How AT&T Makes Money
For nearly a century, AT&T Inc. (T) was one of the largest corporations not just of its kind, but in all of existence. It was as large and influential as Apple Inc. (AAPL) or Exxon Mobil Corp. (XOM) is today. AT&T’s telephone business, which generations of people have since taken for granted, was at least as revolutionary a development as the internet. The idea of being able to converse with someone live, without having to be in each other’s physical presence, not only transformed daily life but made the company an unending stream of money.
In 1918, AT&T received a government-sanctioned monopoly as the sole provider of phone service throughout most of the United States. Then in the early 1970s, the federal government changed its mind and filed an antitrust suit against the company. The case was one of the largest and most convoluted in history and took nearly a decade to resolve. AT&T ended up divesting itself of its monopoly, which led to the creation of regional telephone companies, also known as “Baby Bells.” In 2005 one of those babies, Southwestern Bell, ended up purchasing its erstwhile parent. Southwestern Bell then rebranded itself as AT&T, indirectly leading to the creation of a company that can trace its roots back to the 19th century but that we know today mostly as a mobile phone service provider. (For related reading, see: What Is A “Baby Bell?”)
Today, with a market capitalization of $235.54 billion, Dallas-based AT&T is as dominant in absolute terms as it’s ever been. Still, you might be surprised to know that your and your neighbors’ monthly cell phone bills are responsible for only part of that domination.
A Company in Four Parts
The company’s largest segment actually has little to do with individual phones. Business Solutions is the largest of AT&T’s four segments, and provides services used by companies, governments, and other organizations. In today’s market, having fast and reliable internet is a must in corporate offices, and AT&T makes a killing providing WiFi and more. In their 2017 annual report, AT&T reported that the Business Solutions segment generated $69.4 billion in revenue.
As for AT&T’s three smaller segments, the second largest is the Entertainment Group, which includes DirecTV, and provides vudei, internet, voice communication and advertising services. The main moneymaker in this segment is U-verse, if you use this service for your tv or internet, this is where your money is going. This segment also handles the few customers still on landlines. This segment makes up 32% of AT&T’s total revenue ($50.7 billion).
The third largest segment is Consumer Mobility, which accounted for 20% of the company’s 2017 revenue ($26 billion). This is the service we’re all familiar with. If you have an AT&T plan on your phone, this is the segment where that money goes. As of the end of 2017, the company has 141.6 million wireless subscribers.
AT&T’s smallest segment is their International Business. It mainly consists of Latin American operations and Mexican operations, which the company acquired in 2015. The company offers phone, video, and data plans to citizens of the region. AT&T announced its international segment made more than $8.3 billion in revenue in 2017, or 5% of the company’s total revenue.
The Smart Business of Smartphones
If enabling people to make mobile voice calls was all AT&T did, it would sell nothing but cheap flip phones. The company not only prioritizes the sale of data plans, but also the sale of the vehicles with which to use them. In other words, smartphones. There’s a reason why AT&T can sell a 64GB iPhone that normally retails at $850 for only $400, and that reason is not to be altruistic to customers. A $450 reduction in upfront costs pays for itself several times over during the months and years that an AT&T customer uses such a phone to access data. Allowing more and more people to access that data comes with negligible marginal costs to AT&T.
Time Warner Merger
AT&T and Time Warner (TWX) announced in 2016 that they intended to merge into a mega-company. The deal signaled that AT&T would pay $85 billion for the media company, with a 50/50 split in cash and stock. The announcement shocked the business world, as it would mean AT&T would control Warner Bros, HBO, CNN, and countless other assets, radically changing the landscape of the entertainment industry.
In November of 2017, the U.S. Justice Department sued the companies, setting the stage for one of the most closely watched antitrust battles in modern times. The lawsuit is considered odd, as AT&T and Time Warner are very different companies, which would normally be fine to merge as they wouldn’t create a monopoly. The Justice Department has previously demanded that Time Warner divest some of its assets, like CNN, for the merger to go through. AT&T claims that the lawsuit may come from Donald Trump, who is a vocal critic of CNN, using his position as President to punish CNN for reporting damaging information about the Trump Administration.
The historic lawsuit went to trial on March 19, 2018. Almost three months later on June 12, 2018, Judge Richard Leon ruled in favor of AT&T.
Other Recent Acquisitions
Just two weeks after this big win, AT&T announced the acquisition of digital advertising technology and analytics company AppNexus reportedly in a deal worth $1.6 billion. “Ad tech unites real-time analytics and technology with our premium TV and video content,” said AT&T CEO Brian Lesser.
Just a month later, the company also unveiled its plans to acquire AlienVault, a privately-held company based in San Mateo, California. Through this acquisition, AT&T hopes to expand threat detection and response to AT&T Business Customers. Both companies have approved the deal. Although terms of the deal remain undisclosed, AT&T did share that the deal should not have a material effect on the company’s results. AT&T expects the transaction to close in the third quarter of 2018.
According to AT&T, the acquisition will let the company expand security solutions portfolio and offerings to millions of small and medium-sized businesses.
The Bottom Line
AT&T has enjoyed one of the most successful runs in the history of American business, yet still manages to stay technologically up-to-date, relevant and vital. That’s tough for any company to pull off, but any one that does can assure itself of huge profits for the foreseeable future.
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