AT&T's Gamble on Tiered Plan
In an attempt to make mobile Internet service more affordable for consumers, U.S. wireless service provider
AT&T
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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and
Verizon
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in the U.S. wireless market.
Other rivals include cable companies like
Comcast
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and
Time Warner Cable
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(TWC)
, 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
Apple
's
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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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