Case study: AT&T s multiplay strategy classic bundling mixed with innovative applications drives marketleading growth for U-verse

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1 Case study: AT&T s multiplay strategy classic bundling mixed with innovative applications drives marketleading growth for U-verse 11 September 2012 Mike Roberts Executive summary AT&T has a robust multiplay strategy that integrates and enhances its key fixed and mobile telecoms services to increase subscriptions and ARPU while reducing churn. AT&T U-verse has been the fastest-growing multiplay service in the US market in the past three years, with AT&T consistently taking market share from cable operators, the dominant players in the mature US multiplay market. Classic bundling namely higher discounts for higher spending is a key part of AT&T s multiplay strategy, and has recently been refined after analysis of customer lifetime value. Developing and supporting innovative applications that make multiplay services work better together is another major focus for the operator. AT&T s strength in mobile and resulting investment in the application arena give it a competitive advantage in application development, particularly compared with its cable rivals. Strategic threats to AT&T s multiplay success include OTT players such as Netflix and the recently approved deal between Verizon Wireless and four major US cable companies, which could significantly improve the offerings of AT&T s multiplay rivals. Overview AT&T, the fastest-growing multiplay operator in the US, has a classic multiplay strategy focused on bundling its key fixed and mobile telecoms services to increase subscriptions and ARPU while reducing churn. The operator offers a wide variety of bundles of two to six services (see fig. 1), with discounts typically increasing with the number of services bundled, given that larger bundles reduce churn and drive higher customer lifetime value. Fig. 1: AT&T s multiplay offering U-verse, AT&T s new business based on fiber-to-the-node (FTTN) technology, is at the heart of the operator s multiplay strategy and is already delivering results. In 2Q12 more than 75% of U-verse pay-tv subscribers took triple- or quad-play services from the operator, and tripleplay subscribers had an ARPU of US$170/month. Another key element of AT&T s multiplay strategy is to use its stronger businesses notably mobile, where it has 105 million subscriptions and vies with Verizon Wireless to lead the US market to help support and expand its newer and smaller businesses such as U-verse Informa Telecoms & Media 1

2 TV, which has 4 million subscriptions (see fig. 2). This helps AT&T differentiate its services in the mature US multiplay market, which has been largely defined and dominated by cable companies such as Comcast, the largest pay-tv operator in the world with 22.3 million subscriptions in the segment at end-1q12. Fig. 2: AT&T, subscriptions by major segment, 2Q10-2Q12 Wi-Fi is also an important part of AT&T s multiplay strategy. The group is the largest Wi-Fi operator in the US by far with more than 30,000 hot spots, and it includes free access to the hot spots with all its fixed and mobile broadband services, and most smartphone plans. This has led Wi-Fi usage to soar, with AT&T reporting 1.2 billion connections on its Wi-Fi network in 2011, up from million in 2010 and 85.5 million in In 1Q12 there were million connections on the network, equivalent to 79 connections per second. The figures highlight AT&T s dominant position in the US Wi-Fi market, which is one of its competitive advantages in the multiplay arena. In addition, AT&T has recently refreshed its key multiplay offers by reducing prices and bundling in a popular new device at no charge, the U-verse TV Wireless Receiver. Although the new plans can deliver significant savings to consumers, AT&T has offset the revenue impact by increasing prices on bundles with a lower customer lifetime value. A longstanding part of AT&T s multiplay strategy is to improve the end-user experience by making its various services and devices work better together. Milestones in this strategy include the launch of U-verse Online in May 10, U-verse Mobile in August 2010 and the arrival of the first U-verse enabled third-party applications for smartphone and tablets in October AT&T is also working on bringing new types of connected devices into its multiplay offers. Although some operators are now partnering to bring nontelecoms services such as financial products into their multiplay offers, AT&T is more focused on creating new businesses that can extend existing multiplay offers or create entirely new ones. One of the best examples is AT&T s new Digital Life business, which will launch services for home security, automation and control, using fixed and wireless networks and devices. Strategic goals The key strategic goals of AT&T s multiplay services, in common with those of many multiplay operators globally, are to combine and price services in a way that increases overall subscriptions, revenues and margins. The operator says that as subscribers take more services from AT&T, customer satisfaction increases and churn drops dramatically, leading to a significant increase in customer lifetime value. The operator s fixed business and more specifically its fiber-based U-verse unit naturally has a stronger focus on multiplay services than its mobile business, given that U-verse is competing head-on with cable companies that have long succeeded in selling triple-play packages including TV, broadband and voice services. In addition, the mobile business has a much larger subscription base and stronger market position than the fixed business, which Informa Telecoms & Media 2

