrepancy in AT&T's total consumer mobility subscriber count and its reported net additions is due to its business services. In an 8-K filing accompanying its earnings release, AT&T notes "Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the ABS segment negatively impacted consumer postpaid subscriber and service revenues growth."
However, AT&T doesn't seem to count those consumers switching from consumer plans to business plans as a net loss for its consumer mobility segment. Nor does it count them as net adds for its business solutions segment. Business postpaid subscribers climbed from 48.844 million to 49.432 million last quarter, but AT&T reported postpaid net adds of just 185,000 for the segment.
Why that's important for investors
AT&T's business services are cannibalizing its consumer services. The problem is, as AT&T points out in its 8-K filing, customers are able to subscribe to the same service "for a reduced price." That means a decline in revenue and margins for AT&T even if it's not losing those customers entirely.
AT&T can make up for that reduced margin in the form of lower churn. Last quarter, business solutions wireless customers churned out at a rate of 0.91%. Postpaid consumer subscriber churn was 1.09% and overall consumer subscriber churn was 1.96%. The shift in its subscriber base to more business solutions customers helped lead AT&T to its second-lowest overall postpaid churn number (0.97%) ever last quarter.
That said, AT&T is in all likelihood the largest carrier servicing enterprises. (It's impossible to know for certain since none of the other carriers break out their results.) That makes it the primary target for the competition as the market for traditional consumers becomes more saturated. As such, the benefit in lower churn rates might not last.
T-Mobile (NASDAQ:TMUS) is already going after its connected devices segment by supporting its legacy 2G network through 2020 and offering free data to customers switching from AT&T through the end of the year. AT&T counts over 28 million connected device subscribers in its business segment.
Meanwhile, Verizon is seeing a larger percentage of its customers come from enterprises as well.
AT&T is already feeling the pressure from the competition. Postpaid business subscriber churn increased year over year in three out of the last four quarters. As the competition increases, AT&T may feel more pressure on its net adds or further margin compression due to the growing percentage of customers in its business solutions segment versus its consumer segment.