Please ensure Javascript is enabled for purposes of website accessibility

Would You View Ads for Cheaper Phone Service? AT&T Bets Yes

By Leo Sun – Sep 19, 2020 at 11:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The telco believes there's a market for ad-subsidized wireless plans.

AT&T (T 0.64%) CEO John Stankey recently told Reuters that the telecom giant could launch ad-subsidized wireless plans within a year. Stankey claimed a "segment" of its customer base would likely accept some advertising on their phones "for a $5 or $10 reduction" in their monthly bills.

Stankey also revealed that AT&T was testing "unified customer identifiers", which would allow it to sell targeted ads across its wireless network. But will these new strategies rejuvenate AT&T's sluggish wireless business and strengthen its smaller advertising business?

A woman uses a smartphone.

Image source: Getty Images.

Understanding AT&T's ad business

Prior to 2018, AT&T's advertising revenue mainly came from ads on its U-verse and DirecTV pay TV platforms. But in mid-2018, AT&T bought AppNexus, a cloud-based platform that delivered programmatic ads.

It rebranded AppNexus as Xandr, a platform that crunched the data from AT&T's base of 170 million customers to sell targeted digital and video ads. On its own, Xandr's revenue rose 27% to $1.74 billion in 2018, and grew 16% to $2.02 billion in 2019.

AT&T also bought Time Warner in 2018 and rebranded the media giant as WarnerMedia. That acquisition significantly increased its ad revenue via Warner's Turner cable networks, and AT&T folded Xandr into WarnerMedia earlier this year. AT&T also acquired the digital media company Otter Media in 2018, and folded it into Warner Bros. the following year.

Last year, Turner's advertising revenue nearly doubled to $4.57 billion, and revenue from its Entertainment segment (including ads on its pay TV platforms) grew 7% to $1.96 billion. The combination of those two segments with Xandr, as well as deductions from corporate eliminations, netted $6.99 billion in total advertising revenue for AT&T last year, up 58% from 2018.

However, the advertising business only accounted for 4% of AT&T's total revenue. At the end of 2019, AT&T expected its ad revenue to continue rising with higher spending from the NCAA Final Four and Championship games, as well as the presidential election in November.

Unfortunately, the COVID-19 crisis halted live sporting events, business closures throttled ad purchases, and the pandemic shut down WarnerMedia's production of new content. AT&T's total advertising revenue declined 13% year-over-year to $1.5 billion in the first quarter, and tumbled another 33% year-over-year to $1.2 billion in the second quarter.

Seeking out new strategies, but sending mixed messages

AT&T's advertising business was once its fastest-growing unit, and a rare bright spot compared to its slow-growth wireless business and struggling pay TV business -- which continues to lose subscribers to cord cutters and rival streaming media platforms.

Various images scattered across a digital screen.

Image source: Getty Images.

That slowdown is forcing AT&T to seek new ways to expand its advertising business. Xandr signed new TV ad deals with Disney and AMC Networks in March, and AT&T recently announced it will launch a cheaper ad-supported version of its streaming platform, HBO Max, which usually costs $14.99 a month, next spring.

Stankey told Reuters the ad-supported HBO Max would serve as a new "foundational element" for its advertising business and supply ads for its ad-supported wireless business. Stankey seems to believe AT&T's subscribers will allow ads on their phones for a monthly discount, but previous ad-supported phones and services from Amazon, Virgin Mobile USA, and Sprint's Boost Mobile all flopped. Moreover, AT&T's plan to track its wireless customers with "unique" identifiers for ads could spark serious privacy and security concerns.

Stankey seems committed to expanding AT&T's ad business, but a Wall Street Journal report in early September claimed the company was exploring a sale of Xandr to streamline its business and reduce its debt. AT&T never confirmed those reports, but the rumors send mixed messages about Stankey's commitment to its ad business.

The key takeaways

AT&T's recent announcements suggest it's still committed to expanding its advertising ecosystem as the COVID-19 crisis throttles its growth. But as an AT&T investor, I doubt a significant number of subscribers will sign up for its ad-subsidized wireless plans.

The reason is simple: Today's consumers generally associate ads with free services and paid subscriptions with ad-free experiences. Stankey's plan might work if AT&T offered a free ad-supported wireless tier, but it's doubtful a $5 to $10 discount will attract much attention.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, AT&T, and Walt Disney. The Motley Fool owns shares of and recommends Amazon and Walt Disney. The Motley Fool recommends AMC Networks and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

Stocks Mentioned

AT&T Stock Quote
AT&T
T
$19.24 (0.64%) $0.12
Walt Disney Stock Quote
Walt Disney
DIS
$94.19 (1.77%) $1.64
Amazon.com Stock Quote
Amazon.com
AMZN
$89.44 (-1.01%) $0.91
Amc Networks Stock Quote
Amc Networks
AMCX
$17.77 (0.28%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.