3 means it tends to focus more on selling its core mobile services than fixed/mobile multiplay bundles. Finally, U-verse makes huge investments in exclusive content for its TV unit, and naturally aims to maximize the value of this investment by making the content available to U-verse TV subscribers on all their devices, including PCs, smartphones and tablets. In summary, the key strategic goals of AT&T s multiplay services are Increase subscriptions, revenues and margins and take market share from cable operators through premium U-verse multiplay packages including FTTN-based IPTV, high-speed broadband and VoIP services. Revive the fixed-line business by encouraging migration from declining PSTN-based multiplay services to FTTN-based U-verse packages. Offer more compelling multiplay services than incumbent operators by bundling effectively and capitalizing on AT&T s scale and strength in the mobile market. Use the new exclusive content acquired for U-verse TV services to drive value for U- verse and other AT&T businesses through U-verse Online, U-verse Mobile and other applications. Outside U-verse coverage areas, slow the decline of the traditional fixed business by offering multiplay bundles of PSTN voice, DSL broadband and satellite TV by DirecTV. Business model The importance of multiplay offerings to AT&T s fixed business in general and U-verse in particular means that fixed services are the core of the operator s multiplay strategy. Although wireless is AT&T s largest business, from a multiplay perspective it plays a supporting role by enhancing and broadening access to U-verse fixed services, particularly U-verse TV. But the scale and strength of AT&T s mobile business ensures its role is nevertheless vital in that it can differentiate AT&T s multiplay services, particularly from cable operators that do not have mobile businesses. The importance of multiplay to the fixed segment is reflected in AT&T s multiplay packages, which offer a host of options for each U-verse service namely TV, broadband and voice but do not go into the many mobile services available from AT&T. Instead, customers simply need to prove they are an AT&T mobile customer to qualify for a US$5/month discount on their U- verse multiplay package. This focus on fixed services as the core of multiplay packages, and the supporting role of mobile, is illustrated in fig. 3. Fig. 3: AT&T s key multiplay segments Within its fixed business, AT&T has a host of multiplay offerings, but the most important are those based on its U-verse services, which offer stiff competition to the multiplay offerings of major US cable companies. To make its U-verse multiplay services even more competitive, AT&T recently doubled the duration of promotional rates for certain high-end bundles from 12 to 24 months. This means, for example, that one of AT&T s top quad-play services costs US $161/month (discounted from US$202/month), which delivers a savings of US$984 over the 24 months of the promotional rate and total fees after the discount of US$3,864 over the twoyear period. AT&T has naturally doubled the duration of promotional rates only for its most expensive multiplay packages that is, those that deliver total fees of more than US$2,000 in the two-year period (see fig. 4) Informa Telecoms & Media 3

4 Fig. 4: U-verse s services and selected bundles, Aug-12 AT&T has also recently updated its high-end bundles by including a free U-verse wireless receiver with U-verse multiplay packages based on its U300 TV package and above, in addition to the wired receiver and DVR that is included with most TV packages. AT&T initially launched the wireless receiver in October 2011, in what it described as the industry s first wireless IPTV service. The wireless receiver, which is manufactured by Cisco, is installed along with a customized Cisco VEN401 wireless access point. The access point plugs into the U-verse residential gateway, so it can take U-verse TV content from the gateway and send it via Wi-Fi to the U-verse wireless receiver (see fig. 5). The wireless receiver, which connects via wires to a TV set and power outlet, means TVs no longer need to be by TV outlets so can be placed anywhere there s power and coverage from the Cisco Wi-Fi access point. AT&T typically charges an initial US$49 fee and US$7/month for the U-verse wireless receiver and access point. Fig. 5: U-verse s wireless access point and receiver Although providing more aggressive promotions could hit revenues, the offers are only for new customers subscribing to high-end bundles, so will encourage take-up of those services. AT&T also says it carried out an analysis of the customer lifetime value (CLV) of its multiplay services before launching the new promotions. The strategy is to increase incentives for services with the highest CLV, and to partly offset the revenue impact of the move by decreasing incentives for services with lower CLV. For example, AT&T will be decreasing the duration of promotional pricing for some of its stand-alone DSL services from 12 to six months. The offer of a free U-verse wireless receiver is similar in that it is only for new customers taking a high-end bundle, so it could help increase adoption of those services and overall revenues. The device also dramatically increases customer satisfaction, which in turn reduces churn, AT&T says. In addition, U-verse subscribers currently have an average of two U-verse receivers and if one of them is wireless, it reduces the installation time and costs for new subscribers. Digital Life a new multiplay platform In May 2012, AT&T announced its new Digital Life business, which plans to launch a host of new services for home security, automation and control. The services will be controlled by an AT&T Digital Life platform in homes that will link wirelessly to a number of connected Informa Telecoms & Media 4

