AT&T Puts Limits on Unlimited Plan

Given the massive demand for wireless data services thanks to Apple’s (AAPL - Analyst Report) iPhone, AT&T Inc. (T - Analyst Report) seems to be falling short of bandwidth. The company has formed a new policy of curtailing data speeds to better manage its data services on its network.

For an unlimited plan user through AT&T’s smartphone’s downloading data would now mean a struggle as the company has axed approximately 99% of the data speed in an attempt to limit the “unlimited” services.

The company’s new act is expected to upset around 17 million of its customers under the unlimited plan. Complaints have already started pouring in for speed slowdown after using only 1 to 2 gigabytes by customers. However, on the legal front, the company is playing fair as it has not debarred the unlimited plans as per the contract but only curbed the speed limit which was in any case, not a promised affair.  

This has rendered smartphones worthless for most of the unlimited data users and the only remedy left for them is to switch to a tiered plan. This might sound pretty expensive for those who remain heavy users on unlimited plan but for some (wherein one uses around 2 to 3GB per month) the net impact would be neutral as the company offers tiered plan at a same price for limited data usage. 

We believe that this can be a temporary relief for AT&T to better manage network congestion in busy areas but can not remain the permanent solution in a highly competitive wireless market. Although similar steps have been taken by other top tier company’s like Verizon Communications (VZ - Analyst Report), the approach seems much relaxed compared to AT&T. Verizon is only cutting down by the minimum requirement to keep the networks free of congestion.

The issues now surfacing over bandwidth shortage raises doubts over the efficacy of the present wireless market, ready for the ongoing boom in the wireless data space.  Over the last year, wireless carriers like AT&T, Verizon and Sprint Nextel (S - Analyst Report) have registered an upsurge in their data service revenues.

The companies are in a fray to obtain spectrum licensing and lure customers with deploying 3G and 4G services across their markets.  Most of the investments made are directed toward technological upgrade and entry into new markets as compared to capacity into the existing markets leading to poor standards of services.

Going back to AT&T, the company is working on a number of strategies to tap opportunities in the wireless data market and currently operates the nation's fastest mobile broadband network. By 2013, AT&T intends to extend its 4G network to the entire American population.

These plans only indicate technological advancement by the company but not many have been disclosed to resolve the current network capacity shortfall by the company. How far these issues can eventually impact the financial results of the company is yet to be measured but if these problems continue to persist we believe AT&T may lose customers impacting its churn rates.

The company is already competing with the aggressive pricing plans of Verizon and Sprint. Moreover, smaller wireless carriers such as Deutsche Telekom’s T-Mobile, MetroPCS Communication (PCS - Analyst Report) and Leap Wireless (LEAP - Analyst Report) are also offering cost effective unlimited voice and data plans. This may negatively impact AT&T’s high-end handset sales and result in subscriber retention challenges.

We maintain our long-term Neutral recommendation on AT&T, supported by a Zacks #3 Rank (Hold).

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