AT&T has a Problem: Dividends Exceed Cash Flow

AT&T undoubtedly will announce higher earnings per share, year over year, for the first quarter of 2013.

But there is trouble brewing. In 2012, AT&T dividend payments were nearly $4 billion more than its free cash flow. And AT&T sees free cash flow being some $5 billion lower in 2013. Something has to give. 

The problems largely are attributable to the fixed network segment, which accounts for roughly 47 percent of the company's total revenues.  From 2008 to 2012, the fixed network segment's revenues declined from $67.9 billion to $63.5 billion to $61.2 billion to $60.1 billion to $59.6 billion in past years. 

Free cash flow also might have peaked in 2012, when AT&T reported $19.4 billion of FCF. In 2013, AT&T forecasts free cash flow of a bit over $14 billion, a level more consistent with 2010 and 2011 when FCF was $15.7 billion and $14.6 billion, respectively.

In 2012, AT&T spent $12.8 billion to buy back shares, and another $10 billion to pay dividends. Company-wide, AT&T increased long-term debt by $5 billion in 2012. You do the math. 

Municipal Broadband Provider Greenlight to Go 1 Gbps

Greenlight, the municipal service provider in Wilson, North Carolina, has been selling video entertainment, voice and Internet access for some time, but now plans to add 1 Gbps symmetrical service as well. 

Pricing details are not available, but at present, the 100-Mbps service sells for $150 a month. 

U.K. EE Finds LTE a Mixed Success

Major capital spending programs undertaken by service providers have implications. Such programs, even when necessary, divert cash that might have been used some other way, for example. Long term, the investments often are quite necessary. In the near term, the programs can hit earnings. 

Also, near term, investment sums can vastly outweigh the upside from new services, customer gains or boosts to average revenue per account. That seems to be the case for U.K.-based EE, which launched Long Term Evolution services using existing 1.8 GHz spectrum. 

First quarter 2013 revenues fell by 5.4 percent, year over year.  The launch of LTE services also has had other effects, such as boosting the amount of money EE now spends on device subsidies. 

Granted, it is too soon to make a full assessment. EE is early in its launch of 4G service, and LTE customer penetration is only about 1.2 percent. 

Longer term, higher LTE revenue is expected. The issue is how much higher revenues can be lifted, and how operating costs might change. 

Few think LTE will prove a "problem" longer term, as users switch to use of smart phones and smart phone apps that consume more bandwidth. That should translate into significantly higher user spending on data services. 

On the other hand, the full business case has new device subsidy and small cell implications. Those elements will offset the higher revenue. Nobody seems to think the net result will be anything but positive. But "how positive" will be a bigger issue as competition intensifies. 

Netflix Now Bigger than HBO

Netflix, which ended 2012 with 27.15 million domestic subs, added just over two million net new subscribers in the first quarter 2013 results. 

 HBO ended 2012 with 28.7 million subscribers.  That means Netflix finally has more subscribers than HBO. 

Nor is it possible to describe Netflix as a "DVD by mail" service, given the overwhelming preference for streaming delivery. These days, it is the most successful streaming service. None of which means its challenges are over. 

You might also say Netflix is the most popular "cable network" as well.  

Netflix has faced strong doubts about its prospects several times in the past. But Netflix has surmounted every set of those challenges, most crucially questions about its business model.

Some would say the next set of challenges for Netflix will involve scaling its original programming operations and managing the heavier financial requirements that will entail. There are doubters. There always are, where it comes to Netflix. 

46% of All Smart Phone Shipments in 2018 Will be "Low End"

At some point, it has been clear, there will be very little difference between "phone sales" and "smart phone sales."

As you might also guess, shipments of lower-cost smart phones will grow the most. Devices selling for less than US$250 will grow from 259 million units in 2013 to 788 million units in 2018, according to ABI Research.

Mid-range devices costing up to $400 are expected to grow from 635 million to 925 million units by 2018.

Though observers might not have thought the point would be reached so quickly, in many emerging markets, voice profits already are low enough that selling data plans will make the difference between success and failure, in some cases.

Verizon's device Payment Plan Isn't A Great Deal

People who routinely replace their devices about every year might like Verizon's device payment plan, which separates installment payments for a device costing at least $350 from the service contract. 

But users looking to save money will be disappointed. The service plan is not discounted, so the installment plans don't appear to save users any money. In fact, since there is a finance charge, people likely will wind up spending more. 

The only advantage is that users can buy another new device in a year. Most people probably will just want to buy a subsidized device and take the contract. 

Maybe Video Won't Crash the Mobile Internet

Bandwidth growth shows it is so difficult to accurately and consistently forecast the volume of change, even when the direction of change is clear enough. Everybody expects bandwidth consumption to keep growing. But we rarely get the magnitudes right.

Nor do we necessarily and normally hit the limits linear extrapolation suggests will be encountered, because actors behave rationally. Faced with higher prices for a product, they substitute other products, especially when suppliers encourage such substitution.

One might argue the potential explosion of video bandwidth will not happen in precisely the way observers and forecasters now predict, because users and suppliers will change their behavior. In other words, when there is no financial penalty for using bandwidth to watch video, people will watch. 

When there are incremental costs, behavior will change. And that is why, in the end, even mobile video will not crash the networks, though one could make a decent argument for that eventuality, extrapolating in a linear way from today's trends.

One might explain the Internet bubble demand forecasting failures. There were false signals being sent, in part because of fraudulent activity on the part of bandwidth sellers. But even when that is not the case, we tend to overestimate the degree of bandwidth demand growth.

At least one reason is that people and service providers have learned to act in ways that alter behavior. In other words, given service provider and end user self interest, mobile bandwidth growth has slowed because both suppliers and consumers benefit financially by doing so.

By 2017, almost 21 exabytes of mobile data traffic will be offloaded to the fixed network by means of Wi-Fi devices and femtocells each month, Cisco estimates. 4G Americas says Wi-Fi offload of mobile traffic is at 35 percent today in the United States and is estimated to be 68 percent by 2016.

Without Wi-Fi and femtocell offload, total mobile data traffic would grow at a compound annual growth rate of 74 percent between 2012 and 2017 (16-fold growth), instead of the projected 66 percent CAGR (13-fold growth), 4G Americas says.

Cisco notes that tthe global average for daily data consumption over Wi-Fi is four times that of cellular, averaging 55 MBytes per day for Wi-Fi, and 13 MBytes for cellular.

 Average Daily Wi-Fi and Mobile Data Consumption

Some think the same sort of trend ultimately will characterize mobile broadband bandwidth growth rates as well, In fact, there is little reason to doubt that future trend, given historical precedents.

In March 2011, for example, AT&T projected that data bandwidth growth would be on the order of eight to 10 times over then-current levels between the end of 2010 and the end of 2015.

That forecast appears to be based on an expectation that volumes would roughly double in 2011 and then increase by a further 65 percent in 2012.

Instead, AT&T seems to be seeing something like 40 percent annual growth. To be sure, 40 percent annual growth is significant. It means bandwidth consumption doubles about every two to three years.

Cisco estimates mobile broadband grew about 70 percent in 2012, and will grow at a compound annual growth rate of 66 percent from 2012 to 2017.

Some believe Wi-Fi offload will slow the rate of mobile broadband growth. On the other hand, even such offloading, at high rates of perhaps 80 percent, would slow the rate of growth by about 50 percent.