5 home devices such as door and window sensors, door locks, smoke alarms, thermostats and appliance-power controls. The platform will also enable end-users to control home systems from any connected computer, smartphone or tablet. Digital Life services will rely on fixed and mobile broadband connectivity, so it is natural to assume that AT&T will offer Digital Life services as an extension of its existing multiplay packages. AT&T stresses, however, that although Digital Life will certainly run on its networks, the services will also work on those of any other carrier. That approach shows that AT&T sees Digital Life as a new and relatively independent platform for growth, and thus one that will develop entirely new multiplay offers such as a bundle of home-security and energyconservation services. The group has not announced a launch date but says service trials started this summer in Dallas and Atlanta. But AT&T is not the first multiplay operator to move into the segment. Comcast, Verizon, Cox, Time Warner Cable and Bright House Networks all have home-automation or security businesses, or both. Comcast launched its Xfinity Home service in Houston in 2010 and says it will be available throughout its footprint by year-end. The service offers a variety of homesecurity, automation and control services, similar to AT&T s planned Digital Life services. Technology strategy One of the key aspects of AT&T s multiplay strategy is using technology to make its TV, broadband, voice and mobile services work better together. The end result is often applications that bring the features of one service to the device of another notably U-verse TV content to the PC, mobile and tablet. This has been a focus for AT&T since it launched U- verse in mid-2006, leading to an increasing number of applications that integrate and add value to multiple services (see fig. 6). Fig. 6: Timeline of selected U-verse milestones and apps U-verse Online, launched in May 2010 and available at provides tiered access to U-verse content, with more than 160,000 titles including video clips and movie trailers open to all viewers, and more exclusive content such as recent movies and sports available only to U-verse subscribers. The site also enables subscribers to manage DVR recordings and settings and check local TV listings. AT&T launched U-verse Mobile in August 2010, and by July 2011 it was available on more than 20 smartphones and four major operating systems. It lets subscribers manage DVR recordings and browse the U-verse program guide (see fig. 7). In addition, subscribers on U-verse U200 TV packages and higher can use U-verse Mobile to download and stream TV shows at no charge for the content, although standard mobile data charges apply Informa Telecoms & Media 5

6 Fig. 7: U-verse Mobile s program-guide screen shot Another milestone in AT&T s application strategy came in October 2011, when it supported the launch of the first third-party applications designed to work with and enhance U-verse TV at no charge. These smartphone and tablet apps include BuddyTV Guide: Provides personalized recommendations, customizable TV guide, show reminders, real-time commenting and extra content. Miso: TV social network. Enables users to share what they re watching with friends and try their favorite shows. TV Foundry: Lets users search for TV content and share it via Facebook and Twitter. Wayin: Enables sharing of comments and photos about programs with other Wayin members. When end-users open one of the apps on their smartphone or tablet, it connects via Wi-Fi to their U-verse receiver and then provides relevant content based on what they re watching on U-verse TV. The third-party applications highlight one of AT&T s strategic advantages in the multiplay market: its significant investment in and appeal to the developer community given its huge base of potential application users, including its 105 million mobile subscribers. In fact, several of the applications above were developed at the AT&T Foundry, which aims to work with third parties to launch new products and services. The Foundry, which has facilities in Palo Alto, CA; Plano, TX; and Tel Aviv, Israel, represents an investment that some of AT&T s multiplay competitors might struggle to match, apart from Verizon, which has a similar program. Another differentiator for AT&T is that all its set-top boxes can link directly to applications via Wi-Fi and no other US pay-tv provider can do the same. This gives AT&T an edge in adding value to multiplay services via companion or second screen applications designed to support, enhance and extend the TV-viewing experience. Market positioning AT&T s multiplay market position is defined by U-verse coverage. In areas where U-verse is available, AT&T is the leading multiplay service provider and has consistently taken market share from its main rivals, typically cable operators. AT&T says U-verse currently passes some 30 million living units within its fixed-line footprint in 22 states. Outside of U-verse coverage areas, AT&T multiplay services based largely on its PSTN network are in decline, in common with similar services from its competitors. The operator offers multiplay services with PSTN voice, DSL broadband and DTH satellite TV from DirecTV (and previously also offered DISH satellite TV services from EchoStar). But these services are struggling in many areas, as illustrated by segmenting AT&T s TV subscribers into U-verse and satellite, with growth in the former offsetting decline in the latter (see fig. 8) Informa Telecoms & Media 6

