Under the Spotlight Wall St: AT&T Inc. (T)
One of the first players in the telecom business, AT&T still remains a leading participant in the sector. Let’s put it Under the Spotlight.
Founded by Alexander Graham Bell, inventor of the telephone himself, AT&T ($T) was a forerunner of telecommunications. Bell's invention revolutionised the way people communicated and marked the beginning of the company’s long history of innovation and technological advancement. In 1885, Bell's company, the American Bell Telephone Company, merged with several other small telecommunications companies to form AT&T: American Telephone and Telegraph Company.
In its early years, AT&T focused on building a nationwide network of telephone lines, investing heavily in creating infrastructure that would become the backbone of the American economy. The company built a network of long-distance lines, which connected major cities and towns across the country. This allowed people to make long-distance calls for the first time, and greatly expanded the reach of the telephone.
Investing in infrastructure is extremely expensive and doesn’t always pay off, but for this telecom giant, it paid off big time: in 1913, AT&T was given a government-sanctioned monopoly on the telephone industry. This allowed the company to control all aspects of the telephone business, including the manufacture, sale, and operation of telephone equipment. Thanks to this monopoly, Americans would often refer to the giant as ‘Ma Bell’, short for ‘Mother Bell’.
The idea factory
Holding a monopoly can lead to stale business practices, since without competition, there’s no need for innovation. Well, in the case of AT&T, this proved to be wrong. In 1925, the company established Bell Labs, a subsidiary focused on R&D that would be responsible for a series of technologies we still use to this day.
Among some of Bell Labs biggest inventions are the transistor, invented in 1947 and revolutionising the field of electronics; in 1954, the first solar cell, that converts sunlight into electricity; fibre optics, in 1960, which made it possible to transmit data over long distances using light and is now used by telecoms worldwide; and also the Unix operating system and the C and C++ programming languages used by programmers worldwide.
The company’s monopoly would last for nearly 60 years, until it was broken up by the U.S. Government in the 1970s, due to antitrust laws. The breakup resulted in the creation of several new companies, including the "Baby Bells" which were responsible for local telephone service, while AT&T retained its long-distance and research and development divisions.
Among the Baby Bells, was Bell Atlantic, that eventually would become Verizon ($VZ), USA’s biggest wireless provider, with over 170 million customers, and AT&T’s biggest competitor. Bell Labs would be acquired by Nokia ($NOK) in 1984, but the period of divestment wouldn’t last forever.
In 2015, AT&T would acquire the satellite giant DirecTV for US$48.5b, and in 2016 it acquired Time Warner for US$108.7b. However, the synergies between the businesses didn’t turn out to be great and in 2021, AT&T would decide to spin off both companies in order to take a closer focus on its core business.
Nowadays, AT&T is more engaged than ever towards the growth of its fibre and 5G operations, which accounted for more than US$35b and US$81b of its revenue in FY22. Last year, this objective was achieved, as the firm added 2.9 million postpaid phone customers, totalling 69m, as well as 1.2 million AT&T fibre subscriptions, reaching 7.2m Americans.
The company estimates that 50m+ American citizens still lack access to fibre, and hopes to address this market, reaching 30m customers by 2025. With gross profit margins well above 50%, it’s no wonder that AT&T is looking to expand this customer base.
Investing in telecom infrastructure is expensive, and AT&T holds over US$132b in debt, but due to its high profitability, this number has been falling: in 2022 the company reduced their debts by over US$23b, while still generating US$14.1b in free cash flow. For FY23, AT&T expects growth of revenue in the 4%-5% range, with free cash flow exceeding US$16b. One might think that the rapid pace of technological change could make it difficult for AT&T to keep up with the latest trends, but with more than a century of history filled with innovation, the company might still continue as one of the industry’s leaders.
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