Managerial Econ project

Leveraging assets at the right time









Leveraging assets at the right time: comparative financial analysis of the two main competitors at the telco market
Student Name Here
University
24th August 2015
Abstract
The telecommunication market has expanded multifold in the last few years, regarding the strategies for positioning and differentiating themselves in the increasingly dominant LTE technology of 4th generation wireless protocol, but particularly in the context of how they use their assets and in which area of business to keep their subscribers signing up (Petersen, K. 2015). The recent advancements in telecommunication services coupled by number of technological innovations have brought about many sudden strategical changes to the two behemoths in telco industries around the globe.
For example, AT&T as the major market player with total revenue of $34.4 billion at the end of 2014, has reached the point for the first time when its major competitor could began to jeopardize AT&T brand, by overtaking its customers and market share, in near future (Munche K., 2014). A comparative financial analysis of AT&T Inc. and a Verizon Communications, as two major telecommunications service providers in North America, will uncover that increase in capital investment and decisive top management support is becoming essential in the second half of 2015.
The cellular wireless industry is at a crucial phase in its evolutionary path from old third-generation systems toward next-generation (4G) systems. This paper will analyze how the revenues of the two companies in the last three years have been juxtaposed, and inform the reader how customer retention is becoming key issue to be solved in telco business. More interestingly, AT&T and Verizon provide telephone, Internet, and computer telephone services to over 170 million customers in 32 states, with Verizon having only 7% bigger sales figures than AT&T (Morningstar Financial, Verizon, 2015).

Leveraging assets at the right time: comparative financial analysis of the two main competitors at the telco market
The revenues of the both companies in the last three years have been aligned, following identical pattern (Figure 1). AT&T alone provides telephone, Internet, and computer telephone services to over 95 million customers in 22 states, with 7% less sales figures than Verizon (Morningstar Financial, Verizon, 2015). Main reason for such revenue growth is growing product portfolio: a number of innovative wireless products and services have been offered, by the very competitive terms, such as newest generation of mobile telephony 4G or fiber optic services for household on a national level.
Figure 1. Key financial indicators (blue line AT&T, red Verizon).
Source: WikInvest, 2014.

Main reason why Verizon has become the main competitor of AT&T, beside the sales indices increasing, is the reputation which Verizon built gradually on the US telecommunication market with introduction of recent LTE 4G data service for all new customers by default (Munche, K. 2014). Verizon has managed to significantly reduce churn rates and acquired new customers in 2013 of 94.1 million in total and $120 billion of revenues, as seen in Figure 2, by leveraging assets in the right time. Segments operated by AT&T are Wireless, Wireline, Advertising Solutions and Other, while Verizon excels in Fixed-Line, Wireless, Television and data services.
Growing product portfolio drive revenue growth
Source: WikInvest, 2014.
Figure 2. Figure 3. Smartphone sales and exclusive 700 MHz licensee

Additionally, Verizon was able to leverage cloud services globally as the Internet has become far-reaching with its hi-speed data links in average of 5-12 Mbps downlink and 2-5 Mbps uplink (Quinten, L. 2014). Double-digit growth of sales in telecom market was accompanied by smartphone sales and made a huge difference for Verizon EPS, shown in Figure 3. Therefore, if the AT&T does not provide full end-to-end solutions for its customers shortly, it will start losing the edge. By providing datacenter cloud - professional and security services would increase AT&T net income and customer base.
Leveraging on LTE Performance and hi-speed data links
On the subject of application of LTE based global eco-system with telemetric capabilities, proposed for fiscal year 2015, we can track back three years that AT&T recorded revenues of $124.3 billion and net income of $19.8 billion in 2011 (Morningstar, 2014), but its investment in capital did not follow competitor's levels. "We will be the only company with mobile Internet spanning both countries," Randall Stephenson CEO of AT&T said of the company expanding into Mexico: "We like these assets. We think these assets are sufficient to go in there and compete and take share." (Berg, A. 2015).
Figure 4. Global eco-system of telemetric capabilities
Source: Lew, Q. (2014).

Verizon has switched to wireless products and less expensive option such as VoIP tech, but technology and Fiber-to-the-Home (FTTH) investing over $20 billion in 2011, while AT&T invested only $4.4 billion in order to integrate IP-based video and broadband Internet services over a single consumer line (WikInvest, 2014).


