REG - AT & T Inc. - 2015 10-K <Origin Href="QuoteRef">T.N</Origin> - Part 4
01/04/2016 16:03
- Part 4: For the preceding part double click ID:nRSZ3512Qc
Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number
of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for
each month of that period.
Operating revenues increased $521, or 0.7%, in 2015 and $2,959, or 4.4%, in 2014. Revenue growth was driven by wireless
revenues and continued growth in fixed strategic business services, partially offset by continued declines in our legacy
voice and data services and foreign exchange pressures.
Wireless service revenues increased $505, or 1.7%, in 2015 and $486, or 1.6%, in 2014. The revenue increases reflect
smartphone and tablet gains as well as customer migrations from our Consumer Mobility segment.
Business wireless subscribers increased 13.1%, to 73.7 million subscribers at December 31, 2015 compared to 14.0%, to 65.1
million subscribers at December 31, 2014. Postpaid subscribers increased 6.9% in 2015 compared to 10.7% in 2014 reflecting
the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing
competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU)
and lower churn, increased 26.8% in 2015 compared to 22.2% in 2014 reflecting growth in business customers using tracking,
monitoring and other sensor-embedded devices on their equipment.
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and
improve margins. Business wireless postpaid churn increased to 0.99% in 2015 from 0.90% in 2014 and 0.89% in 2013.
Fixed strategic services revenues increased $1,244, or 12.9%, in 2015 and $1,222, or 14.5%, in 2014. Our revenues, which
were negatively impacted by foreign exchange rates, increased in 2015 and 2014 due to: Ethernet increases of $389 and $340,
U-verse services increases of $247 and $170, Ethernet access to Managed Internet Services increases of $190 and $163 and
VPN increases of $116 and $359.
Legacy wired voice and data service revenues decreased $1,838, or 9.3%, in 2015 and $1,812, or 8.4%, in 2014. Traditional
data revenues in 2015 and 2014 decreased $1,040 and $1,318 and long-distance and local voice revenues decreased $797 and
$475. The decreases were primarily due to lower demand as customers continue to shift to our more advanced IP-based
offerings or our competitors.
Other service revenues decreased $302, or 7.8%, in 2015 and $18, or 0.5%, in 2014. Other service revenues include
project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing,
government professional service and customer premises equipment. The declines in 2015 and 2014 are primarily due to lower
project-based and equipment revenues, as well as impacts from foreign exchange rates.
Wireless equipment revenues increased $912, or 13.0%, in 2015 and $3,081, or 77.8%, in 2014. The increase was primarily due
to the increase in handsets sold under our AT&T NextSM (AT&T Next) program and the increase in sales of higher-priced
smartphones.
Operations and support expenses decreased $880, or 1.9%, in 2015 and increased $2,384, or 5.5%, in 2014. Operations and
support expenses consist of costs incurred to provide our products and services, including costs of operating and
maintaining our networks and personnel costs, such as compensation and benefits.
Expense decreases in 2015 were primarily due to:
· Lower commission costs of $995 primarily due to lower average commission rates and fewer upgrade transactions.
· Lower employee-related charges of $508 resulting from workforce reductions and other cost initiatives.
· Reductions of $269 in access costs, primarily due to lower interconnect, roaming and traffic compensation costs.
· Lower customer service costs of $146 primarily resulting from our simplified offerings and increased efforts to
resolve customer inquiries on their first call.
Partially offsetting the decreases in 2015 were:
· Higher wireless handset insurance cost of $370 resulting from higher claim rates and costs per claim.
· Increased equipment expense of $304 due to the continuing trend of customers choosing higher-cost devices.
· Higher bad debt expense of $173 resulting from a higher AT&T Next subscriber base.
Expense increases in 2014 were primarily due to:
· Increased equipment expense of $1,779 due to increased sales and the continuing trend of customers choosing
higher-cost devices.
· Network system costs increased $315 due to increased lease fees, higher maintenance and energy costs resulting from
the increase in the number of cell sites and expenses related to our network enhancement efforts.
· Higher wireless handset insurance cost of $159 resulting from higher claim rates and costs per claim.
Depreciation expense increased $434, or 4.6%, in 2015 and $390, or 4.4%, in 2014. The increases were primarily due to the
increase in ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets.
Operating income increased $967, or 6.3%, in 2015 and $185, or 1.2%, in 2014. Our Business Solutions segment operating
income margin was 23.0% in 2015, compared to 21.8% in 2014 and 22.5% in 2013. Our Business Solutions EBITDA margin was
36.8% in 2015, compared to 35.1% in 2014 and 35.8% in 2013.
