AT&T (T) has grown revenue each year since 2009, but at a relatively slow rate of only 1.7% per year. When AT&T reported first quarter earnings back in April, it once again reported relatively small earnings increases. AT&T had first quarter earnings per share of $0.60, which was a 5.2% increase from earnings per share of $0.57 in the first quarter of 2011. First quarter revenues were $31.8 billion, which was a 1.9% increase from revenues of $31.2 billion in the first quarter of 2011. First quarter net income was $3.58 billion, which was a 5.3% increase from net income of $3.4 billion in the first quarter of 2011. AT&T's first quarter earnings highlights included a 19.9% increase in wireless data revenues, a 19% increase in its strategic business services and a 38.2% increase in its consumer U-verse revenues. But, with these increases, how much control does AT&T have in the telecom market? And how does it compare against Verizon (VZ) in terms of investment opportunity? Let's find out.
Have AT&T and Verizon Become a Duopoly?
AT&T currently has 100.7 million wireless subscribers, and despite its strong first quarter performance, it still lags behind Verizon, which has 108.7 million wireless subscribers. Many of the analysts that have followed the wireless communication business refer to the combination of AT&T and Verizon as a duopoly. It is their perception that AT&T and Verizon pretty much control the wireless communications services market. After all, Verizon controls 33.7% of the market and AT&T controls 31.2% of the market. Together, the companies control 64.9% of the U.S. telecommunications market, and an even greater percentage of its prices, services and products.
If AT&T and Verizon are truly a duopoly, they could control mobile communication price rates, and make huge profits. The Department of Justice has taken note of the duopoly theories, and in 2011 it sued to block the purchase of T-Mobile by AT&T. T-Mobile controlled 10.4% of the U.S. market and the Department of Justice argued that the deal would result in diminished competition and higher prices in the U.S. telecommunications market. The Department of Justice is now "reviewing Verizon's proposal to acquire $3.6 billion in additional spectrum from cable companies that would increase their control of and capacity for U.S. smartphone data traffic".
Shared Data Pricing Plans
In a new development that has raised eyebrows, and which seems to reinforce the duopoly theory, Verizon recently announced a new pricing plan that it calls the "Share Everything" pricing plan. The new plan is pushing customers to purchase plans that will connect all of their non-phone devices like tablets and PC's to the Verizon network.
The new pricing plans, which could result in higher prices for many subscribers, start at $90 per month for a smartphone and increase according to the number of additional devices that the subscriber connects. I mention the Verizon pricing plan because AT&T has already announced that it would probably introduce shared data plans as well. The shared data plans could work to increase AT&T's relatively flat revenues, while squeezing out weaker competitors like Sprint-Nextel (S) and T-Mobile. Some people might not like that AT&T and Verizon seem to be moving in unison, but I believe that AT&T will adopt a shared data pricing plan by the end of this year.
Positives for AT&T moving forward
AT&T has made it known that it will almost certainly adopt a shared data plan by the end of 2012. It appears that the shared data pricing concept will help the larger wireless carriers like AT&T and Verizon to further establish themselves as the leaders in the wireless communication industry. If AT&T adopts a shared data plan, it will be able to increase prices and grow revenues. Since the company can initiate a shared data plan with its current infrastructure, it should also be able to increase its margins and profitability.
Despite the fact that AT&T had to give up on its plan to purchase T-Mobile, it is still the nation's second largest wireless communications company. As the nation's second largest wireless communication company, it is in a position to influence prices and services throughout the industry. Since December 19th, when news got out that AT&T had dropped its bid to purchase T-Mobile, the stock price has increased by 27.5%.
AT&T added 726,000 new wireless subscribers and 460,000 new subscribers for (tablet, tethering plans, etc.) "to reach a total of 5.8 million, up almost 70% versus a year ago."
"Total AT&T U-verse subscribers (TV and High Speed Internet) reached 6.2 million in the first quarter. AT&T U-verse TV added 200,000 subscribers to reach 4.0 million in service."
AT&T's first-quarter wireless operating income margin increased from 25.8% in 2011 to 27.2% in 2012.
Back in April, AT&T began selling the Nokia (NOK) Lumia smartphone. Sales of the Lumia smartphone exceeded expectations, and the company plans to spend $150 million on the marketing of the Lumia 900, which is more than it spent to market the Apple (AAPL) iPhone. AT&T hopes that the Lumia which features the Microsoft (MSFT) 7.5 Windows operating system, will help it to compete with Verizon.
Negatives for AT&T moving forward
In December of 2011, AT&T announced that it will no longer pursue its $39 billion bid to buy T-Mobile from Deutsche Telekom (DTEGY.PK). AT&T needed to purchase T-Mobile so that it could use T-Mobiles wireless spectrum to increase its 4G LTE wireless network. AT&T's still needs to increase its 4G LTE network so that it can compete with Verizon which has the nation's largest 4G LTE network.
AT&T could face a loss in market share if Verizon's newly announced "Share Everything" pricing plan is successful.
AT&T and Verizon are in a fierce competition to be this nation's number one mobile communications carrier. Unfortunately for AT&T, Verizon seems to have the upper hand. Verizon will be first to initiate a shared data pricing plan, and in the first quarter Verizon increased its revenues by 4.8% compared to AT&T, which increased first quarter revenues by 1.9%. Verizon grew its first quarter earnings per share by 15% compared to AT&T, which grew first quarter earnings per share by 5.2%. As a result of Verizon's higher level of performance, its 52 week stock price also outperformed AT&T, and increased by 22.1% compared to AT&T, whose stock price increased by 15.6%. I believe that Verizon is the better investment, and will outperform AT&T over the next 52 weeks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.