How AT&T Makes Money

For nearly a century, AT&T Inc. (T) was considered one of the largest corporations — not just in telecommunications, but across the entire market. At its height, AT&T was just as, if not more, influencial than Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM) are today. AT&T’s telephone business has since been taken for granted by generations of consumers, but it's important to remember that cellular technology was at one point as revolutionary as the internet or artificial intelligence. 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.

On Dec. 21, 2018, AT&T launched its mobile 5G network in 12 cities around the United States, becoming the second major telecommunications provider to do so after Verizon. The first wave of 5G cities includes Atlanta, Charlotte, Raleigh, Dallas, Houston, Indianapolis, Jacksonville, Louisville, Oklahoma City, New Orleans, San Antonio, and Waco. AT&T has announced that it will release two Samsung 5G phones in early 2019.

In 1918, AT&T received a government-sanctioned monopoly to become 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.

Today, with a market capitalization of $216.81 billion, Dallas-based AT&T is as dominant 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 the company's success.

The company's largest segment actually has little to do with 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 companies with wifi connectivity and more. In their 2017 annual report, AT&T reported that the Business Solutions segment generated $69.4 billion in revenue. 

AT&T's second-largest segment is the Entertainment Group, which includes DirecTV, and provides video, internet, voice communication, and advertising services. The main moneymaker in this segment is U-verse, if you use this service for your television 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 had 141.6 million wireless subscribers. 

AT&T's smallest segment is 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 those regions. AT&T announced its international segment made more than $8.3 billion in revenue in 2017 or 5% of the company's total revenue. 

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.

 AT&T and Time Warner 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 anti-trust battles in modern times. The lawsuit was considered odd at the time because AT&T and Time Warner operate in different business segments and a merger would not create a monopoly. The Justice Department had previously demanded that Time Warner divest some of its assets, like CNN, for the merger to go through. AT&T claimed 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. the DOJ decided to appeal to the U.S. District Court's decision on Aug. 6, 2018. On Dec. 7, 2018, representatives from AT&T, Time Warner, and the DOJ made their cases before a three-panel judge in the Washington D.C. Court of Appeals. To be clear, the merger has already happened. That means the DOJ is effectively asking the D.C. Court of Appeals to "unmerge" the two companies seven months after they combined operations.

Shortly after Judge Leon's first ruling on June 12, 2018, AT&T announced the acquisition of digital advertising technology and analytics company AppNexus in a deal reportedly 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 one 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.

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 anyone that does can assure itself of huge profits for the foreseeable future.