AT&T Inc. Strategy Analysis

Strategic Management Final Project

Kyle Hugheskhughes5@tulane.edu

andMairead Coogan

mcoogan@tulane.edu

AT&T: A Communications Giant in a Changing World

Once known as the technological pioneers of American communications, AT&T has faced many hurdles. Patent infringement from competitors, anti-trust accusations and lawsuits brought by the U.S. government, as well as an industry that has been in rapid evolution since its inception; these have all influenced AT&T and the communications industry as a whole. Beginning in 1877 with three investors including Alexander Graham Bell, exploring the commercial viability of the newly-invented telephone (with the company formerly known as Bell Telephone Company, or BTC), AT&T’s beginnings were humble yet progressive. The company has seen several iterations as a telephone service provider, a licensor of its technology, and a government and military contractor; yet AT&T has led the industry in research and development of newer, faster, and more capable communications technology many times over. From installing the world’s first public payphone in 1880, transmitting the first network radio broadcast in 1923 and collaborating to lay the first trans-Atlantic telephone cable in 1955, to being an industry leader in cellular and data communications, satellite video services, and high-speed Internet streaming today, AT&T has stayed at the forefront of the communications industry for well over a century. 1

Fast forward to 2016. CEO Randall L. Stephenson must keep the company competitive in an industry that is both rapidly changing, and thoroughly saturated with competitors, varying in size, from all over the world. More and more consumers are willing to spend top dollar for high-quality, reliable services, but are increasingly able to find those services from a variety of companies. To remain competitive, AT&T must continue to provide consistent superior service with a range of innovative plans, services, and devices that appeal to modern consumers and provide differentiation from their competitors. This not only includes keeping up with the latest technology in data transfer and voice services, but also expanding their relationships to provide complete voice and data packages to corporate partners as well as increasing their international presence.

The U.S Telecommunications MarketIn the U.S., the giants of the mobile phone industry are AT&T, Verizon, Sprint, and T-

Mobile.2 With each company jockeying for customers and constantly creating new combinations of service offerings and products, the competition in the U.S. is currently very tight. Price wars, which are benefiting consumers, are narrowing profit margins, and causing companies to look beyond the traditional voice and data package offerings to gain market share, increase revenues, and create a competitive advantage. For example, in 2015, Sprint began offering consumers a promotion which would cut their bill in half for switching, while still providing unlimited talk, text, and data plans. This kind of hostile price competition is currently dominating the high-end cellular market. A recent trend has been for companies to eliminate traditional pricing plans for wireless devices where consumers would pay a down payment and receive discounted pricing for devices upon signing one or two year contracts, in favor of monthly installment plans which allow customers the privilege of upgrading to a new device annually, without a down payment. AT&T has followed this trend with their popular Next plan, which has provided a large boost in new subscribers but has narrowed margins and reduced average revenue per consumer. With a 1 "AT&T Inc." Notable Corporate Chronologies. Gale, 2017. Business Insights: Essentials. Web. 26 Nov. 20162 See Appendix 2

shift away from legacy telephone services, increased content expenses, the high infrastructure spending that is required to provide high-quality voice and data service, and investments in large network build-outs, profitability has become increasingly difficult to maintain.3

Current Coverage and Recent AcquisitionsAT&T covers all major metropolitan areas and serves roughly 300 million people with its

LTE data technology. It also provides 4G services using a variety of technologies and is in position to expand its offerings to a wider geographical area, including rural, underserved and international areas. As the industry moves toward more internet-based, blended technology, AT&T is working toward positioning itself to provide integrated services to consumers. With AT&T U-Verse, the company is expanding their broadband and video offerings as well as developing IP-based services that allow consumers to integrate their home wired service and wireless services. With the recent acquisition of Direct TV, for $48.5 billion in cash and stock, the transaction will provide for the opportunity to expand its video products and the ability to negotiate with large media outlets. The acquisition of Direct TV also provides access to over 18 million subscribers in Latin America. Recently, on October 22, 2016 AT&T had a mega $85.4 billion deal to merge with Time Warner which, if pushed through Senate, will give the telecommunications company ownership of leading news and information content including producers such as Warner Bros, HBO, and CNN. The acquisition of Time Warner will launch AT&T's content production throughout the United States, increasing brand recognition and market share.4

The major carriers are hindered by their size, which makes it difficult to change their prices and offerings quickly, as an increasing number of smaller, low-cost carriers enter the market with a greater ability to respond to changing demands from consumers in a timely manner. AT&T has responded to this challenge by acquiring prepaid carrier Leap Wireless to reduce the threat of smaller rival carriers, as well as provide access to lower income consumers. J.D. Power has chosen the company as the customer satisfaction leader in the Small/Medium Business Wireless Service category for two consecutive years.5

