Why 5G is ‘less exciting’ for consumers, analyst explains
MoffettNathanson Co-founder and Senior Analyst Craig Moffett joins Yahoo Finance Live to discuss fourth quarter earnings for AT&T, where the U.S. went wrong with its 5G rollout, and the outlook for 5G pricing.
JULIE HYMAN: AT&T, as I mentioned before the break, was out with its numbers this morning. And by and large, those numbers beat estimates-- at least, if you look at earnings per share. $0.78 on an adjusted basis beating estimates. It looks like the company's forecast for this year as well leaves it room for it to beat estimates. It was pretty much in line.
The shares, though, are down by 1.1%. Let's bring in Craig Moffett, MoffettNathanson co-founder and senior analyst, to make some sense of this. I mean, it feels like it was sort of another maybe noisy quarter from AT&T. There's a lot of outstanding issues, including what's going on with WarnerMedia. There's the 5G rollout that's sort of hanging over them. What did you make of the results overall?
CRAIG MOFFET: Yeah, look-- thank you for having me, on by the way. It's very hard to make sense of these numbers because there are so many moving pieces. Remember, they have divested DIRECTV. They're in the process of divesting Latin American DIRECTV under the name of Rio. They've sold their advertising business. They're waiting for the close of the sale of all of WarnerMedia.
So there's so many different pieces that when you look at the numbers initially, the as-reported numbers for any category, you're not really seeing a picture of what the company is going to look like. Cut through all the noise, and what you're left with is a company that on a pro forma going forward basis-- just what's going to be left after all the divestitures-- you've got 0.0% organic revenue growth, and you've got 0.0% organic EBITDA growth in the most inflationary time that we've had in the macroeconomy in decades.
BRIAN SOZZI: So Craig, 0% growth, to me, as a former analyst, I don't want to hear that. That does not sound good. You know, what is management--
CRAIG MOFFET: It's awful.
BRIAN SOZZI: What is it that they need to do? How do they get investors after they spin off these assets? How do they drum up enthusiasm for the stock?
CRAIG MOFFET: I have no idea, you know? Because look, right now, the wireless business-- and the wireless business, to be fair, is doing better, right? It's at least growing revenues-- 4.6% service revenue, which isn't terrible. All that's coming from subscriber growth, because they're being very promotional. So RPU, revenue per user, is actually down a little bit, again, in a very inflationary environment.
So the wireless business isn't awful. But if you look forward, they're going to have a network disadvantage relative to T-Mobile. And T-Mobile not only will have a better network, but it also has much lower prices. And you're competing against the cable industry that's now offering wireless at much lower prices than AT&T. So it's hard to be particularly optimistic about AT&T's growth prospects in wireless.
And the rest of the business is worse. The commercial wireline business that nobody pays much attention to, but it's 22% of the business after the WarnerMedia spinoff, is now shrinking at more than 5% a year. You can't outrun that. That's shaving 100 basis points off of top-line growth. And the consumer wireline business that gets a lot more attention, with fiber, is also flat revenue and shrinking EBITDA. So again, it's just really hard to find anything here that's likely to get people excited.
JULIE HYMAN: Well, speaking of things to get people excited-- I'm going to lump together AT&T and Verizon for just a second-- because 5G was supposed to be the greatest thing since sliced bread, right? And this was the thing that was going to get consumers excited, and get them signing up, and it hasn't really felt like it's worked out that way, Craig. What happened?
CRAIG MOFFET: Well, first, to be fair, 5G was and probably still is more about enterprises than it is for consumers. It's nice, as consumers, to think about how fast our phones are going to download data, but the value proposition for consumers is a little squishy. So there was supposed to be a lot in 5G for enterprises-- things like IoT, or internet of things, with thousands and thousands and thousands of small devices connected to the net, private networks for factory of the future, and people talked about autonomous vehicles, and things like that. The problem with most of those enterprise fantasies around 5G is that they all bring different competitors to them.
And mobile edge compute is one of the sort of buzzwords around 5G wireless. Mobile edge compute is essentially what it sounds like. It's computing out at the edge of the network. Well, if that sounds a lot like cloud, it's because it is a lot like cloud. And so you have to ask yourself, are Verizon and AT&T going to compete successfully in that business versus Amazon and Microsoft? Probably not.
In private networks, the problem is, well, they're private networks. They are essentially more akin to a Wi-Fi network for an enterprise than they are for a public network. And therefore, they're probably not significant revenue pools for the carriers.
So 5G maybe is a little bit less exciting than people would have hoped for consumers. But I think the real issue is whether there are real revenues for businesses. And that, to me, is a bigger question, and still very much a question.
JULIE HYMAN: And in a recent note, to go back to the issue of pricing, you wrote about that, really, more than 5G right now, the issue for these carriers is these price wars that you alluded to. I mean, is it a better time to be a consumer of wireless service now than it has been in a long time because of this? And how long is that going to last?
CRAIG MOFFET: Well, look, when Sprint and T-Mobile merged, the thesis for the industry from a lot of people was, this is fantastic. We're finally going from four competitors down to three. That should be good for pricing. Unfortunately, we're not really going from four competitors down to three. We're arguably going from four competitors up to five.
The cable industry has come in and is now stronger and more competitive in wireless than Sprint was. So there's probably been a net intensification of competition. And Dish Network is around the corner, building a network with its own spectrum and with an MVNO agreement from AT&T that'll add to the competition even more.
So you've got more downward pressure at a time when you have lots of CapEx required for building out 5G networks. You have more downward pressure on pricing. AT&T has sort of led that spiral, by the way, by being very aggressive with promotionality, and giving away free phones to existing subscribers, which is something we hadn't seen since 2013 or so. And that has pulled the industry back into this very hyper-competitive pricing environment.
JULIE HYMAN: Bad for them, perhaps good for us. Craig Moffet, thanks so much. MoffettNathanson co-founder and senior analyst. It's always great to get time with you, Craig. Appreciate it.