The Next Phase of Growth for AT&T Inc. and Verizon Communications Inc. May Surprise You

By Markets Fool.com


More devices per account will help grow revenue. Source: Zak Mensah/Flickr.

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With smartphone adoption nearing saturation and wireless carriers competing with one another to attract smartphone users with low-price plans, the era of increasing revenue per device at AT&T and Verizon is over.

AT&T has seen year-over-year declines in average billing per user in each of the last three quarters. Verizon has resisted installment billing thus far and has been able to slow the decline in average revenue per device. The company only started seeing a year-over-year decrease in average revenue per device last quarter.

T-Mobile U.S. continues to attract customers away from Verizon and AT&T with its promotions such as paying for early termination fees and low-price service plans. The result has been for Verizon and AT&T to offer customers more for the same price, as both have largely resisted decreasing service prices.

Yet there are two areas where AT&T and Verizon continue to grow. They're more heavily reliant on the broad 3G and 4G/LTE coverage AT&T and Verizon provide, which gives them a big advantage when it comes to attracting new customers. The next phase of growth for these companies is tablets and connected devices.

Increasing revenue per account
Verizon doesn't use average revenue per user when it reports its financial results. Instead, it uses average revenue per account, which lumps family plans in with individual plans and doesn't give as clear of a picture. It does, however, point to a positive trend for Verizon, which is that Verizon is able to continue increasing its revenue per account by adding more devices to the account.

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Last quarter, Verizon's average devices per account increased to 2.89 from 2.72 a year ago. Those devices are mostly tablets. In each of the last two quarters, Verizon has added a net total of over 1 million tablet customers. Comparatively, the company added a net total of 761,000 phone subscribers in the same period.

The same pattern is occurring at AT&T. Last quarter, 450,000 of AT&T's 800,000 net additions were tablets. The quarter before, AT&T added 366,000 postpaid tablet connections compared to 234,000 other net device additions.

The value of adding tablets
While the value of a tablet connection isn't as high as a 4G smartphone, tablets can still provide AT&T and Verizon very high incremental value for several reasons.

First, tablet users typically consume a lot of data compared to the average smartphone user, which allows the companies to upsell higher-priced data plans.

Second, tablet customers typically exhibit lower churn, which means the more devices on an account the more likely it is to stay with Verizon or AT&T.

Finally, tablets have lower cost subsidies than smartphones, so customer acquisition is less expensive.

Considering tablets still represent a small percentage of Verizon's and AT&T's customer bases, there's a lot of potential for growth over the next few years.

T-Mobile isn't letting AT&T and Verizon take all of the new tablet customers, though. The "uncarrier" offers a $100 subsidy on tablets as well as 250 MB of free data a month. The strategy seems to be to disrupt point number three (low subsidies) while taking advantage of the first two points in order to upsell tablet customers and keep existing customers from leaving. Last quarter, the company added 200,000 net tablet subscribers.

Don't forget about connected devices
Connected devices is really a catch-all category for things that need a 4G connection to operate. In 2014, the category is largely composed of new cars with Internet capabilities. Last quarter, the total number of connected device net additions in the industry outnumbered the total number of net new phone subscribers.

AT&T and Verizon certainly have an advantage in the category as their networks offer more coverage. A wireless connection in your car isn't of great use if there's never a signal. However, getting into connected cars and other devices means working with manufacturers, so there's an additional barrier beyond consumers for the carriers to overcome.

AT&T has already made a lot of progress in connected devices, adding 1.3 million customers last quarter alone. 500,000 of those devices are connected cars, meaning AT&T is also making progress in the broader Internet of Things category that includes things like its home security automation system, Digital Life.

For Verizon, connected devices still represent a very small percentage of revenue. Last quarter, the company brought in $150 million in revenue from its "machine-to-machine" segment. The segment is growing quickly, however, with a 40% increase in revenue in the first nine months of 2014.http://seekingalpha.com/article/2579835-verizon-communications-vz-q3-2014-results-earnings-call-transcript

Going forward, there's a lot of potential for growth at both companies. Analysts estimate the Internet of Things will grow to more than 40 billion devices by 2020 with 75% of future growth coming from devices not called smartphones, tablets, or PCs.

Future revenue growth
Both AT&T and Verizon are slow-growing dividend payers. Thus it's imperative for them to maintain current revenues and cash flows in order to pay out those dividends. Their growing tablet customer bases help protect keep existing customers from churning out to a competitor like T-Mobile, as more devices makes it harder to leave, while adding incremental revenue to an account. Meanwhile, the potential growth in connected devices could be a real revenue driver for the two largest data networks.

The article The Next Phase of Growth for AT&T Inc. and Verizon Communications Inc. May Surprise You originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications,. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.