Brief History:
Alexander Graham Bell was credited for inventing the telephone, as he’d been the first to obtain a patent in 1876. He then founded the Bell Telephone Company in 1877, which eventually became the American Bell Telephone Company in 1880 and collectively became known as the Bell System. Bell began laying down the telephone long-line infrastructure, which was the first nationwide long-distance network to be commercially monetized and would be officially incorporated as the American Telephone & Telegraph Company (AT&T) in 1885. Over the turn of the century, AT&T acquired its subsidiary American Bell Telephone Company and continued to expand nationwide.
Throughout majority of the 20th Century, AT&T and its Bell System had functioned as a legally sanctioned and regulated monopoly; although, advancements in telecom led to an antitrust suit by the U.S. Justice Department against AT&T. The suit was settled in 1982 when AT&T was strong armed into being split from the Bell System. On January 1st 1984, AT&T had been severed from the seven separated Regional Bell Operating Companies (RBOCs). In addition, the Federal Communications Commission enacted the Telecom Act of 1996 which regulated the prevention of telecom monopolies. Under the original Title II, the act emphasized that functions of Telecom must be operated similar to a utility to develop their infrastructure.
Opposed to decline, AT&T successfully launched their internet service and invested $45 billion in acquisitions and upgrades to its infrastructure both to manage the growth of data traffic and to establish direct local connections to business customers. By mid 2000s, AT&T grew three networks: data, broadband, and wireless, and four separate businesses: cable, wireless, business and consumer. In 2004, AT&T merged with Cingular Wireless, a joint venture of SBC and BellSouth; and shortly after in 2005, SBC Communications merged with AT&T and the conglomerate rebranded as ‘the new AT&T’.
Current Situation:
In 2013, AT&T announced a plan to expand into Latin America to deliver global advanced enterprise solutions to multinational companies. Through this expansion, AT&T had developed plans to build on existing capabilities and interconnections for the U.S., Mexico and Brazil which would allow broader regional coverage deep within Latin American countries. In the midst of Google Fiber’s disruptive technology, AT&T recently announced plans for the U-verse GigaPower 1GB Broadband Internet to remain competitive with emerging internet providers. In 2014, AT&T announced plans to acquire DirecTV for their premium television service. These routes of expansion are AT&T’s reactions to the impending change of advanced telecom technologies. Currently today, AT&T is the second largest global telecom provider, the largest fixed landline operator and the second largest mobile operator after Verizon in the U.S.
AT&T’s main competitor happens to be Verizon in providing services like fixed landline and Mobile 4G LTE network Telecom Operations, High Speed Internet and Television. They each develop their own proprietary technologies, AT&T has its U-verse bundled services and Verizon has its FiOS bundled services. Although they are both fiber optic connections, FiOS implements fiber-to-the-premise (FTTP) which requires expanding the fiber optic infrastructure directly to a subscriber’s home. Meanwhile, U-verse makes use of existing fiber optic infrastructure with fiber-to-the-node (FTTN) which extends fiber to a subscriber’s home via double paired copper wire. AT&T has the option of adopting a pure fiber FTTP network but would rather sustain the more inexpensive, convenient and albeit lesser performing method. Verizon also sustains a much larger spectrum of 4G LTE networks, which vastly trumps AT&T’s offerings. AT&T may succeed as the largest fixed landline operator, but they are the second largest mobile operator to the likes of Verizon.
Business Environment: (Collaboration with Fumitake Matsushita)
The telecommunications industry is rapidly evolving from fixed location voice-oriented services into an industry driven by customer demand for instant availability and data-based services. The products, services and plans of AT&T are changing as they transition into more sophisticated, high-speed, and IP-based alternatives. They’re also re-designing the networks to accommodate these new demands and to take advantage of related technological efficiencies.