AT& T Strengths vs. Weaknesses
Brand Recognition - Dropped calls in wireless networks
Largest Wireless Carrier - Too focused on I-phone model
(Revenue & Customers)
Variety of Products - High debt
Contracted Customers - Poor customer service
Competitive Advertising - Big churn in landline services
Largest Broadband Service provided in U.S.
The customer service is the largest blind spot for telecommunication companies, because retaining an unhappy customer costs as little as $15, while winning a new one from the competition can cost up to $600. In the Figure 5 below the stock price indices show volatility on the telecom market and strong recovery from the 2012 downfall, at 2% increase on intraday and 7.25% on the 1 year level for AT&T (Trefis, T. 2015.).
Figure 5. Stock prices, intraday, 6 months and 1 year
Source: Morningstar Inc. (Financials, 2015).

As for the net income, AT&T and Verizon, both, have seen significant advance from the 2012 level as forecast for 2015 is $12 billion, which is satisfying indeed, and represented in the Table 1.

Table 1. Net Income
Net Income
In millions
2014
2013
2012
2011
AT&T
$6,220
$18,249
$7,264
$3,944
Verizon
$9,620
$11,497
$875
$2,404

Sales revenue as the strongest point of AT&T, show no significant churn and has been on steady rise over the last four-year period.

Table 2. Sales revenue comparison
Sales revenue (million)
2014
2013
2012
2011
AT&T
$132,000
$128,752
$127,434
$126,723
Verizon
$127,000
$120,550
$115,846
$110,875

Cost investments are evaluated to determine whether mark-to-market declines are temporary and reflected in other comprehensive current assets vs. asset liabilities ratio, or other than temporary and recorded as an expense in the income statement.

Figure 6. Source: WikInvest, 2014.

Table 3. Total Asset assessment
Total Assets
In millions
2014
2013
2012
2011
AT&T
$293
$278
$272
$270
Verizon
$233
$274
$225
$230

The Earnings per Share ratio, has resumed growth from prior fiscal year, and P/E value for AT&T reached 28.20 currently (MorningStar Financials, 2014). The Verizon Communications (NYSE: VZ) is at half of AT&T with P/E value 14.02 (MornigStar Financials, 2014). Price/Earnings Ratio as index of stock distinction, shows that the purchaser of the AT&T stock is paying $28 for every dollar of earnings, while in Verizon case it is only $14 (in comparison, P/E for the industry is at 18.40), Table 3.

Table 4. Earnings per share
EPS
2013
2012
2011
AT&T
$3.35
$0.66
$1.25
Verizon
$4.00
$0.31
$0.85
At the end of the Q4 2014, AT&T reported total revenue of $34.4 billion, while diluted earnings of $0.55 per share. Verizon completed 2014 with $33.2 billion in total revenue and diluted earnings of $0.71 per share. Most importantly average revenue per user is shown in Figure 7.

Figure 7. Verizon's continually boosting ARPA
Source: http://www.slideshare.net/att-inc-vs-verizon-communications-which-wireless-carrier-ruled-the-quarter
Verizon only reports Average Revenue per Account (ARPA), instead of by user* (Entner, R. 2015.). But if the carrier's ARPA ($162.98) is divided by the number of connections per account (2.87), we get an ARPU of about $56.78 for the quarter. However, both companies have a slightly higher than 1% churn rate, which is very low.
Verizon ARPA is up 3.5% year-over-year due to customers sign up for the carrier's "More Everything" plan, which brings in more revenue per account. AT&T ARPU fell down by 4.1%, but should bounce back by the end of 2015. As for the retail postpaid net additional services Verizon left AT&T's by adding 2 million, while AT&T totaled with 854,000.
To conclude AT&T wireless operating income was $3.2 billion -- down 18.1% year over year -- mainly because of increased volumes and costs from the Leap Wireless purchase. In turn, wireless margins were pushed down to 16.3% (from 21.4% a year earlier), because of "strong seasonal gross adds and upgrades", Mobile Share Value plans, and costs of new services.
Olygopoly

