Wall Street reacted positively Tuesday to AT&T's first-quarter earnings, with shares (NYSE: T) gaining 3.6% to 31.72 by the time the final trading bell rang. Investors appeared willing to overlook AT&T's anemic 1.8% revenue growth to $31.82 billion -- just short of analysts' average estimates of $31.86 billion -- and focus instead on consensus-beating profit of $3.58 billion, or 60 cents a share. That was up from $3.41 billion, or 57 cents a share in last year's Q1, and beat the street average estimate of 57 cents a share. But as Peter Svensson of the Associated Press points out, buried deep in AT&T's first-quarter number is a ticking bomb that threatens the revenue growth of not just AT&T, but all wireless carriers.
Calculations by the Associated Press, based on AT&T's public statements, indicate that the average monthly bill for its smartphone subscribers has fallen from $88 to $80 in the space of a year.
This might not be such a terrible problem if the U.S. smartphone market were in its nascent stage. But it's not. In fact, it's maturing rapidly. Half of all mobile phone owners in the U.S. now use smartphones. (In AT&T's case, nearly 60% of its contract subscribers own data-consuming smartphones. And smartphone bills for AT&T customers are nearly twice as high on average as bills for non-smartphone subscribers.) Further, non-smartphone owners by definition aren't as motivated to own smartphones, either because of price or other factors. Some will never convert, and those that do likely won't be willing to pay a lot for data. Bottom line: The low-hanging fruit has been picked in the U.S. smartphone market. Which is why wireless carriers are relying on consumers to spend more on mobile data consumption. Here's Ralph de la Vega, AT&T's president and CEO for mobility, on Tuesday's earnings conference call:
Data revenues were $6.1 billion, up more than $1 billion from the first quarter a year ago. As I just mentioned, data revenues are now a $24 billion annualized revenue stream, growing at nearly 20% a year. Data drives this business, and I firmly believe we're still in the early stages of mobile data growth, driven by the mobile Internet.
While de la Vega is probably correct that "data drives this business," his claim that "we're still in the early stages of mobile data growth" -- while technically accurate -- begs the question of how much consumers are willing to pay for mobile data. And how much are they willing to pay? Obviously it's an individual thing, but it'd be safe to assume that very few consumers would be willing to pay, say, $500 a month for mobile data. Same for $400 or even $300. My guess is $100 to $120 would be the top limit for most consumers. For me it'd be under $100. How much would readers be willing to pay monthly for mobile data? (Feel free to answer below.) And where does that leave companies like AT&T and Verizon once the vast majority of their customers own smartphones and have limits to how much they'll spend on commodity mobile data? Maybe they'll need to offer unique, value-added content. That's why I wouldn't be surprised to see either AT&T or Verizon buy Netflix (AT&T's recent battle with the streaming-video company over a bandwidth cap for DSL customers notwithstanding). If you're just offering a service, and people are only willing to spend so much for that service, you've got to sell them something else if you want to grow revenue. Otherwise you (and your stock price) just stagnate.
Now read this: