One of the significant changes within the wireless industry over the past few years has been the push by cable companies like Comcast and Charter to offer inexpensive wireless services to their customers. On the surface, this appears to be a major risk to telecom giants like AT&T (T +0.73%).
Comcast's Xfinity Mobile offers a $15 per month plan that comes with 1 GB of data, as well as a $30 per month unlimited plan. Charter's Spectrum Mobile offers similar options, as well as a bundle that includes internet service and one free unlimited wireless line.
It makes sense for cable companies to hook customers on as many services as possible. People don't switch home internet plans very often or switch wireless service providers very often. Get a customer using both, and that customer will likely stick around.
NYSE: T
Key Data Points
Not sustainable
Cable companies aren't building their own wireless networks. Instead, they're operating as mobile virtual network operators, buying capacity from one of the major wireless providers. MNVOs are a dime a dozen, and many of them offer rock-bottom pricing. Cable companies are taking it a step further, offering free lines in some cases for existing customers.
Because cable companies are paying the major wireless providers for capacity, a subscriber gained by a cable company is not a 100% loss for the wireless industry. AT&T recently struck a deal with the National Content & Technology Cooperative, a group of nearly 700 independent communications service providers, to be their exclusive wireless carrier for any wireless services sold to subscribers. As these companies launch wireless products, AT&T will get a piece of the revenue.
In cases where AT&T isn't the underlying wireless provider, CEO John Stankey isn't particularly troubled. During Goldman Sachs' Communicopia & Technology Conference, Stankey called the cable company wireless business model unsustainable:
I think when you look at how cable plays into this space, boy, I'll tell you, when you're in a business where consumption is growing 35%, 40% a year and you're on a variable cost structure for that and you're not at the lowest marginal cost in the industry, it's tough to be a price leader forever.
While AT&T's costs are mostly fixed, cable companies' wireless costs are not. The more a cable company's wireless subscriber uses the service, the more the cable company will need to pay for capacity. With the amount of mobile data consumed growing quickly, Stankey doesn't expect the aggressive pricing offered by cable companies to last forever.
A rational environment
Even with cable companies offering enticingly cheap wireless service, Stankey sees "very rational" behavior coming from AT&T's competitors.
AT&T's second-quarter results suggest that the company isn't having much trouble keeping subscribers and boosting revenue per subscriber, which tracks with Stankey's comments about a rational market. AT&T's postpaid revenue per subscriber edged up 1.5% year over year in the second quarter, and postpaid phone churn was just 0.79%.
AT&T's subscriber growth rate has slowed this year as the wireless industry cooled down a bit, but there were some one-off factors as well. The company decided not to bid on renewing a large government account because of profitability concerns, which hurt subscriber growth numbers. Pricing changes from competitors also caused some disruption, but Stankey says that has now normalized.
AT&T reiterated its guidance calling for at least $16 billion of free cash flow this year. With the company valued at just $103 billion, putting the price-to-free-cash-flow ratio at a meager 6.4, the stock looks like a compelling option for value investors. While cable companies do pose a threat, AT&T is unlikely to be derailed in the long run by this unsustainably aggressive competition.