Entertainment Group
Segment Results
Percent Change
2015 2014 2013 2015 vs. 2014 2014 vs. 2013
Segment operating revenues
Video entertainment $ 20,271 $ 6,826 $ 5,810 - 17.5 %
High-speed Internet 6,601 5,522 4,219 19.5 30.9
Legacy voice and data services 5,914 7,592 9,667 (22.1) (21.5)
Other service and equipment 2,508 2,293 1,846 9.4 24.2
Total Segment Operating Revenues 35,294 22,233 21,542 58.7 3.2
Segment operating expenses
Operations and support 28,345 18,992 17,943 49.2 5.8
Depreciation and amortization 4,945 4,473 4,815 10.6 (7.1)
Total Segment Operating Expenses 33,290 23,465 22,758 41.9 3.1
Segment Operating Income (Loss) 2,004 (1,232) (1,216) - (1.3)
Equity in Net Income (Loss) of Affiliates (4) (2) - - -
Segment Contribution $ 2,000 $ (1,234) $ (1,216) - (1.5) %
The following table highlights other key measures of performance for the Entertainment Group segment:
Percent Change
(in 000s) 2015 2014 2013 2015 vs. 2014 2014 vs. 2013
Video Connections
Satellite 19,784 - - - -
U-verse 5,614 5,920 5,257 (5.2) 12.6
Total Video Connections 25,398 5,920 5,257 - 12.6
Video Net Additions 1
Satellite 240 - - - -
U-verse (306) 663 889 - (25.4)
Net Video Additions (66) 663 889 - (25.4)
Broadband Connections
IP 12,356 11,383 9,484 8.5 20.0
DSL 1,930 3,061 4,829 (36.9) (36.6)
Total Broadband Connections 14,286 14,444 14,313 (1.1) 0.9
Broadband Net Additions
IP 973 1,899 2,266 (48.8) (16.2)
DSL (1,130) (1,768) (2,103) 36.1 15.9
Net Broadband Additions (157) 131 163 - (19.6)
Retail Consumer Switched Access Lines 7,286 9,243 12,013 (21.2) (23.1)
U-verse Consumer VoIP Connections 5,212 4,759 3,701 9.5 28.6
Total Retail Consumer Voice Connections 12,498 14,002 15,714 (10.7) % (10.9) %
1 Excludes acquisition-related additions during the period.
Operating revenues increased $13,061, or 58.7%, in 2015 and $691, or 3.2%, in 2014. Our July 2015 acquisition of DIRECTV
was largely responsible for higher revenues beginning in the third quarter of 2015. Also contributing to the increases was
continued strong growth in consumer IP broadband and U-verse video, which more than offset lower revenues from legacy voice
and data products.
Video entertainment revenues increased $13,445 in 2015 and $1,016, or 17.5%, in 2014. The 2015 increase was primarily
related to our acquisition of DIRECTV. With our acquisition of DIRECTV, we are now focusing our sales efforts on satellite
service as there are lower content costs for satellite subscribers. U-verse video revenue increased $932 in 2015. The 2014
increase was primarily due to a 12.6% increase in U-verse video connections, when compared to 2013.
High-speed Internet revenues increased $1,079, or 19.5%, in 2015 and $1,303, or 30.9%, in 2014. When compared to 2014, IP
broadband connections increased 8.5%, to 12.4 million connections at December 31, 2015; however, 2015 net additions were
lower due to fewer U-verse sales promotions in the year and churn of video customers, some of whom also purchased broadband
service. When compared to 2013, IP broadband connections increased 20.0%, to 11.4 million connections at December 31,
2014.
Legacy voice and data service revenues decreased $1,678, or 22.1%, in 2015 and $2,075, or 21.5%, in 2014. The revenue
decreases were due to a $1,083 and $1,367 decrease in long-distance and local voice revenues, respectively, and a $593 and
$710 decrease in traditional data revenues, which include circuit-based services.
Other service and equipment revenues increased $215, or 9.4%, in 2015 and $447, or 24.2%, in 2014.
Operations and support expenses increased $9,353, or 49.2%, in 2015 and $1,049, or 5.8%, in 2014. Operations and support
expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our
networks, providing video content and personnel costs, such as compensation and benefits.
Increased operations and support expenses in 2015 were primarily due to our acquisition of DIRECTV, which increased our
Entertainment Group operations and support expenses $9,683. The increases were primarily due to our addition of DIRECTV and
content cost increases for our U-verse services.
Increased operations and support expenses in 2014 resulted from an increase of $763 in content costs, reflecting an
increased number of subscribers and increasing content costs; an increase of $192 for installation costs; and an increase
of $90 for selling and commission expenses resulting from the overall growth of our U-verse services.
Partially offsetting the increased expenses in both years were lower employee charges resulting from ongoing workforce
reductions, our focus on cost initiatives and lower equipment costs.
Depreciation expenses increased $472, or 10.6%, in 2015 and decreased $342, or 7.1%, in 2014. Our 2015 increase was
primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially
offset by fully depreciated assets. Our 2014 decrease was primarily due to extending the estimated useful life of software,
partially offset by ongoing capital spending for network upgrades and expansion.
Operating income increased $3,236 in 2015 and decreased $16, or 1.3%, in 2014. Our Entertainment Group segment operating
income margin was 5.7% in 2015, (5.5)% in 2014, and (5.6)% in 2013. Our Entertainment Group EBITDA margin was 19.7% in
2015, 14.6% in 2014, and 16.7% in 2013.
