AT&T hopes you forget it's a phone company

AT&T lost more than 348,000 postpaid phone customers as it builds out new lines of business like its DirecTV streaming service.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
5 min read
Sarah Tew/CNET

With T-Mobile tearing up the wireless industry, what's a carrier to do? If you're AT&T, start looking outside the wireless business.

AT&T doesn't want to be known as just a telecom company anymore. It's using its DirecTV Now streaming service to take control of what you watch and of how you watch it. AT&T owns one of the key services delivering you video through its acquisition last year of DirecTV, and with its pending deal to buy Time Warner, it wants to be the company behind "Game of Thrones" and Superman.

But even the Man of Steel can't rescue AT&T as it continues to fall victim to stiff competition that's eroding its core wireless business. Smaller rivals Sprint and T-Mobile have been scooping up its subscribers. It's the same trend that has forced Verizon to make its own acquisitions, although Verizon's bets, like those in AOL and Yahoo, have been relatively smaller ones.

The numbers bear out why AT&T is making such big, bold bets. The Dallas telecommunications provider said Tuesday it lost 348,000 postpaid wireless phone subscribers, or those who pay monthly bills, in the first quarter.

The results echo those of Verizon, which on Thursday posted its first-ever loss of post-paid customers -- people who pay at the end of the month and boast higher credit scores and loyalty. Verizon's decision to enter into the unlimited game later cost it valuable postpaid customers -- 289,000 to be exact.

T-Mobile, meanwhile, continued to outstrip the industry in customer growth during this period, underscoring the momentum behind the "Un-Carrier" movement. T-Mobile gained 914,000 postpaid customers, including 798,000 who used a phone. T-Mobile estimates it captured 250 percent of the subscribers in the period.

"We right now are the wireless business," CEO John Legere said on a conference call with analysts.

T-Mobile attributes its success to its early all-in bet on unlimited data. AT&T initially had an unlimited data plan available to only DirecTV and U-Verse TV subscribers but shifted gears with a new standalone unlimited option that includes free HBO access.

AT&T CEO Randall Stephenson admitted on a conference call Tuesday that the company responded late to offering unlimited plans to all wireless customers. But he added once the company added DirecTV Now discounts and free HBO service to the unlimited offer, the company was able to attract more subscribers. AT&T has touted the streaming service DirecTV Now as a big success, but it didn't break out how many customers it added in the quarter. Earlier this year, it said it had signed up more than 200,000 customers in the first couple of months it was available.

"We lost some share," Stephenson said. "But we played to our strengths." He added that customer defections are subsiding and things are returning to normal in terms of customer growth and retention.

Stephenson also said the shift to unlimited data will highlight which networks can really stand up to heavy demands from subscribers streaming loads of video and which ones can't. He said AT&T has more spectrum and fiber than its competitors and has a network that can keep up with the demands of unlimited data.

"We are prepared and can sustain this better than anyone else," he said.

Changing politics might help

A new pro-business Republican administration in Washington will likely help AT&T continue this strategy. The GOP-led Congress and President Donald Trump have already rolled back Obama-era privacy regulation, which AT&T and others argued would make it difficult to compete in the advertising market with the likes of Google and Facebook.

Stephenson said during the conference call that this opens the door for AT&T to do more targeted advertising especially with its acquisition of Time Warner. He said AT&T can use information it has about its broadband and wireless customers to help sell targeted advertising on its Time Warner content. He said the kind of localized and personalized advertising it can offer marketers could be worth three to four times more than traditional advertising.

There are other positive changes in Washington that could help AT&T in the future. Federal Communications Commission Chairman Ajit Pai will likely soon take action to end net neutrality regulations, which AT&T claims is stifling its network investment.

Stephenson said that even though the company will continue to support the "tenants of net neutrality" the company thinks "it's illogical to regulate using rules that were put in place 83 years ago" for the traditional phone network.

On the whole, he said the changes at the FCC have been positive.

"There was a lot of consternation with the former FCC over things like sponsored data and set-top boxes," he said. "Now all those concerns are gone."

He said now the company will have the freedom to experiment with new pricing plans and other business models. He added, the company won't have to "stop or pause to think about how it will be regulated."

Now that the FCC's latest wireless auction has ended, there's likely to be a spate of industry consolidation. The friendly political environment is also good news for AT&T's Time Warner merger. Stephenson said he expects officials in the US to approve the deal by the end of the year. Regulators for the European Union have already signed off on the deal, he said. The US Department of Justice is reviewing the deal now. Stephenson added that the FCC won't need to review the merger, since there are no wireless license transfers as part of the deal.

Still, 2017 is likely to remain a tough year for AT&T especially when it comes to its core wireless business.

AT&T reported quarterly earnings that met analysts' expectations of 74 cents per share on $39.31 billion in revenue. But it fell short of revenue predictions. Analysts, on average, expected earnings of 74 cents a share and revenue of $40.57 billion, according to Yahoo Finance.

AT&T shares were trading up 0.90 percent to $40.30 after the market closed.

Updated 3:15 p.m. PT: This story was updated with more information from the investor conference call, including statements from the AT&T CEO.