Telecoms Reveal Competing iPhone Profit Theories
In the face of AT&T's options and its comparative financial and network position, Moffett writes, "Starting a spending war is AT&T's best option," of the company's wireless capex budget through 2015.
The numbers are striking, according to Moffett's calculations.
In 2013, AT&T is expected to spend over $12 billion on its wireless network, roughly 30% more than competitor Verizon and 176% more than Sprint, who is already playing catch up when it comes to network strength.
Meanwhile, between 2009 and 2013, AT&T is projected to spend $57 billion cumulatively, compared with $54 billion at Verizon, $17 billion at T-Mobile and just $14 billion at Sprint.
For investors who have recently cheered AT&T's growing profit margins, free cash flow and returns of capital, the consequences may be negative. Meanwhile, the issue of iPhone subsidies - an earnings drain Moffett's been worrying about through 2012 - looks to rear its head in the fourth quarter.
AT&T now expects to sell 10 million smartphones in the fourth quarter, in a forecast that augurs poorly for wireless profit margins. On larger than expected smartphone sales, Guggenheim Partners analyst Shing Yin cut AT&T's price target and noted that roughly 8 million subsidized iPhone sales could reduce the company's wireless margins for the year below 40%.
On the surface, it would appear AT&T is heading down a misguided path of spending and more spending when it comes to Apple smartphones and tablets. That would miss Moffett of Bernstein's wider point.
In spite of what appear to be diverging strategies and earnings profiles heading into 2013, Moffett sees reason to believe AT&T is simply being forthcoming about the true capital costs telecoms face as they prepare for growing smartphone and data usage.
The bigger question for investors may be whether strategies, for instance Sprint's unlimited data plans and smaller-than-peer wireless network spending, reflect reality.
"Capital spending per post-paid equivalent subscriber, already much higher at AT&T than peers, is pulling away. And once again, Sprint's chronic under-spending over the past four years is striking, particularly in light of its open courtship of super heavy users as a consequence of its heavy promotion of its "unlimited" data plans,"writes Moffett of the differences between AT&T and Sprint.
"This raises obvious questions about the widely held expectation that capital spending can return to below-industry levels after just two years of
AT&T's spending plan in the context of its competitors raises the question of whether capex -- a perennial investor fear in the telecom sector "becomes a key industry issue in 2013 as carriers disclose just how much it will cost to serve surging demand for smartphone handsets and service.
For more on AT&T and Verizon, see why the iPhone drove telecom paranoia in 2012 .