According to our SWOT Analysis, AT&T’s main strength had obviously been their brand. According to Fortune Global 500, AT&T is ranked 34th in U.S. Brand Top 100 in 2013. AT&T’s financial bottom line had been to provide their high quality services at a discount, by bundling services together and exposing a great value at the best possible price. A bundling strategy rewards customers who consolidate their services (e.g., long distance telephone, high-speed internet, wireless and video) with AT&T. They’ve implemented a home monitoring service which had become in demand as of late, announced plans for a car related security, and integrated their entertainment service into their bundle. AT&T had also been working on advanced mobile network technologies such as 4G, UMTS and HSPA+ spectrum. They’re enhancing their network capabilities and striving for superior mobile broadband speeds for data and video services for their concurrent customers. AT&T currently emphasizes employee training programs that provide graduates opportunities to begin a career in the industry. They also provide the opportunity for their employees to earn a master’s degree in computer technology online through the partnership with Georgia Tech and Udacity.
AT&T’s growth drivers are mainly three segments: wireless, wireline data and managed IT services. TheWireless segment accounted for approximately 54% in 2013 of total segmented operating revenues as compared to 52% in 2012 and 76% of our 2013 of total segmented income as compared to 70% in 2012. This segment includes the portion of the results from AT&T’s mobile payment joint venture ISIS, which is accounted for as an equity method investment. The Wireline segment accounted for approximately 46% in 2013 of total segmented operating revenues as compared to 47% in 2012 and 27% of 2013 total segmented income as compared to 31% in 2012. The income margin decreased from 12.2% to 10.7% in 2013. The decrease in operating income and margin in 2013 was driven primarily by lower voice revenue and higher operations and support expense, partially offset by data revenue growth, lower depreciation and amortization expense. However, AT&T expects continued growth in their more advanced IP data products while traditional data and DSL revenues continue to decline. The other segment includes the ownership percentage of the results from América Móvil and YP holdings, and costs to support corporate-driven activities and operations. Decreased equity in net income of affiliates in 2013 was due to reduced earnings and foreign exchange impacts from América Móvil. These decreases were partially offset by earnings from YP Holdings LLC. Through the analytical procedure, AT&T had better profitability than Verizon. AT&T’s revenue had been increasing from $126,723m in 2011, to $128,752m in 2013. The profit margin also increased from 3.1% in 2011, to 14.2% in 2013. Compare to AT&T, Verizon increased its revenue from 126,723m in 2011, to 128,752m in 2013. Verizon had a high profit margin at 14.2%. However, both revenue and net income are lower than that of AT&T. ROA for AT&T is 6.63% and ROIC is 12.73%. The ratios of AT&T are higher than ROA and ROE of Verizon, 4.61% and 12.54% respectively.
Unfortunately, AT&T’s weakness in their services led the average consumer to rate their Customer Satisfaction as one of the poorest companies in America. AT&T is notorious for insufficient text, voice and customer service quality, data capping services like high speed internet lower than advertised, and their technicians always showing up late for install appointments. In the American Customer Service Index Telecommunications and Information Report 2014, AT&T is ranked second for Internet service provider, third for fixed-line telephone service, and last among all for wireless telephone service. In addition, the loss of iPhone exclusivity was a big issue for AT&T. The iPhone still makes up about 80% of AT&T’s smartphone sales versus about 50% at Verizon Wireless, and around half of AT&T’s retail customer base uses the device. Since AT&T lost iPhone exclusivity in early 2011, it has continued to expand its postpaid customer base, but T-Mobile has taken aim at the firm’s iPhone customer base. AT&T had gained Amazon’s Fire smartphone as an exclusive but it has yet to be seen if it is a sufficient replacement. AT&T expects cash flow to decline sharply in 2014 as it spends heavily on its networks and cash taxes take a bigger bite. The firm hopes that moderating network spending and continued revenue growth will enable cash flow to rebound. However, a sustained drop in cash flow could hinder AT&T’s ability to meet debt and other obligations on attractive terms or force the firm to cut its dividend.