United States wireless market represents a textbook case of oligopoly, dominated by two companies which were closely examined: AT&T and Verizon. In recent years as we have seen from above analysis, there was reduction of the number of players in the carrier market, while the magnitude of each player grew bigger via various mergers and acquisitions. For example, AT&T acquired Leap Wireless, while T-Mobile got Metro PCS and Japan's Softbank purchased Sprint.
Hence, the wireless U.S. market is actually a duopoly of AT&T and Verizon. They share about two-thirds of the whole market. Sprint and T-Mobile are thought of as the competitors, but lagging behind. 
T-Mobile, even as the smallest of the four, has been challenging the carrier market by its "Un-carrier" service — which annihilated roaming charges for international carriers, and advancing features for premium wireless packages. T-Mobile CEO John Legere, announced the plans to keep up with the fierce competition in early 2015 by bundling up service fees and taxes into single price.
However, in a present oligopoly situation, advancement of the services to the advantage of the private consumers is unlikely to happen. AT&T and Verizon are focused on B2B, since there is where most of the revenues streams are coming. B2C and customers will have to wait to get more attractive packages by reduced prices, printed on a simple statement bills.
Some customers' solution to locked contracts is to breach them, while others will reject the possibility to renew them. AT&T tried to acquire T-mobile in 2011, but was blocked by the antitrust division of the United States Department of Justice (Kang, C., Jia L., 2011).

Conslusion
The cellular wireless industry is at a crucial phase in its evolutionary path from old third-generation systems toward next-generation (4G) systems. Rumelt's Four criteria regarding the strategy for transition towards implementing 4G technology in order to gain international footprint are affirmative, i.e. the Verizon was behind the competition due to the old CDMA wireless technology which is not compatible with Vodafone subscribers when roaming in Verizon's network with GSM card only (Lew, Q. 2014.).
While both carriers represent behemoths in the U.S. wireless market, Verizon led the quarter in net additions -- no small feat for the nation's largest carrier -- and managed to grow ARPA at the same time, while providing Fiber optic services for households on national level, offering increased speed, quality and flexibility. Yet, both carriers manage to stave off other competitors continually in the fierce wireless market. Most important feature of Verizon was the ability to bring cost structures more in line with revenues through consolidations, since downsizing number of employees, businesses (Verizon, Verizon Wireless and Verizon Business) are getting streamlined, and services bundled to keep the churn to a minimum level.
To conclude, Verizon has increased its investment in their datacenter services and created new needs on the market. Clients purchasing Verizon co-location services from datacenters across the country have the option of selecting third party network provider for carrier diversity and redundancy (Quinten, L. 2014). If AT&T does not quickly get in the same boat and boost added valued of its services with global ecosystem and telemetric capabilities, current fiscal year might end up with significant market share loss and sharp drop in stock prices value.
However, "to state the obvious, when companies act in parallel, the consumer is in the same position as if he were dealing with just one big firm" (Wu, T. 2013). That is to say that oligopolies are actually monopolies in disguise, which is hurting consumer choices and market mechanism, such as competition and deregulation.



References

Berg, A. (2015). AT&T's Stephenson: This Will Be A Very Different Company. Wireless Week: News. Retrieved from http://www.wirelessweek.com/news/2015/01/ts-stephenson-will-be-very-different-company.
Entner, R. (2015). U.S. Telecom Quarterly. The Nielsen Company. Retrieved from http://www.nielsen.com/content/dam/corporate/us/en/newswire/uploads/2009/05/nielsentelecomq12009.pdf.
Lew, Q. (2014). Leveraging Assets at the right time. Telecom review: MEF awards. Retrieved from http://www22.verizon.com/wholesale/attachments/MEF.pdf
Kang, C., Jia Lynn Y. (2011). How AT&T fumbled its $39 billion bid to acquire T-Mobile. The Washington Post, Retrieved from washingtonpost.com.
Morning Star (2014). Verizon Communications Inc. Retrieved from http://financials-morningstar.com/balancesheet/bs.html?t=VZ®ion=usa&culture=en-US
Munche, K. (2014). Verizon Wireless Network: Cloud Services Verizon Wireless: News section. Retrieved from: http://www.verizonwireless.com/news-article/2014/08-verizon-wireless-network-cloud-services-provide-telemetry-for-california-shellfish-ranch.html
Petersen, K. (2015). Long Term Evolution (LTE) and the road to 4G. AT&T Developer. Retrieved from http://developer.att.com/technical-library/network-technologies-long-term-evolution.
Trefis, T. (2015). Verizon Reports Strong Q1 Earnings Amid Sluggish Subscriber Adds. Forbes: Investing. Retrieved from:http://www.forbes.com/sites/greatspeculations-
04/22/verizon-reports-strong-q1-earnings-amid-sluggish-subscriber-adds/
WikInvest (2014). Wiki Analysis: Verizon (NYSE: VZ). Retrieved from http://www.wikinvest.com/wiki/Verizon
Wu, T. (2013). The Oligopoly Problem. New Yorker. Retrieved from http://www.newyorker.com/tech/elements/the-oligopoly-problem.
RUNNING HEAD: Leveraging assets at the right time
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Average Revenue Per User