As security threats and concern rise, consumers continue to chase after the safest protection plan. AT&T's NetBond allows users to bypass the public internet, enhancing reliability and performance. NetBond's integration last week with AWS Direct Connect (DX) bundled to offer highly secure access to Infor and Pegasystems, two leading application and Software-as-a-Service (SaaS) providers. This expansion added to NetBond's already large clientele base which includes: Amazon Web Services, IBM Managed Cloud Service, Blue Jeans Network, Microsoft Azure and Office 365, Box, Salesforce.com, Cisco WebEx, IBM SoftLayer, CSC Agility Platform, Sungard Availabilty Service, HP Helion, and VMware vCloud Air.6

International OperationsAT&T’s international operations have seen steady growth in recent years and are

expected to grow about 25% this year. These expectations are driven in part by its wireless

3 See Appendix 14 "AT&T to Acquire Time Warner." October 22, 2016.5 "AT&T Inc." Notable Corporate Chronologies. Gale, 2017. Business Insights: Essentials. Web. 26 Nov. 20166 "AT&T Expands Service Offerings on Amazon Web Services." December 2, 2016.

operations in Mexico which are also being bolstered by investment into its mobile high-speed internet service across the country. The current market leader in Mexico is America Movil, and due to recent regulations intended to reduce their dominance and empower smaller players, AT&T has an opportunity to capture greater market share there. In addition, greater sales in the video entertainment segment across Latin America are expected.7

A segment which has recently seen expansion is AT&T’s IoT (Internet of Things) solutions, including their most recent announcement along with Japanese firm Suzuken to improve the pharmaceutical supply chain in Japan. The partnership is intended “to more safely deliver sensitive medicines to hospitals, clinics and pharmacies globally”. 8 Suzuken’s UPR Worldkeeper integrated with AT&T Cargo View with FlightSafe, will increase visibility for each Suzuken shipment globally. AT&T is expected to expand into an increasing number of similar relationships and other integrated solutions partnerships around the globe using its supply chain technology Cargo View.

Growth OptionsAs competition in the communications and digital environment continues to rise, AT&T

must maintain focus on its core competencies to maximize growth throughout all segments of its value chain. Beginning with customer service, one of AT&T's core competencies, AT&T must continue to lobby for customer’s rights and concerns. This year AT&T's led strike force against robocalls not only raised government awareness and action but also raised brand loyalty. 9 This fight for privacy will take ongoing work with the FCC to increase security and eliminate network problems resulting from telemarketing, identity theft, and fraud. As a company, AT&T must continue its focus on higher cyber security for their users and consider vertically integrating their own voice defense platform for consumers, a safety feature similar to their NetBond service for businesses.

“Along with the total annual capital investment of approximately $22 billion, AT&T reveals that it will spend about $10 billion related to the delivery of integrated solutions for the business market.”10 In January 2015, AT&T extended their previous partnership with McDonald's to include fully integrated solutions encompassing their digital menu boards and signage.11 AT&T's business solutions segment continues to grow and has vast potential; however, to maximize this market the company must continue to lobby for change of FCC regulations to gain spectrum and increase capacity to meet businesses growing need for data bandwidth.

As the demand for hotspots continues to rise throughout the world. AT&T must continue to invest in the implementation of domestic and international hotspots to maintain network growth and corporate advantage. Originally the company's multi-year exclusive agreements were

7 “How Is AT&T's International Business Expected To Trend?” Trefis Team. May 24, 2016. 8 “AT&T, UPR and Suzuken Work Together to Improve Pharmaceutical Supply Chain.” International. Tokyo, Japan, Nov 14, 2016.9 "AT&T-Led Stike Force Takes On 'Scourge' of Robocalling." Maisto, Michelle. EWeek, August 22, 2016.10 "AT&T Inc." Notable Corporate Chronologies. Gale, 2017. Business Insights: Essentials. Web. 26 Nov. 201611 "AT&T Integrated Solution Powers McDonald's USA's New Customer-Friendly Digital Menu Boards." P.R. Newswire. January 13, 2015.

directly with car companies, however recently AT&T contracted with SK Telecom who plans to "lay the foundation for 5G-based connected car technologies, and inspire us to achieve more innovation. 'Connected cars are widely regarded as a predecessor of autonomous vehicles, which are eventual targets of so many global companies. Hence, competition to take the lead in the lucrative business is very stiff'."12 This merge is leading innovation in the auto industry technology and will also expand AT&T's network, capabilities, and data range. It is important that as car innovation takes off, AT&T stays ahead of the network and data capacity of mobile hotspots globally to maintain their lead in market capitalization. In order to do so, the company must continue to increase their business relationships and contractual agreements with car companies and public transportation companies world-wide.

