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AT&T's Gamble on Tiered Plan

The new tiered plan poses a downside risk to the stock, but it could drive up adoption of smartphones by its customers.
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In an attempt to make mobile Internet service more affordable for consumers, U.S. wireless service provider


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suspended its $30 unlimited data plan for new subscribers earlier this year and introduced tiered pricing.

AT&T competes with

Sprint Nextel

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in the U.S. wireless market.

Other rivals include cable companies like


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Time Warner Cable


, as well as independent VoIP providers like Skype and Vonage.

The new plans could crimp AT&T's average revenue per subscriber (ARPU), putting downward pressure on the stock. But this downside risk could be mitigated by rising smartphone adoption. Our analysis follows below.

About 50% of AT&T's postpaid subscribers use smartphones or integrated devices. This percentage has been growing in recent years, driven by the increasing popularity of smartphones and in particular by the runaway success of



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iPhone handset , for which AT&T is the exclusive U.S. service provider. Newer customers have even higher smartphone penetration.

AT&T also draws data revenue from connected devices like e-readers, iPads and alarm monitoring units. The ARPU for such devices is typically much lower than the ARPU for smartphones. However, connected devices contribute positively to AT&T's overall ARPU because they don't substitute for smartphones.

AT&T now offers two data plans at a monthly charge of $15 for 200MB and $25 for 2GB, respectively. Customers are charged extra if they exceed the data cap. Subscribers who were already on the $30 unlimited plan have been allowed to keep it as long as they stick with the same device.

AT&T estimates that about 65% of its smartphone users consume less than 200MB of data per month. Another 33% use between 200MB and 2 GB per month, and the remaining 2% consume more than 2GB. The $15 plan is targeted at low-end data users, while the $25 plan is designed for mid-to-high end users.

We estimate that AT&T's new data plans could shave $2 to $3 off our current ARPU forecast of around $17 for 2010. In this scenario we see a potential downside of more than 5% to AT&T's stock.

However, if the cheaper plans convince more AT&T customers to adopt smartphones, data ARPU would presumably rise, mitigating the downside risk. AT&T should also benefit from reduced network congestion as well as increased customer satisfaction resulting from cheaper access to mobile data.

You can see the complete $37.91 Trefis price estimate for AT&T's stock



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