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Transforming AT&T: Declining Growth in Wireless Means Strategic Redirection for Company

Phillip Dampier October 25, 2012 AT&T, Broadband "Shortage", Competition, Consumer News, Data Caps, Video, Wireless Broadband 2 Comments

With a declining number of Americans willing to pay AT&T’s prices for smartphones and wireless service plans, AT&T’s future revenue growth will increasingly depend on getting the company’s current customers to pay more for data and adopt new types of wireless communications services.

After a quarterly earnings report found AT&T subscriber growth falling far behind its larger rival Verizon Wireless, AT&T appears ready to concede there is a finite number of new customers to be won from endless battles for market share.

AT&T was expected to add 358,000 new customers in the previous quarter, but only managed to attract 151,000. Demand for the latest Apple iPhone has yet to meet available supply, with most iPhones obtained by AT&T allocated to existing customers. AT&T exclusively launched the iPhone in the United States in 2007 and retains the largest share of iPhone owners, even after the phone became available from other carriers. Verizon Wireless had fewer problems adding new customers because it is not nearly as dependent on Apple.

de la Vega

Despite lackluster subscriber growth, AT&T reported stellar revenue during the quarter, partly from rate increases and the launch of usage-limited, family share plans. AT&T also continued to benefit from  tax savings, share buybacks, and refinancing debt at lower interest rates. With fewer customers adding subsidized phones, AT&T also paid fewer subsidies.

AT&T’s profit rose to $3.64 billion, or 63 cents per share, up from $3.62 billion, or 61 cents per share — $.03 ahead of Wall Street expectations.

AT&T can thank its wireless data services for a significant chunk of their earnings, with more to come.

The company reported more than 2/3rd’s of their customers (28+ million) are now on usage-based pricing plans. That is 10 million more than a year ago. The company’s new mobile share plans have attracted almost two million subscribers during the first five weeks they were on offer. More than one-third of those customers are choosing the company’s 10GB data allowance, which costs the customer $150 a month with unlimited talk and texting ($30 a month for each additional smartphone on the account.) Around 15% of new mobile share customers are choosing to abandon their grandfathered unlimited data plans.

AT&T’s forthcoming strategic redirection, to be announced Nov. 7, is likely to center around increasing revenue from the company’s wireless data network.

The average AT&T customer’s wireless broadband data bill is on the increase.

Ralph de la Vega, president and CEO of AT&T Mobility and Consumer Markets, told investors it is taking “this massive data growth and building products and services on top of that.”

“One of the best examples I can give you is our launch of Digitize that will happen next year,” de la Vega said. “It leverages this huge smartphone database and adds services on top of it and not just data access, but services that differentiate us from the competition. So you’re talking about connecting the home with service automation and security monitoring. We’re talking about connecting your car with all kinds of entertainment services.”

That means AT&T sees its future revenue coming mostly from existing customers paying more.

“Those services are not dependent on adding more customers per se, but connecting more houses, connecting more cars and connecting more things that drive significant revenue streams with good margins for us,” de la Vega said. “In terms of what we see happening with others in the industry, I don’t think anything we have seen changes our plan. We’re going to execute [and] let others react to our plan, instead of us reacting to them.”

AT&T seemed unconcerned by competition in the current marketplace, especially from those offering cheaper plans. de la Vega predicted other carriers will come around to AT&T and Verizon’s way of thinking about mobile plan pricing.

“I think these mobile share plans are very compelling to customers,” de la Vega told investors. “And I think those that don’t put them in, in the industry will probably have to rethink down the road because I think the reception has been exceptional.”

John Stephens, AT&T’s chief financial officer, called AT&T’s data growth important, as long as those customers are on tiered data plans. With three-quarters of their customers buying “higher-priced plans,” AT&T can grow revenue by encouraging data usage that forces customers into ever-higher allowance plans that deliver revenue boosts indefinitely.

