T-Mobile US (TMUS) CEO John Legere, who is waging war on his fellow carriers by cutting prices and dumping onerous terms, often points to Batman as his favorite super hero.
So you might call AT&T's (T) anti-Legere strategy a Bat Shield. Instead of matching Legere cut for cut, AT&T is basically giving its customers a price break until they buy their next phone. And so far it's keeping the Batman at bay, at least for AT&T, which reported continued subscriber growth and only modest churn for the third quarter.
The question is whether the strategy will fend off Batman over the next six months, as the arrival of new iPhones from Apple (AAPL) drives a massive upgrade cycle. Now that Batman, err, Legere is offering Apple's latest devices, too, the two carriers are more evenly matched. In previous iPhone cycles, T-Mobile didn't carry Apple's popular models. Investors are clearly worried, as AT&T shares lost 3% on Thursday, even as the overall market gained.
The nation's second-largest wireless carrier on Wednesday night reported that it added a net 785,000 monthly customers in the quarter, about double what it added in the same period last year but considerably less than Verizon's (VZ) 1.1 million gain. Over half of AT&T's so-called post-paid sign-ups were tablets, however, which bring in much less revenue per month than smartphones. Average revenue per user dropped 9% from last year.
AT&T's churn rate, the percentage of customers who defected to a competitor, was 1%, about the same as it's been all year.
Short-term strategy
So just how has AT&T been keeping customers even as T-Mobile dropped family prices, added more data and even offered to cover switchers' early termination fees?
It wasn't by matching T-Mobile's lower prices for the same kinds of plans.
Instead, AT&T is letting millions of its customers sign up for its Next plan even though they aren't upgrading their phones yet. The Next plan charges a slightly lower monthly fee but eliminates phone subsidies. So instead of getting a new iPhone, say, for $199 and paying $80 a month, a Next customer pays $65 a month but also has to pay $27 a month for the iPhone for the following two years.
By letting a customer switch to Next-like pricing before buying a new phone, the customer only experiences the lower, $65 service fee. The additional monthly installment payment for a phone won't hit until they next upgrade their phone.
So far, AT&T says it has switched about 20 million people over to the "Pre-Next" plan, as they call it. That reduces a lot of the immediate attraction of T-Mobile's cheaper plans.
But what happens when all those millions of customers want a shiny new iPhone 6 or some other hot model? They'll suddenly discover AT&T wants a much higher monthly payment and that their great, new deal wasn't so great. With the iPhone available everywhere this year, they may decide to shop on price and discover that T-Mobile is a better deal.
AT&T says so far, they aren't seeing any such problems. "Quite frankly, with 90%-plus of the people coming into our stores we're not seeing [customers leaving]," CFO John Stephens said on a call with analysts. "I won't say we haven't seen one or two, but we're not seeing any strong number, at all, of sticker shock."
Analysts aren't sure that will hold up as the rate of phone upgrades explodes for new iPhones, which went on sale at the very end of the third quarter.
Accounting-driven boost
Meanwhile, the AT&T customers who have been buying new phones under the regular Next plan have given the company a seeming boost in revenue from last year. That's just in the accounting. AT&T can count almost the full retail price of the phone as revenue immediately when it sells one under Next, compared with a drawn-out recognition of the revenue under the traditional subsidized plans.
That accounting-driven revenue boost is seemingly making up for the very real revenue that's being lost on the price cuts given to all the pre-Next customers. Adjusting AT&T's results for these factors, total revenue would have been flat instead of rising 2.5% and earnings before interest, taxes, depreciation and amortization would have plunged 12% instead of falling 4%, figures long-time telecom industry analyst Craig Moffett.
"With weakness across the board, and with the going expected to be tougher in Q4 with a full quarter of iPhone upgrades (associated churn), it is hard to find a reason to be more optimistic," Moffett wrote today. "AT&T shares remain overvalued in our view."
T-Mobile, which has said it had its best month ever for subscriber gains in August, reports its third-quarter results on Oct. 28. Analysts expect an 11% increase in revenue, to $7.4 billion, and earnings per share of 4 cents, up from a loss 5 cents in the third quarter of 2013.
So far, Legere's team is putting the hurt mostly on Sprint (S). But AT&T could fall victim to the bat soon if its "Pre-Next" strategy falls apart.
- Technology & Electronics
- Company Earnings
- T-Mobile
- John Legere
- AT&T
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