AT&T's Connected Device Critics Are Missing the Point

By Markets Fool.com

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Behind Verizon (NYSE: VZ), AT&T (NYSE: T) is the second-largest wireless provider in the United States. According to research company Strategy Analytics, Verizon boasted 142.8 million subscribers, with AT&T claiming 131.8 million subs in the recently reported second quarter. Both companies have approximately two times the total subscribers as No. 3 wireless provider T-Mobile (NASDAQ: TMUS), which reported 67.4 million total subs this quarter.

However, AT&T in particularhas been faulted because the vast majority of the company's subscriber additions are from its connected device segment. For example, of last quarter's 1.36 million subscriber additions, nearly 1.2 million of these were connected devices (tablets, monitoring devices and services, and connected automobiles). Comparing highly desired postpaid smartphone subscribers, AT&T only added 250,000 subs during the quarter, a lower number than Verizon (336,000), T-Mobile (877,000), and even struggling Sprint (259,000) during this timeframe.

Where many see connected devices masking poor performance in postpaid subscribers, I'm personally encouraged by AT&T's connected device growth.

Connected devices are the next big opportunity

Connected devices are an essential part of the Internet of Things. Bringing Internet connectivity to current offline objects is the next logical step in the future of digital connections. Major tech companies Apple and Alphabet are currently engaged in an intense behind-the-scenes battle to establish connected-home platforms with their HomeKit and Brillo OS, respectively, while AT&T itself offers a narrow-focused home-management service called AT&T Digital Life.

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It's important to note that connected devices in the home will, most likely, be connected through your home's existing Wi-Fi ISP (the notable exception is AT&T's Digital Life, which the company charges for and counts as a new connection), but it's a signal that demand for internet connectivity will only increase going forward. It's unlikely Apple or Alphabet would bother if the potential was limited.

One area where AT&T appears to be growing nicely is connected automobiles. Earlier this year, AT&T announced a deal to bring 4G LTE to more than 10 million Ford SYNC Connect customers by 2020. Additionally, AT&T has added connected-car data plans for nine car brands. These deals are paying off in a major way as connected devices increased 23.7% on a year-over-year basis for AT&T, with Connected Devices now comprising 22% of AT&T's total wireless subscribers. AT&T is shaping this industry and further monetizing its wireless network beyond traditional smartphone consumers.

Traditional wireless is becoming price-sensitive

In addition to slowing growth overall, the traditional wireless world is quickly becoming a price-sensitive market. After an earlier shift in wireless billing to metered data plans, T-Mobile and Sprint have reversed course and embraced unlimited data offerings. Recently, both companies further cut the prices of these Unlimited data offerings in exchange for throttled video bandwidth and tethering limits. T-Mobile has added subscribers at a rapid clip since instituting its Un-carrier plans.

While these cost-cuts and other givebacks are notable wins for consumers, they point to lower profit margins and increased churn in AT&T's core wireless business since the company will have to compete or face lost customers. AT&T has responded by offering a marketed Unlimited data plan for wireless customers with DirecTV service, and it has recently announced its plans to stop data overages in favor of throttling as well. The financial result of this switch, at least in the short run, will be continued pressure on the company's core wireless business.

Critics may continue to point out AT&T's wireless-subscriber growth is powered by connected devices, but it appears to be a wise business move to attempt to shape this nascent, high-growth market while the traditional smartphone market faces intense competition.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette owns shares of Alphabet (C shares), Apple, and AT& T. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, Ford, and Verizon Communications. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends T-Mobile US. Try any of our Foolish newsletter services free for 30 days.

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