AT&T (NYSE:T) didn't have a great 2015, at least when it comes to stock price. Near the end of the year, the company's shares are almost exactly where they began, which had to be frustrating for CEO Randall Stephenson, who managed to pull off the $49 billion acquisition of DirecTV.
Still, while the company's efforts didn't particularly pay off in 2015, they did position the brand for a very big 2016. The problem is that while AT&T has all the pieces needed to grow its subscriber base in the coming year, it also faces some major headwinds from the changing marketplace it operates in.
That means that 2016 could be AT&T's best year ever, but it faces a number of challenges in making that happen.
Here's why it could happen
In buying DirecTV, AT&T can now offer pay television, wireless, Internet, and even landline service across its entire customer base, whereas it could previously only do that in areas where it had built out its U-Verse capability. That acquisition also makes it the only wireless carrier that can also offer pay television service anywhere in the United States.
Those two factors give the company both an offensive and a defensive advantage over its rivals. On the offensive side, the company can offer aggressive bundles deals to lure customers to switch from rivals. AT&T is generally a higher-priced player in wireless, but DirecTV is often cheaper than traditional cable, and Internet prices tend to be flat across many markets. By bundling all of its services together and offering a one- or two-year teaser price, AT&T could offer consumers a better overall value and a single bill for up to four services.
On the defensive side, this level of bundling also makes it less likely that people will leave. If AT&T sends you one bill for cable, wireless, Internet, and a landline, the idea of dropping a piece of the bundle to get a cheaper price on a single service feels like more of a hassle.
Delivering multiple services to a customer on a single bill is also more efficient. That gives AT&T efficiencies in billing, back-office functionality, and marketing that its rivals simply can't equal.
Here's why it may not
AT&T's bundling advantages will keep it from having a disastrous year where it sheds a massive amount of customers, but cord cutting in pay television and price competition in wireless make it unlikely the company will have its best year ever in 2016.
While it has held its own in 2015 when it comes to battling low-priced rivals T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S), neither of those companies is likely to back off in 2016. AT&T also has to deal with the fact that its biggest selling point to wireless customers, its network, is no longer quite the advantage it once was.
Consumer perception may not have fully caught up to that reality, but the most recent RootMetrics Wireless Mobile Performance in the United States Report showed that Sprint and T-Mobile continue to cut the gap. That should ultimately remove the key reason that has kept people from leaving AT&T (and Verizon) for their cheaper rivals.
On the pay-television side, AT&T must also deal with the fact that cord cutting is slowly becoming a factor. It's not the mass exodus many predicted (at least not yet), but it's enough to keep AT&T from using its bundling advantage to add millions of pay-TV subscribers.
In its most recent report, Leichtman Research Group found that the 13 largest pay-TV providers in the U.S., about 95% of the market, lost roughly 190,000 video subscribers in the third quarter of 2015, compared with a loss of about 155,000 subscribers in the same period a year before. AT&T lost 91,000 pay-TV customers during the quarter, while its DirecTV brand gained 26,000.
And the verdict is ...
Stephenson deserves credit for getting his company into a good position for the coming major changes in wireless and pay television. That, along with his efforts to reduce expenses, should get the company's stock moving back in the right direction, but it's probably not enough to drive it to its best year yet.
The company is simply facing too many competitors with the ability to curtail or even stop its wireless growth. It's also unrealistic to believe that it will post big gains in pay-TV when that market is slowly shrinking.
Things could have been much worse for AT&T, and the fact that its 2016 prospects are decent is a credit to its management. It's not, however, a recipe for a great year.
Daniel Kline has no position in any stocks mentioned. He just drove 1,350 miles in 24 hours and does not recommend doing that. The Motley Fool recommends Verizon Communications. 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.