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Stock of the Day
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AT&T (T)
It's Game Time for AT&T
The nation's second largest wireless carrier is approaching a pivotal time period and the quality of its decision making and execution over the next few months could end up shaping its future for years to come. There is the growing threat of smart phones from rival carriers (each of which is getting closer to catching the iPhone), the perceived and real problems with its network, its lack of 3G coverage and the looming expiration of its exclusivity agreement with Apple over the iPhone Given that the landline business is fast approaching extinction, investors are looking for the company to survive largely on its wireless interests. But will AT&T let them down?
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| Daily Chart |
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| Stock Analysis |
The Dallas, TX based communications giant reported third quarter earnings late last month. The quarter was good not great as earnings/share came in at $0.54 (the street was at $0.50) and revenue was basically in line with estimates. The show stopper in the report was the activation of 3.2 million iPhones during the slow summer months in a recessionary environment. This helped the company attract 2 million new wireless subscribers, a large chunk of which no doubt defected from rivals Verizon (VZ: Charts, News, Offers), Sprint (S: Charts, News, Offers) and T-Mobile. The iPhone deal has some negatives. Margins have been pressured given the payments to Apple (AAPL: Charts, News, Offers) and the subsidies AT&T offers to consumers who buy the phone. The proliferation of the iPhone has also overwhelmed the carrier's wireless network as consumers treat the device as less of a phone and more of a mini-computer. AT&T's reputation as a reliable carrier has taken a major hit and subjected the company to ridicule. But on the balance, the exclusivity deal with Apple was a major plus given the number of new subscribers and the higher data fees that these customers pay. Also, it's been 2.5 years since the first iPhone was launched and rival manufacturers are still trying to come up with phones that match the iPhone's functionality. AT&T aligned itself with the correct horse in Apple and that is why it is still ahead of the market.
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However, Verizon is not sitting still and the company's latest smartphone, Droid, manufactured by Motorola (MOT: Charts, News, Offers), which goes on sale today, has by most accounts, come very close to replicating the iPhone experience. It even exceeds the iPhone in certain areas (e.g. physical keyboard, ability to run multiple apps simultaneously) and falls short in others (e.g. multi-touch functionality). No doubt, the iPhone is still better but the gap is closing. Droid should help slow the number of defections form Verizon to AT&T over the upcoming holiday season though AT&T is supposedly planning to release an 8GB version of the iPhone 3GS for $99. Then there is the issue of the exclusivity agreement with Apple which is scheduled to expire next year. Most observers believe Apple will start making the phone available via Verizon and that would be the rational choice given how far Apple has already penetrated AT&T's customer base and the fact that Verizon offers a 80 million strong new pool of potential iPhone customers. AT&T would have to make a very attractive offer to retain Apple exclusively, something it probably will not and should not do given the huge numbers it would take to compensate Apple for continuing to ignore more than half of the US wireless market.
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Given these factors, it is absolutely essential that AT&T continue to improve its wireless network and do so as soon as possible. AT&T is currently suing Verizon because it claims that the latter is misrepresenting its wireless coverage but all the lawsuit does is bring more attention to the fact that AT&T's 3G coverage is much spottier than Verizon's. If the reliability of AT&T's wireless network continues to be an issue when the iPhone is available through other carriers, then we could start seeing customer defections out of AT&T. Apple has given AT&T a lot of new customers, it's AT&T's job to retain them.
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Longer term, you have to worry about the attractiveness of all wireless stocks including AT&T's. These companies' fortunes are so dependent on those of handset manufacturers. The only differentiating factor is the reliability and speed of their network and once that reaches its technological limits or gets to a point where users cannot discern any improvements in speed, the wireless business could get further commoditized and be grouped with other utilities such as electric and water, in terms of attractiveness.
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Other AT&T related news
AT&T's Rivals Still Seek Answer To iPhone - The Palm Pre made some noise over the summer, now it's the Droid's turn to take a shot.
AT&T's lawsuit over Verizon ads could backfire, some argue - AT&T should have probably ridden this one out instead of making a fuss about it.
There's Something About Droid - The commercials were impressive, the phone itself apparently does not disappoint.
What else is going on?
Deja Vu: Wal-Mart, Amazon, Target in DVD Price War - First books, now DVDs, what is next?
Unemployment hits 10.2% - The jobs report was a disappointment this morning.
Three cheers for college football towns - Besides great Saturdays, you also get great affordability
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Click here to view a detailed profile of AT&T.
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