“I think some of the things driving our pricing and the price moves we made almost a year ago where we increased our data pricing are driving our revenue growth,” de la Vega admitted. “But we’re also seeing people sign up for more data. And the fact is, as you sell more smartphones or more tablets, people need more data. Usage-based data pricing means as usage goes up, we can see some of that lift also coming from additional average revenue per customer. So not only do we feel good where we are, but I feel really good about where we’re going, because you have to have that base of usage base in order to be able to monetize the data growth that we foresee in the future.”

AT&T continues to depend primarily on its wireless division for most of its revenue, but as growth slows, the demand for ever-increasing average revenue from each customer will have to come from increasing prices or finding new services to sell that customers want.

Applications that wireless carriers seek to monetize

Some other highlights:

  • AT&T was questioned by Wall Street about its decision to voluntarily contribute a $9.5 billion preferred equity interest in AT&T Mobility into the Pension Plan Trust. Some analysts consider that amount unnecessary and above the amount required by law, despite the company’s assertion this would help protect the long-term health of AT&T’s pension fund. But some retirees note AT&T’s generosity benefits itself — the company’s contribution to the pension plan is invested entirely in AT&T’s wireless business;
  • AT&T now has 7.4 million U-verse subscribers, driving wireline revenue growth to levels not seen in more than four years. But AT&T still only averages less than a 15% market share in the cities where U-verse is available, suggesting cable operators are maintaining their market dominance;
  • AT&T’s new upgrade policy, which curtails early upgrades and imposes new upgrade fees, is having a dramatic impact on discouraging customers from upgrading their phones. That has kept AT&T’s upgrade rate at a steady 7%, even with the introduction of the wildly popular new iPhone. AT&T has effectively cut their subsidy costs and took a 28% increase in equipment revenue from new upgrade fees to the bank;
  • Capital expenditures are on target at $13.8 billion, with more than half of that invested in the wireless business. Landlines and U-verse upgrades took a back seat.
  • AT&T receives enough iPhones to activate 5,000-10,000 new iPhone customers a day and still that is insufficient to meet demand;

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/ATT Quarterly Earnings 10-24-12.flv[/flv]

AT&T’s Ralph de la Vega explores the company’s latest quarterly earnings, focused on its profitable wireless business.  (3 minutes)

Halloween Scare Stories: Controlling the “Spectrum Shortage” Data Tsunami With Rate Hikes, Caps

Phillip Dampier October 25, 2012 Astroturf, AT&T, Broadband "Shortage", Competition, Consumer News, Data Caps, Editorial & Site News, Public Policy & Gov't, Sprint, T-Mobile, Verizon, Video, Wireless Broadband Comments Off on Halloween Scare Stories: Controlling the “Spectrum Shortage” Data Tsunami With Rate Hikes, Caps

Phillip “Halloween isn’t until next week” Dampier

Despite endless panic about spectrum shortages and data tsunamis, even more evidence arrived this week illustrating the wireless industry and their dollar-a-holler friends have pushed the panic button prematurely.

The usual suspects are at work here:

  • The CTIA – The Wireless Association is the chief lobbying group of the wireless industry, primarily representing the voices of Verizon, AT&T, Sprint, and T-Mobile. They publish regular “weather reports” predicting calamity and gnashing of teeth if Washington does not immediately cave to demands to open up new spectrum, despite the fact carriers still have not utilized all of their existing inventory;
  • Cisco – Their bread is buttered when they convince everyone that constant equipment and technology upgrades (coincidentally sold by them) are necessary. Is your enterprise ready to confront the data tsunami? Call our sales office;
  • The dollar-a-holler gang – D.C. based lobbying firms and their astroturf friends sing the tune AT&T and Verizon pay to hear. No cell company wants to stand alone in a public policy debate important to their bottom line, so they hire cheerleaders that masquerade as “research firms,” “independent academia,” “think tanks,” or “institutes.” Sometimes they even enlist non-profit and minority groups to perpetuate the myth that doing exactly what companies want will help advance the cause of the disenfranchised (who probably cannot afford the bills these companies mail to their customers).

