AT&T and Verizon — the nation's two biggest carriers — are seeing their traditional U.S. wireless businesses shrink, having suffered from an ongoing price war and declining buyer interest in new smartphones.
To make up for that drop, both carriers are increasingly focused on new areas for growth, including Internet of Things projects, as well as far-flung investments like AT&T's wireless service in Mexico and Verizon's investments in new media through AOL advertising technology.
This movement into new business areas is seen as a long-range mega-trend that was borne out by the latest earnings reports from AT&T this week and Verizon last week. Both companies reported 5% declines in wireless service revenues.
"What we are seeing is that the traditional market that both carriers go after is saturated, since pretty much everyone who has wanted a cell phone already has one," said Chris Antlitz, an analyst at TBR. "They are both trying to grow new businesses and investing heavily in the hope they can offset the price war that's eating into their traditional business."
What's happening instead? "Both companies are getting big into IoT and machine-to-machine and that's a big growth engine. They both have powerful networks spanning the country and global partners so they can provide unique ways to connect their network to devices."
Both AT&T and Verizon have also invested significantly in cloud computing services to enterprises, but "that's been met with mixed success," Antlitz said.
There are even a variety of alternative growth initiatives, including AT&T's decision to buy DirecTV and to invest in wireless service in Mexico, where smartphone saturation is less than the U.S. (As of the end of 2015, AT&T had 8.7 million wireless subscribers in Mexico.)
In AT&T's earnings report for the quarter that ended Dec. 31, the carrier showed a 5% decline to nearly $19 billion in its Mobility division revenue. TBR analyst Steve Vachon attributed the decline to a 15% drop in equipment revenue that stemmed from fewer smartphone and device activations from customers who want to use their devices for a longer duration to avoid the cost of buying a new unsubsidized device.
"TBR believes AT&T's expanding IoT portfolio will be the main driver that will recover Mobility revenue," Vachon added.
At Verizon, which had its earnings call for the same quarter last week, Vachon noted that wireless subscribers are migrating to equipment installment plans, which had a positive impact on equipment revenues. The overall result was that revenue increases from equipment and Verizon's FiOS fiber-optic connections led to a 3.2% increase in consolidated revenue, even as wireless service revenues declined by 5.6% to $17.2 billion.
Also contributing to Verizon's bottom line was $882 million in revenue that benefited from AOL advertising technology — another alternative to the more traditional investment approach to wooing smartphone subscribers. If Verizon were to buy Yahoo, the deal would expand Verizon's footing in Web services and digital media markets, Vachon noted. Verizon acquired AOL in June 2015.
The long-term interest that Verizon has in a 5G wireless network rollout will also support the most futuristic of IoT applications that rely on massive data analytics, such as self-driving cars and complex medical solutions. Vachon noted that the 5G industry standard won't be established until 2020, although Verizon will begin marketing 5G beginning in 2017.
"Laying claim to offering 5G services before competitors will help Verizon distinguish the company from competitors and spur subscriber growth without succumbing to the wireless pricing war," Vachon said.
In its earnings statement, Verizon reported $200 million in IoT revenues from IoT for the quarter and $690 million for all of 2015, an increase of 18% over 2014. AT&T didn't break out the IoT category.
The price war's impact
Even though the price war has gone on for about two years and was initiated by T-Mobile, Antlitz said Sprint is now the leader. That's because Sprint has extended until mid-February a discount plan giving 50% off competitors' monthly rates.
"Sprint has acute issues and needs every subscriber they can get," Antlitz said.
"T-Mobile has been aggressive, but Sprint is now the price leader and is carrying the mantle," he added. "It has definitely become a price war for all the top tier carriers," a group that includes Verizon, AT&T, Sprint and T-Mobile.
T-Mobile's success has come largely at the expense of Sprint, at least in subscribers, although it is pretty clear that the resulting price war has affected Verizon and AT&T as well, especially by pushing them into new markets.
"T-Mobile is adding the most smartphone subscribers by far and siphoning them off from the other three," Antlitz said.
Ranking the carriers
By both subscribers and financial results, both AT&T and Verizon are far bigger than either Sprint and T-Mobile.
Carriers have recently begun reporting total wireless connections instead of subscribers, since one subscriber could own several devices with separate lines.
As of Dec. 31, Verizon was on top with 141.6 million wireless connections; AT&T had 128.6 million; and Sprint had 58.4 million. T-Mobile has not yet reported earnings for the final quarter of 2015, but TBR estimated it had 63.7 million as of Dec. 31.
In terms of financial results, most analysts noted that "free cash flow" is the most meaningful measure of financial health. Again, Verizon and AT&T come out far ahead.
For all of 2015, AT&T had $15.9 billion in free cash flow, which TBR defines as operating cash flow minus capital expenditures. Verizon had $21.2 billion, and Sprint had a loss of $3.2 billion. TBR estimated that T-Mobile had $100 million, since it has not reported yet.
"There is a clear duopoly by AT&T and Verizon, as both continue to get strong," Antlitz said. "T-Mobile is fighting hard and staking a position as a value play while Sprint has just fizzled away."
Antlitz said a company's cash flow is the most visible way to judge a balance sheet, since accounting practices make it easier to hide problems in other areas. "Cash flow is important since either you have the cash or don't and there's no tinkering with it," he said.
Comparing AT&T and Verizon on IoT
As both AT&T and Verizon focus on IoT, there's so far not much differentiation.
"These two companies are very similar and usually neck and neck in whatever they do," Antlitz said. "You rarely see a margin between them. Verizon is talking more about IoT, but if you look at the underlying story, AT&T is a little ahead."
While Verizon is producing IoT innovations, it also has been secretive about its plans, Antlitz said. "AT&T is not only talking, but showing business results for IoT."