Although, AT&T has great opportunities as they plan to expand their network into Latin America, release U-verse GigaPower Internet and acquire DirecTV. AT&T also has the option of adopting a pure fiber FTTP network like that of Verizon’s FiOS services but they must retain their low cost structure. Technology will continuously advance, thus AT&T must conform to new technological advancements and expand their offerings. There are high fixed costs in advancing technology and expanding infrastructure, so they must leverage sales volume to retain profitable. However, the threats AT&T must face are growing exponentially in relation to the market’s saturation. AT&T cannot monopolize this industry, due to the FCC’s telecom act of 1996. AT&T must account for switching costs involved by the competitive market, as well as the commitment they must abide by developing the expensive infrastructure. The infrastructure they develop must also be standardized, especially due to their interests in globalization.
AT&T is facing potential threats in the telecom industry, particularly encountering significant spectrum and capacity constraints on their wireless network in certain markets. They believe that future wireless growth will increasingly depend on our ability to offer innovative services, plans, devices and a wireless network, which has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. While AT&T is continuing to invest significant capital in expanding our network capacity, their capacity constraints could affect the quality of existing voice and data services and their ability to launch new, advanced wireless broadband services, unless they are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make new or existing spectrum available to the wireless industry to meet the expanding needs of AT&T subscribers. To that end, AT&T made more than 60 deals to acquire spectrum and wireless operations during 2013. Much of the recently acquired spectrum came from an innovative solution in which AT&T obtained FCC approval to use Wireless Communication Service spectrum for mobile broadband for the first time. A National Health Interview survey found that more than one-third of American homes (35.8 percent) had only wireless telephones during the first half of 2012, while 15.9 percent of all households had both landline and wireless telephones but received all or almost all calls on their wireless phones. This means 51.7 percent of U.S. homes don’t have or didn’t use their landlines in the first half of 2012. That’s a 1.8 percent increase from the same period a year ago. AT&T also faces threats in terms of market saturation. Subscriber growth is now expected to come from poaching customers from competing networks. They face a number of international competitors, including Orange Business Services, British Telecom, Singapore Telecommunications Limited and Verizon Communications Inc., as well as competition from a number of large systems integrators, such as HP Enterprise Services. This market saturation in AT&T’s fastest growing segment had led to Wall Street’s diminishing expectations of future growth for the Company, resulting in the lowest performing stocks in the Dow Jones Industrial Average index. The current economy in U.S. also influences the company’s business. The slow economic recovery pressures customer’s demand and their ability to pay for existing AT&T services. To decrease the expenditure, customers tend to change their buying habits. It results in the greater pressure on pricing and the company’s pursuing a low cost strategy. As new technologies arise, these customer’s lives are heavily impacted. Internet based entertainment is becoming more available, as AT&T actively countered this threat by transitioning their video services online for television subscribers. AT&T must do exactly that to transform its threats into opportunities.
Recommended Strategy:
According to an interview with Randall Stephenson by Fortune, AT&T and Verizon have entered a stalemate in the United States market. Therefore, the best strategy is to evade the threat of market saturation like Verizon; they intend to penetrate the Canadian telecommunications market, and so we intend to counter with the Latin American telecommunications market. Hence, our recommended strategy is to expand into Latin America as a Globalization Strategy.
The primary reason AT&T is pursuing an acquisition of DirecTV is to leverage a deeper and more effective expansion into the Latin American market. Fierce Cable reported that in 2013, DirecTV generated 21.5% of revenue in Latin America, held 18 million subscribers and expects 9.6% revenue growth. Latin America’s market only has 36% pay TV penetration, opposed to 90% Pay TV penetration for the United States. DirecTV is an invaluable asset for AT&T if the acquisition is approved. Marketplace claimed, “In most emerging markets public infrastructure is limited, Satellite access is cheaper and more feasible for customers.” Therefore, DirecTV is an important asset for AT&T’s expansion into Latin America.
