AT&T (NYSE:T) is the only company positioned to offer wireless phone service, in-home internet, and a pay-TV solution nationwide. Comcast has developed its Xfinity Mobile product, but the cable company is limited by geographical restrictions. AT&T, comparatively, has satellite or streaming television everywhere. Its home internet service is still restricted geographically, but the company is working on a 5G network and an in-home device that could eventually deliver home internet nationwide.
However, AT&T might not be the only one able to provide these services all over the U.S. One of the arguments T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) presented to the Federal Communications Commission is the potential for New T-Mobile to offer broadband internet connections to millions of Americans. "I plan for the New T-Mobile to be the country's fourth largest in-home [internet service provider] by 2024," T-Mobile CEO John Legere wrote in a blog post. He expects the companies' combined 5G networks to offer 100 Mbps speeds to two-thirds of the country within a few years, and 90% of the country by 2024.
A broad 5G network combined with T-Mobile's acquisition of Layer3 TV at the end of 2017 would give New T-Mobile all of the tools it needs to take on AT&T and the rest of the cable industry.
Taking on the pay-TV and broadband industries
The New T-Mobile plans to be competitive in all three of the converging wireless phone service, video entertainment, and in-home broadband internet service industries. Legere believes it can do for the latter two industries what it did for the wireless phone industry. In other words, it can provide consumer-focused services with competitive pricing.
And that would fit into T-Mobile's M.O. The biggest reason T-Mobile has been so aggressive with its wireless service is because its biggest weakness is its lack of scale compared to AT&T and Verizon. Although T-Mobile has taken on the same fixed costs of running a nationwide wireless network as its bigger competitors, it serves just half the customers. That means AT&T and Verizon are able to produce profit margins well in excess those of T-Mobile or Sprint.
T-Mobile could do the same in television and in-home internet. Both services will rely on T-Mobile's wireless network, so both businesses would benefit from scale. That said, the television business has much more marginal expenses (distributors pay media companies per subscriber) than simply providing mobile or in-home internet service.
Bundling television with home internet, as every other pay-TV distributor does, could enable it to scale faster. Legere and newly minted President Mike Sievert have both said they're not going to do the same thing as other pay-TV providers, which implies no cumbersome bundles. But perhaps it will offer a bundle with more transparent pricing than its competitors.
Should AT&T investors worry?
The combined T-Mobile and Sprint would be a formidable opponent to AT&T with the potential to do the same to its home internet and video businesses as it did to its wireless business, which has seen declining service revenue and poor subscriber growth for years. But those businesses are already struggling for AT&T, which is why it's moved to rely heavily on the bundle and acquired Time Warner.
Time Warner gives AT&T the vertical integration it needs to offer better television advertising, which would enable it to produce higher revenue per users without having to charge customers more. That's essential in an industry where consumers are increasingly price conscious, and it provides AT&T with something of a competitive advantage over other pay-TV distributors and media companies.
As the largest pay-TV provider and the second-largest wireless service provider, AT&T has a huge head start over the combined T-Mobile and Sprint. But the barriers to entry to pay TV are crumbling and so are the ones around home internet. Therefore, AT&T could see continued margin pressure on those businesses as companies like New T-Mobile and Verizon enter the market for home internet and television.