AT&T has taken a strong stance on sustainability integration throughout the corporation. AT&T asks its website users "How can the technology that weaves through smart cities and our connected world make a positive impact on our planet?” 13In response to this question we want to encourage the actions that Director John Shultz is pursing and recommend vertical integration of AT&T's design and products to reduce waste, excess products, and resources. Vertical integration of products and design will not only increase AT&T's overall bottom-line, it will speed up coordination and communication, as well as allow for immediate response time to consumer’s desires and needs.

At this year’s annual meeting of stockholders, majority voted against the political spending and lobbying report however we strongly recommend maintaining both budgets. The biggest issue our analysts foresee AT&T facing in the near future is lack of data capacity. It is critical that legacy regulations continue to be fought to maintain the companies competitive advantage. It is also crucial that AT&T defends and protects wireless services so these regulations do not spill over into the future of the telecommunications industry.

12"SK Telecom takes lead in 6G competition" Korea Times. November 29, 2016. 13 "Planet- AT&T's People, Planet, Possibilities.

Appendix 1: Historical Financial Data

Appendix 2: Business Segments Financial Data

Appendix 3: Market Capitalization: Key Competitors

Appendix 4: AT&T Global Network Map

Appendix 5: AT&T Global Voice Map

Appendix 6 Stock Market Data

Appendix 7: Revenue and Expense Segments

Appendix 8 2016 Election of Directors and Proposals Submitted by Board of Directors

Appendix 9 2016 Proposals Submitted by Stockholders

Sources

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"AT&T-Led Strike Force Takes On 'Scourge' of Robocalling." Maisto, Michelle. EWeek, August 22, 2016.

"Value Chain Mapping: Global Reporting Initiative G4 Indicators." AT&T 2014 Annual Sustainability Update. http://about.att.com/content/dam/csr/valuechain/determining-g4-aspects.pdf.

"AT&T Renews Multi-Year Exclusive Connected Car Agreement." India Automotive News. January 5, 2016. http://www.lexisnexis.com.libproxy.tulane.edu:2048/hottopics/lnacademics.

"A Look at AT&T's Value Proposition in the U.S. Telecom Market." Market Realists. Andrew Smith. November 8, 2016. http://marketrealist.com/2016/11/look-atts-value-proposition-us-telecom-market/.

"AT&T Inc. Financial Review." http://www.att.com/investor/ATT_Annual/2015/downloads/att_ar2015_completefinancialreview.pdf.

"AT&T to Acquire Time Warner." October 22, 2016. http://about.att.com/story/att_to_acquire_time_warner.html.

"AT&T Expands Service Offerings on Amazon Web Services." December 2, 2016. http://about.att.com/story/att_expands_service_offerings_on_amazon_web_services.html.

"AT&T Integrated Solution Powers McDonald's USA's New Customer-Friendly Digital Menu Boards." P.R. Newswire. January 13, 2015. http://www.prnewswire.com/news-releases/att-integrated-solution-powers-mcdonalds-usas-new-customer-friendly-digital-menu-boards-300019515.html.

"AutoZone Inks Agreement With AT&T For Integrated Solutions." January 25, 2016. http://www.prnewswire.com/news-releases/autozone-inks-agreement-with-att-for-integrated-solutions-300208671.html.

"AT&T: A Short SWOT Analysis." Value Line. Kenneth J. DeFranco Jr. February 17, 2015. http://www.valueline.com/Stocks/Highlights/A_Short_SWOT_Analysis_of_a_Telecom_Giant.aspx#.WEhdNneZO8U.

"SK Telecom takes lead in 6G competition" Korea Times. November 29, 2016. http://www.lexisnexis.com.libproxy.tulane.edu:2048/hottopics/lnacademic/.

"Planet- AT&T's People, Planet, Possibilities.” http://www.about.att.com/content/csr/home/planet.html/

“How Is AT&T's International Business Expected To Trend?” Trefis Team. May 24, 2016.http://www.nasdaq.com/article/how-is-atts-international-business-expected-to-trend-cm625708

“AT&T, UPR and Suzuken Work Together to Improve Pharmaceutical Supply Chain.” International. Tokyo, Japan, Nov 14, 2016

http://about.att.com/story/att_and_suzuken_join_to_improve_pharmaceutical_supply_chain_in_japan.html