Another important asset for AT&T is collaborative strategic alliances with Latin American firms. AT&T is expanding with América Móvil into the following Latin American markets: Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Peru, and Uruguay. América Móvil is a valuable collaborator since they’re the most powerful telecommunications firm in Latin America and provides services to 246 million mobile subscribers. According to América Móvil, “Brazil has six times as many mobile phone users than landlines, compared to the United States where that ratio is 2 to 1”. American Banker also reported on another strategic alliance, “targeting banking institutions with the Aval Groups: routing 1,000 ports to support Aval’s 800 ATMs in 167 cities, and connecting 190 financial institutions with the Brazilian Federation of Banking Associations (Febraban).” In order to expand into Latin America, collaborative strategic alliances are crucial for AT&T to capture market share and operate successfully.
In terms of Globalization in Latin America, a cost leadership strategy allows AT&T to capture market share in the emerging Latin American markets. AT&T has implemented a low cost mobile phone plan going for $10 dollars per month with unlimited texts, but accruing 1 cent per minute to Mexico and 9 cents per minute throughout the rest of Latin America. Biz journal reported that AT&T claimed, “With calling rates at less than a dime a minute and unlimited messaging, our customers in Latin America now have a convenient and affordable option for staying connected.” AT&T’s Latin America talk and text plan is crucial to pursuing a Cost Leadership Strategy, which attributes toward AT&T’s Globalization strategy in Latin America.
In terms of Cost Leadership, Centralization is the main characteristic to the Cost Leadership’s low cost strategy. Telecommunication infrastructure also depends on centralization to establish their technological infrastructure in a particular region. Developing infrastructure albeit is expensive but necessary. AT&T mentioned on their corporate press note, “América Móvil’s group of companies networks provides AT&T customers access to 15 markets in Latin America, with more than 2,000 MPLS-enabled IP services nodes, more than 50,000 services/access, 91,000 miles of fiber optic network installed throughout the region, and 12 data centers in Latin America.” Centralization is important to building the telecom infrastructure within the particular region of Latin America.
Strategy Explained:
Globalization, Cost Leadership, and Centralization strategies in combination make AT&T’s expansion possible. Centralization is the main characteristic of the Cost Leadership strategy, since it establishes single coordinated planning and decision making activities within particular geographic locations. Cost Leadership is also an important strategy to expand into Latin America since low cost plans are crucial to capturing market share. AT&T also claimed in their press note, “AT&T’s goal is to provide delivery of a consistent global experience for our customers who continue to expand internationally, and the long-standing relationship with the América Móvil group of companies is a key pillar of our global strategy.” AT&T’s overall Globalization, Cost Leadership, and Centralized strategies, alongside AT&T’s collaborative strategic alliances build AT&T’s expansion strategy into Latin American markets.
Strategic Implementation:
We plan to adopt a Worldwide Area Structure since AT&T needs to function in divided geographic areas like Latin America. These divided areas provide self-contained and autonomous operations with its own set of value creation activities that are self-sufficient from operations in America. However, Latin American operations will be controlled by AT&T headquarters for strategic direction. Our structure will allow AT&T to operate under a low degree of diversification and domestic structure fit for the Latin American market or other markets AT&T may pursue in the future.
To overcome the rivalry against Verizon, AT&T must adopt a Sun Tzu strategy. Sun Tzu stated in chapter V Energy, that “in all fighting, the direct method may be used for joining battle, but indirect methods will be needed to secure victory.” AT&T is pursuing a Globalization strategy to secure long-term victory. When AT&T has developed advanced technologies, they’ll both provide a defense which enacts another Sun Tzu strategy of chapter XI The Nine Situations; “strike at its head, and you will be attacked by its tail; strike at its tail, and you will be attacked by its head; strike at its middle, and you will be attacked by head and tail both.” Attacking directly, indirectly, and defending like a snake will ensure a powerful strategy against Verizon.
Conclusion:
AT&T has been in business for over a century and retains seniority over competing telecom entities like Verizon. AT&T is experiencing market saturation in their major market of the United States and impending technological advancements regarding advanced mobile networks and improved services; these areas are AT&T’s main priority. AT&T must adapt to the industry by picking and choosing its battles wisely. Our Sun Tzu methods build the most formidable offense and defense. As a result, these strategies are the best fit to defeat Verizon.
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