Tim Farrar of Telecom, Media, and Finance Associates discovered something interesting about wireless data traffic in 2012. Despite blaring headlines from the wireless industry that “Consumer Data Traffic Increased 104 Percent” this year, statistics reveal a dramatic slowdown in wireless data traffic, primarily because wireless carriers are raising prices and capping usage.

The CTIA press release only quotes total wireless data traffic within the US during the previous 12 months up to June 2012 for a total of 1.16 trillion megabytes, but doesn’t give statistics for data traffic in each individual six-month period. That information, however, can be calculated from previous press releases (which show total traffic in the first six months of 2012 was 635 billion MB, compared to 525 billion MB in the final six months of 2011).

Counter to the CTIA’s spin, this represents growth of just 21 percent, a dramatic slowdown from the 54 percent growth in total traffic seen between the first and second half of 2011. Even more remarkably, on a per device basis (based on the CTIA’s total number of smartphones, tablets, laptops and modems, of which 131 million were in use at the end of June), the first half of 2012 saw an increase of merely 3 percent in average wireless data traffic per cellphone-network connected device, compared to 29 percent growth between the first and second half of 2011 (and 20-plus percent in prior periods).

[…] What was the cause of this dramatic slowdown in traffic growth? We can’t yet say with complete confidence, but it’s not an extravagant leap of logic to connect it with the widely announced adoption of data caps by the major wireless providers in the spring of 2012. It’s understandable that consumers would become skittish about data consumption and seek out free WiFi alternatives whenever possible.

Farrar

Cisco helps feed the flames with growth forecasts that at first glance seem stunning, until one realizes that growth and technological innovation go hand in hand when solving capacity crunches.

The CTIA’s alarmist rhetoric about America being swamped by data demand is backed by wireless carriers, at least when they are not talking to their investors. Both AT&T and Verizon claim their immediate needs for wireless spectrum have been satisfied in the near-term and Verizon Wireless even intends to sell excess spectrum it has warehoused. Both companies suggest capital expenses and infrastructure upgrades are gradually declining as they finish building out their high capacity 4G LTE networks. They have even embarked on initiatives to grow wireless usage. Streamed video, machine-to-machine communications, and new pricing plans that encourage customers to increase consumption run contrary to the alarmist rhetoric that data rationing with usage caps and usage pricing is the consequence of insufficient capacity, bound to get worse if we don’t solve the “spectrum crisis” now.

So where is the fire?

AT&T’s conference call with investors this week certainly isn’t warning the spectrum-sky is falling. In fact, company executives are currently pondering ways to increase data usage on their networks to support the higher revenue numbers demanded by Wall Street.

If you ask carriers’ investor relations departments in New York, they cannot even smell smoke. But company lobbyists are screaming fire inside the D.C. beltway. A politically responsive Federal Communications Commission has certainly bought in. FCC chairman Julius Genachowski has rung the alarm bell repeatedly, notes Farrar:

Even such luminaries as FCC Chairman Julius Genachowski has stated in recent speeches that we are at a crisis point, claiming “U.S. mobile data traffic grew almost 300 percent last year” —while CTIA says it was less than half that, at 123 percent. “There were many skeptics [back in 2009] about whether we faced a spectrum crunch. Today virtually every expert confirms it.”

A smarter way of designing high capacity wireless networks to handle increased demand.

So how are consumers responding to the so-called spectrum crisis?

Evidence suggests they are offloading an increasing amount of their smartphone and tablet traffic to free Wi-Fi networks to avoid eroding their monthly data allowance. In fact, Farrar notes Wi-Fi traffic leads the pack in wireless data growth. Consumers will choose the lower cost or free option if given a choice.

So how did we get here?