7 Fig. 8: AT&T, TV subscriptions by segment, 3Q10-2Q12 Results Since U-verse is at the heart of AT&T s multiplay strategy and TV is at the heart of U-verse, U-verse TV subscriptions are one of the best indicators of the success of AT&T s multiplay strategy. By that metric, U-verse is the fastest-growing pay-tv service in the US, adding 2.66 million subscriptions from 1Q09 to 1Q12, ahead of its rival Verizon with 2.14 million additions and DirecTV with 1.92 million. AT&T s performance is in stark contrast to that of leading cable multiplay providers, which have far more pay-tv subscriptions than AT&T but saw their totals decline in the period, with Comcast losing 1.81 million subscriptions from 1Q09 to 1Q12 and Time Warner Cable losing 450,000 (see fig. 9). Fig. 9: US, pay-tv subs, top 10 operators, 1Q09 and 1Q12 AT&T also provides the following highlights of U-verse results in 2Q12: U-verse TV added 155,000 subscriptions in 2Q12 to reach 4.1 million. About 75% of U-verse TV subscribers have triple- or quad-play services from AT&T. ARPU for U-verse triple-play subscribers was US$170 in 2Q12, up slightly year-on-year. In 2Q12, 90% of new U-verse TV subscribers took U-verse Internet and some 50% took U-verse Voice. U-verse revenues were US$2.25 billion in 1Q12, up 38.3% from US$1.63 billion in 2Q11. Strategic threats One of the main strategic threats to AT&T s multiplay strategy is the recent strategic alignment of its main multiplay rivals. In a deal that was announced in December 2011 and approved this month by the US Justice Department, Verizon Wireless will buy wireless spectrum owned by four major cable companies and sell cable services from the companies in areas where Verizon does not sell its own TV and broadband services Informa Telecoms & Media 7

8 The deal is with Comcast, Time Warner Cable, Bright House Networks and Cox, which plan to bundle Verizon Wireless into their multiplay offers as part of the deal. Verizon Wireless will also pay the cable companies US$3.9 billion for their jointly owned AWS wireless spectrum, in a deal that still needs approval from the Federal Communications Commission. Over-the-top players are another strategic threat for AT&T and other pay-tv operators in the US. Although both Apple and Google are rapidly developing OTT TV services, the most established OTT threat in the segment is Netflix, which had 24 million subscribers in the US at end-2q12, well ahead of AT&T s 4.1 million U-verse TV subscribers in the same period. In addition, Netflix charges US$8/month for access to a huge selection of movies and TV shows, compared with the main U-verse TV packages, which range in price from US$57 to US $199 a month. This has naturally led to concerns that U-verse TV subscribers might migrate to Netflix or other OTT players, which in turn led AT&T to launch Netflix-like features on U- verse Online and U-verse Mobile, among other things. Although OTT players have not had a significant impact on U-verse to date, they clearly remain a threat. Another strategic threat is that AT&T s rivals claim superior next-generation fixed technologies, although AT&T disputes the claim. U-verse is based on fiber-to-the-node technology, which relies on ADSL2+/VDSL over copper from nodes to homes. Verizon FiOS, in contrast, is based on fiber-to-the-home (FTTH) technology, which can deliver much higher speeds than FTTN, as can the DOCSIS 3.0 systems deployed by US cable operators. One indication of AT&T s technology position is that the fastest U-verse broadband plan offers 24Mbps downstream, compared with Time Warner Cable, which offers a 50Mbps plan and Verizon FiOS, which tops out at 300Mbps. Certainly AT&T could make a case that 24Mbps is more than enough for most consumers today, and U-verse s position as the fastest-growing multiplay service in the US suggests its technology has not been a disadvantage to date. In addition, technologies such as VDSL vectoring mean U-verse can be upgraded to provide downstream speeds of 100Mbps or more. But the ever-increasing bandwidth required by TV and broadband will make it harder for AT&T to continue outperforming rivals that have invested more in fatter pipes. Conclusions and recommendations Conclusions AT&T s U-verse is the fastest-growing multiplay service in the US AT&T has created a strong multiplay service that has added more pay-tv subscriptions than any of its multiplay rivals in the past three years, including fellow IPTV player Verizon. In 2Q12, AT&T overtook Charter to become the seventh-largest pay-tv provider in the US by subscriptions, and should overtake Cox by year-end to become the sixth-largest provider. On current trends, AT&T will also overtake Verizon by 2015 to claim fifth position in the pay-tv market. The operator has expanded its multiplay business through a combination of advanced fiber-based technology, competitive pricing and innovative applications AT&T U-verse multiplay services have succeeded through a combination of massive investment in U-verse FTTN rollout, competitive multiplay pricing that can undercut that of incumbent cable operators and innovative applications such as U-verse Mobile that make multiplay services more valuable for subscribers. This combination could enable AT&T to continue outpacing its multiplay rivals, although others such as Comcast, DirecTV and Verizon are also focused on application development. The massive mobile business of AT&T is a key strategic asset for developing its multiplay services Although U-verse fixed services are the heart of AT&T s multiplay strategy, mobile is the secret sauce that helps integrate multiplay services and differentiate them from the competition. For example, AT&T s scale and success in the mobile market led it to invest significantly in courting and supporting application developers, which in turn led it to be one of the first multiplay operators to announce third-party applications supporting its TV service. This will continue to be a strategic advantage for AT&T, albeit one that is largely matched by its multiplay rival Verizon. AT&T s new Digital Life business is an ambitious attempt to create entirely new multiplay services AT&T aspires to do nothing less than create a new IP-based operating system for homes, one that can deliver a host of new multiplay services for home security, automation and control. Although the potential demand for the services is huge, the challenge of delivering them is larger still, given the host of different standards, technologies and ecosystems in the segment Informa Telecoms & Media 8

