Nearly 25 years ago, while attending college in North Georgia, I worked for Bell South Mobility selling cell phones, which later merged back into AT&T Inc. (T, Financial). Our best-selling phone was the Nokia 5110 and the StarTac from Motorola. I was paid about $250 per activation and selling was more like a product demo.
At the time, cell phones were not the necessity they are today. People had to be convinced to buy them and then spend money monthly for calls and texts. Times have changed and while a lot of companies in this space have seen their stocks ascend, AT&T’s shares have actually lost 65% of their value. Even with the dividends totaling more than $22 a share and the 71% of ownership after the Warner Media spinoff and merger, investors that bought in 1998 are still down.
AT&T as a global brand
That said, the company is still a Fortune 500 company. Originally, The Bell Telephone Company was established in 1879 by Alexander Graham Bell, inventor of the telephone. That company eventually became AT&T. Over 100 years later, a major anti-trust lawsuit led to the breakup of the original AT&T (often referred to as Ma Bell) into multiple independent companies, known as the "Baby Bells," in 1984.
Some good news is that AT&T can take advantage of economies of scale, having made significant investments in the past. Today, it can lower costs per unit, which does lead to a competitive pricing advantage. The company is also able to license its communications network to mobile virtual network operators like Cricket, Straight Talk and Boost Mobile.
Brand recognition and service offering
AT&T may have the strongest brand recognition, which comes from decades of being in the industry. This high level of brand recognition has led to customer loyalty and trust in the company's products and services. The switching costs are still very real and most consumers do not want to switch carriers once they start unless something egregious happens.
The telecom company offers a wide range of services, including wireless communication, broadband, video services and more. This broad service offering allows it to serve a wide variety of customer needs and can lead to cross-selling opportunities. AT&T has a vast and robust infrastructure in place, including a comprehensive wireless network and extensive fiber optic cable system. This allows it to deliver high-quality, reliable service.
Financial resources and challenges
AT&T has significant financial resources, which allows it to invest in new technologies, infrastructure and strategic acquisitions. Its strategic partnerships and acquisitions, such as the acquisition of Time Warner, which has since been spun off to merge with Discovery, allowed it to diversify its business and enter new markets. That was a mistake in hindsight and now the company needs to focus on its core model.
The real problem is that running AT&T is capital intensive.
Reinvestment is a necessity
Being a global brand also puts a lot of pressure on the company to maintain its position, which has been extremely hard for AT&T, especially since it needs to continue reinvesting to meet growing demand for faster network communications.
Preparing for 6G
6G is on the horizon and, while still in the early stages of development, will be where telecom infrastructure investments are made for the next decade. In 2021, AT&T's former chief technlogy officer, Andre Fuetsch, who retired last year, outlined a vision for 6G that includes a number of key elements.
First is increased capacity and frequency. 6G is expected to push the spectrum envelope into the terahertz region, with throughputs that are 100 times that of 5G. Like its predecessor, 6G will also push radio communications into higher frequency bands, while the lower spectrum bands will continue to serve as the backbone for wide area coverage. If you want to have artificial intelligence with you everywhere or engage in augmented reality or virtual reality, you need more speed and capacity.
Fuetsch also referred to 6G as a "network of networks," including elements such as aerial access points, non-public networks and Wi-Fi integration. The end points for this network could even include screen-less skin-wearable devices. The promise of 6G, according to Fuetsch, is an "ambient internet of everything" that brings intelligence to both living and business environments. This vision will require further research into technologies like volumetric spectrum sharing, efficiency, intermodulation interference, energy management, battery life and the integration of software communities with standards and processes to allow for quicker testing of features.
He also stressed the importance of open architectures, disaggregation of network elements and interoperability as the industry moves toward the next generation of wireless technology. AT&T's strategy is to adopt and implement open RAN as this technology becomes available.
The point is all of this costs a lot of money. The company already has more debt on the books than its market capitalization. And while it has paid down a sizable $43 billion since 2018, the fact that it needs to continue to spend just to keep its place in the pecking order is a major concern.
AT&T has done a good job condensing itself back into a telecommunication-focused entity; however, that does not have the same pricing power it used to.
Valuation and future prospects
The company is currently paying over $6 billion a year in interest expense on that massive debt pile. The lenders are happy, but even though AT&T generates more than $30 billion a year in operating cash flow, the shareholders should only expect lower prices. The company needs to pick up its acquisitions in the next generation of communication equipment and services, namely AI and quantum computing. That is the only way it will be able to leverage these massive investments and get off the cycle of capital expenditures that seems to help everyone except it.