When first conceived, wireless carriers built long range, low density cellular networks. Today’s typical unsightly cell tower covers a significant geographic area that can reach customers numbering well into the thousands (or many more in dense cities). If everyone decides to use their smartphone at the same time, congestion results without a larger amount of spectrum to support a bigger wireless data “pipe.” But some network engineers recognize that additional spectrum allocated to that type of network only delays the inevitable next wave of potential congestion.

Wi-Fi hints at the smarter solution — building short range, high density networks that can deliver a robust wireless broadband experience to a much smaller number of potential users. Your wireless phone company may even offer you this solution today in the form of a femtocell which offloads your personal wireless usage to your home or business Wi-Fi network.

Some wireless carriers are adopting much smaller “cell sites” which are installed on light poles or in nearby tall buildings, designed to only serve the immediate neighborhood. The costs to run these smaller cell sites are dramatically less than a full-fledged traditional cell tower complex, and these antennas do not create as much visual pollution.

To be fair, wireless growth will eventually tap out the currently allocated airwaves designated for wireless data traffic. But more spectrum is on the way even without alarmist rhetoric that demands a faster solution more than  a smart one that helps bolster spectrum -and- competition.

Running a disinformation campaign and hiring lobbyists remains cheaper than modifying today’s traditional cellular network design, at least until spectrum limits or government policy force the industry’s hand towards innovation. Turning over additional frequencies to the highest bidder that currently warehouses unused spectrum is not the way out of this. Allocating spectrum to guarantee those who need it most get it first is a better choice, especially when those allocations help promote a more competitive wireless marketplace for consumers.

[flv width=”600″ height=”358″]http://www.phillipdampier.com/video/KGO San Francisco FCC considers spectrum shortage 9-12-12.flv[/flv]

KGO in San Francisco breaks down the spectrum shortage issue in a way ordinary consumers can understand. FCC chairman Julius Genachowski and even Google’s Eric Schmidt are near panic. But the best way to navigate growing data demand isn’t just about handing over more frequencies for the exclusive use of Verizon, AT&T and others. Sharing spectrum among multiple users may offer a solution that could open up more spectrum for everyone.  (2 minutes)

Six Strikes Copyright Enforcement Getting Ready to Launch: Torrents Are Primary Target

Phillip Dampier October 23, 2012 AT&T, Cablevision (see Altice USA), Comcast/Xfinity, Consumer News, Online Video, Public Policy & Gov't, Verizon, Video 9 Comments

AT&T will begin sending out anti-piracy warning notices to subscribers caught downloading copyrighted content from torrent sites starting Nov. 28.

The new anti-piracy measures are part of a joint agreement between the Motion Picture Association of America (MPAA), the Recording Industry Association of America (RIAA), and five major national ISPs to help curtail content theft.

TorrentFreak obtained internal AT&T training documents that outline how AT&T will deal with customers suspected of illicit downloading. After a series of warnings, AT&T intends to block access to websites suspected of copyright infringement until a customer successfully completes a course on online copyright law. Eventually, those caught repeatedly downloading pirated movies and music could face legal action after AT&T turns over the identities of suspect customers. Gone from early draft proposals are suggestions that ISPs will throttle or suspend service altogether for repeat violators.

Late reports indicate that other ISPs participating in the copyright enforcement action — Cablevision, Comcast, Time Warner Cable and Verizon — will also launch their own programs on the same date.

Most at risk are customers who frequent peer-to-peer file sharing sites. Tracking BitTorrent traffic is a priority for the newly-launched Center for Copyright Information (CCI) — a joint venture run by the ISPs in coordination with the MPAA and RIAA.

While not all peer-to-peer file traffic consists of illicit swapping of copyrighted works, some high profile torrent sites are among the first choices for consumers looking for free movies or music. CCI believes its Copyright Alert System (CAS) is primarily an educational tool for consumers who may not realize they are stealing copyrighted content. With its “six warnings” policy, CCI wants consumers to take action to protect themselves, their Internet accounts, and home networks well before any legal action is taken.