9 AT&T is also playing catch-up to some of its multiplay rivals such as Comcast, which have already launched similar services, a move that will make it harder to differentiate its services. Recommendations AT&T needs to carefully evaluate how to respond to the strategic alliance between Verizon and four major cable companies U-verse competes mainly with cable operators, so the alliance of four major cable operators with Verizon Wireless could make for much stiffer multiplay competition for AT&T. Although at first glance it seems that AT&T needs to respond in some way to maintain U-verse growth rates, its strategic options are limited. One could be a closer relationship with DirecTV, in order to develop more compelling multiplay services outside the U-verse footprint, but the decline in AT&T s current satellite subscription base would make this a high-risk approach. AT&T might also feel that an alliance between multiple operators often fails, and knows that the previous alliance the four cable operators had with Clearwire did fail. So, in the short term, it might be content to wait and see whether the Verizon/cable deal unravels. AT&T needs to provide better integration of mobile into its multiplay packages Although mobile is key to AT&T s multiplay strategy and services, it is not well integrated into the group s multiplay offers. Although customers are rewarded with more discounts as they increase spending on U-verse fixed services, this is not the case for mobile services, where customers simply get a US$5/month discount for subscribing to any AT&T mobile service. Mobile customers on a US$120/month family plan might wonder why they get the same US$5/month multiplay discount as a customer on a US$30/month mobile data plan. Better integration of mobile into multiplay offers could reduce churn for AT&T s highest spenders across fixed and mobile, and encourage migration to higher spending through targeted discounts. Multiplay rivals need to review their application strategies AT&T is using its strength in the mobile market and investment in the application arena to build a lead in applications that make its multiplay services work better together. Certainly its rivals are not standing still, with DirecTV joining forces with Miso before AT&T s deal, Comcast developing its own second-screen technologies in-house, and Verizon offering applications such as Flex View, which rivals U-verse Mobile. But AT&T has an edge on its rivals based on the number of applications it has developed internally, such as U-verse Mobile, and the increasing number of U-verse enabled applications provided by third parties. AT&T s unique position of having all its set-top boxes enabled with Wi-Fi, and thus able to link directly to second-screen applications, is also a concern for rivals. The net result is that other multiplay operators need to ensure that their application strategies and road maps are competitive. All multiplay providers need to continue responding to the OTT threat US multiplay operators recognize that OTT services are a serious threat and have responded by introducing OTT-like services for their subscribers and retaining exclusive rights to premium content such as sports and recent movies. But the huge price gap between US pay-tv services such as U-verse and OTT services such as Netflix means multiplay providers will have to continue to innovate, differentiate and provide clear value for money to fend off the OTT threat Informa Telecoms & Media 9