The latest implementation of the Copyright Alert System has watered down some of its earlier provisions, which could have put a customer’s Internet account at risk of being speed throttled or canceled. For now, consumers will receive six warnings about any suspected copyright infringement:

  • The first three strikes carry no consequences and are intended to serve as informational warnings that the downloading of copyrighted content may be taking place;
  • The fourth and fifth strikes will trigger forced browser redirects to a copyright education page and an online course on copyright law that must be successfully completed before the customer can once again visit suspect websites;
  • Strike six means AT&T (and presumably other ISPs) will turn over the IP addresses of repeat offenders and comply with any subsequent court orders requesting the identity of the customer for possible legal action. AT&T does not say it will terminate the customer’s account, but does remind customers to be mindful of its Acceptable Use Policy, which does allow them to terminate service for illegal acts.

Edward Stroz

Consumers caught allegedly downloading copyrighted content can protest their innocence, but a $35 refundable filing fee is required to begin the arbitration process. If a consumer proves the files downloaded were not illegally obtained or that their account was flagged in error, they can have the warning canceled and get their filing fee refunded. But there are no penalties for CCI, its copyright tracking arm run by MarkMonitor, or the ISP if the copyright tracking system gets it wrong.

Critics of the copyright enforcement scheme claim it delivers too many benefits for CCI and its industry backers and insufficient protection for consumers misidentified during copyright infringement dragnets.

For-profit copyright tracking companies have made false allegations in the past, forcing CCI to hire an “independent and impartial technical expert” to verify the accuracy and security of the tracking technology used. CCI hired the firm of Stroz Friedberg as their expert.

Critics charge Stroz Friedberg is actually a recording industry lobbying firm, who worked with the RIAA for five years, earning $637,000.

Eric Friedberg

“It’s a disappointing choice, particularly in light of CCI’s professed desire to build public confidence in CAS and the fairness of its processes,” University of Idaho Law Professor Annemarie Bridy told TorrentFreak. “It would have been refreshing to see an academic computer scientist or some other truly independent party appointed to fill that important role.”

Bridy calls CCI’s Copyright Alert System lacking in transparency and stacked in favor of copyright holders, not consumers.

Stroz Friedberg’s appointment has also raised eyebrows among others that suggest their past lobbying violates the spirit of a Memorandum of Understanding signed by all parties requiring “independent and impartial” oversight.

“CCI’s choice of a former RIAA lobbying firm makes it clear that the copyright owner parties to the Memorandum of Understanding were more interested in appointing someone they trust than in appointing someone the public can trust,” Bridy adds.

Network World columnist Steven Vaughan-Nichols worries this is just the beginning of another copyright enforcement overreach:

The name of their game is to monitor your network traffic, with the help of your friendly ISP. Their justification for this is the usual made-up “facts” that content theft leads to “more than 373,000 jobs, $16 billion in lost wages, and $2.6 billion in lost taxes.” Yeah, I’m also sure someone downloading copyrighted porn leads to cats and dogs living together.

One reason I can’t buy into all this is that, as TorrentFreak points out, the Center’s expert who vouches that this all works is none other than Stroz Friedberg, a former RIAA lobbyist. Oh yeah, he doesn’t have bias for paranoid copyright protection companies.

What this means for you is that if your ISP is AT&T, Cablevision, Comcast, Time Warner, or Verizon, they’ll be watching your use of BitTorrent and letting CCI decide if you deserve some warnings, an end to your Internet service, or a full-out lawsuit.

[…] The RIAA, the MPAA, and other copyright “protectors” have never done anything for content creators. They’re all about protecting the businesses stuck with old, broken, pre-digital business models. Even that wouldn’t be so bad, except historically they’ve always vastly over-reacted.

We all know the stories of some poor slob who’s been slammed with tens of thousands of damages for downloading a song. What you may not know is that all the powers that be have to do is to claim something is copyrighted, whether it is or not, and multiple websites can be closed in minutes or your entire digital library can be destroyed.

Does that sound like paranoid fantasy? I wish.

[…] Oh yeah, I feel really sure that the CCI and friends are going to do a good job. Welcome to the new copyright world, same as the old, where you’re always considered guilty rather than that quaint idea of being considered innocent before proven otherwise.

CCI admits sophisticated pirates will probably never get caught by its Copyright Alert System, because most of them are moving to secured Virtual Private Network (VPN) technology that effectively masks their identities. TorrentFreak notes sales for VPN’s are skyrocketing, many headquartered far away from the reach of the United States in exotic, subpoena-proof locations like Cyprus, the Seychelles, Romania, and Ukraine.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/RT Thom Hartmann Copyright Alert System 3-20-12.flv[/flv]

RT’s Thom Hartmann presided over a debate about online copyright theft control measures proposed earlier this year by the entertainment industry and Internet Service Providers. Appearing with Hartmann are David Seltzer, Attorney & Mark Bledsoe. (March 20, 2012) (12 minutes)

Emboldened Sprint Seeks Controlling Interest in Clearwire; Will Pay $100 Million for Co-Founder’s Stake

Phillip Dampier October 18, 2012 Competition, Consumer News, Sprint, Video, Wireless Broadband Comments Off on Emboldened Sprint Seeks Controlling Interest in Clearwire; Will Pay $100 Million for Co-Founder’s Stake

Sprint will have majority ownership in Clearwire, including its lucrative wireless spectrum.

Sprint-Nextel will gain majority control over its beleaguered wireless partner Clearwire with the $100 million acquisition of Craig McCaw’s stake in the wireless company he co-founded.

Sprint already controlled 48 percent of Clearwire, which provides many Sprint customers with 4G WiMAX service, but today’s purchase will give Sprint more control over Clearwire’s considerable wireless spectrum holdings.

Jeff Kagan, an independent telecommunications analyst this morning told Bloomberg News Sprint’s acquisition will make a Sprint-Clearwire combination more attractive to Softbank, which is buying a controlling interest in Sprint and wants firm ground in the U.S. market.

“It gives the combined company much more spectrum, much more ability to deliver services,” Kagan said.

But Sprint denied it was seeking a complete acquisition of Clearwire, which still has Intel and cable operator Comcast as part-owners.

Clearwire’s planned 4G TD-LTE network upgrade due to launch in 2013 is also a comfortable fit for Sprint’s new partner — Tokyo-based Softbank, which uses the same technology on its own 4G network in Japan. Softbank last week announced it would pay $20.1 billion for a controlling interest in Sprint-Nextel.

[flv]http://www.phillipdampier.com/video/CNBC Faber Report Sprint Gains Control of Clearwire 10-18-12.flv[/flv]

CNBC covers Sprint’s announced acquisition of a controlling interest in beleaguered Clearwire, and what impact the acquisition will likely have on Sprint shareholders. (3 minutes)

Verizon CEO: 7 or 8 Wireless Competitors Are Not Good for Anybody

Phillip Dampier October 18, 2012 Competition, Consumer News, Public Policy & Gov't, Verizon, Video, Wireless Broadband Comments Off on Verizon CEO: 7 or 8 Wireless Competitors Are Not Good for Anybody

[flv]http://www.phillipdampier.com/video/CNBC Verizon Wants More Consolidation 10-18-12.flv[/flv]

Lowell McAdam, chairman & CEO of Verizon Communications, is back on CNBC in this exclusive interview calling for additional wireless industry consolidation. McAdam also discusses Verizon’s huge earnings after its wireless plan changes, Verizon’s latest union contract, and the current state of the U.S. economy. (8 minutes)

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