Consumer Mobility
Segment Results
Percent Change
2015 2014 2013 2015 vs. 2014 2014 vs. 2013
Segment operating revenues
Postpaid wireless $ 22,030 $ 24,282 $ 27,140 (9.3) % (10.5) %
Prepaid wireless 4,662 4,205 2,317 10.9 81.5
Other service revenue 2,458 2,363 2,399 4.0 (1.5)
Equipment 5,916 5,919 4,387 (0.1) 34.9
Total Segment Operating Revenues 35,066 36,769 36,243 (4.6) 1.5
Segment operating expenses
Operations and support 21,477 23,891 22,545 (10.1) 6.0
Depreciation and amortization 3,851 3,827 3,683 0.6 3.9
Total Segment Operating Expenses 25,328 27,718 26,228 (8.6) 5.7
Segment Operating Income 9,738 9,051 10,015 7.6 (9.6)
Equity in Net Income (Loss) of Affiliates - (1) - - -
Segment Contribution $ 9,738 $ 9,050 $ 10,015 7.6 % (9.6) %
The following table highlights other key measures of performance for the Consumer Mobility segment:
Percent Change
2015 2014 2013 2015 vs. 2014 2014 vs. 2013
(in 000s)
Consumer Mobility Subscribers
Postpaid 28,814 30,610 31,827 (5.9) % (3.8) %
Prepaid 11,548 9,965 5,817 15.9 71.3
Reseller 13,690 13,844 14,028 (1.1) (1.3)
Connected devices 1 929 1,021 1,567 (9.0) (34.8)
Total Consumer Mobility Subscribers 54,981 55,440 53,239 (0.8) 4.1
Consumer Mobility Net Additions 2
Postpaid 463 1,226 395 (62.2) -
Prepaid 1,364 (311) 377 - -
Reseller (168) (351) (1,074) 52.1 67.3
Connected devices 1 (131) (465) (390) 71.8 (19.2)
Consumer Mobility Net Subscriber Additions 1,528 99 (692) - -
Consumer Mobility Postpaid Churn 2, 3 1.25% 1.22% 1.26% 3 BP (4) BP
Total Consumer Mobility Churn 2, 3 1.94% 2.06% 1.84% (12) BP 22 BP
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
2 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total
number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the
churn rate for each month of that period.
Operating revenues decreased $1,703, or 4.6%, in 2015 and increased $526, or 1.5%, in 2014. Decreased revenues in 2015
reflect declines in postpaid service revenues due to customers choosing Mobile Share plans and migrating to our Business
Solutions segment, partially offset by higher prepaid service revenues. Our business wireless offerings allow for
individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of
these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service
revenue growth.
Increased revenues in 2014 are primarily due to an increase in prepaid services attributable to our acquisition of Leap and
increased equipment revenues. These increases were partially offset by customers choosing Mobile Share plans and migrating
to our Business Solutions segment.
Postpaid wireless revenues decreased $2,252, or 9.3%, in 2015 and $2,858, or 10.5%, in 2014. These decreases were largely
due to customers continuing to shift to no-device-subsidy plans, which allow for discounted monthly service charges under
our Mobile Share plans and the migration of subscribers to Business Solutions. Without the migration of customers to
Business Solutions, postpaid wireless revenues would have decreased approximately 4.0% in 2015 and 5.4% for 2014.
Prepaid wireless revenues increased $457, or 10.9%, in 2015 and $1,888, or 81.5%, in 2014. Our prepaid services, which
include services sold under the Cricket brand, are monthly prepaid services. Prepaid wireless revenues increased in 2015
primarily due to growth in the subscriber base. The increase in 2014 was primarily due to our March 2014 acquisition of
Leap.
Other service revenue increased $95, or 4.0%, in 2015 and decreased $36, or 1.5%, in 2014.
Equipment revenue decreased $3, or 0.1%, in 2015 and increased $1,532, or 34.9%, in 2014. The increase in 2014 was
primarily related to the increase in devices sold under our AT&T Next program and the increase in sales of higher-priced
smartphones.
Operations and support expenses decreased $2,414, or 10.1%, in 2015 and increased $1,346, or 6.0%, in 2014. Operations and
support expenses consist of costs incurred to provide our products and services, including costs of operating and
maintaining our networks and personnel costs, such as compensation and benefits.
Decreased operations and support expenses in 2015 were primarily due to the following:
· Selling and commission expenses decreased $861 primarily due to lower average commission rates, including those paid
under the AT&T Next program, combined with fewer upgrade transactions.
· Network costs decreased $434 primarily due to lower interconnect costs resulting from our ongoing network transition
to more efficient Ethernet/IP-based technologies.
· Equipment costs decreased $406 primarily due to the decrease in volume of equipment sales, partially offset by an
increase in the cost of smartphones.
· Customer service costs decreased $275 primarily due to reduced salaries and benefits, lower vendor and professional
services from reduced call volumes.
· Other cost of service decreased $209 primarily due to incollect roaming fee rate declines, which were partially
offset by increased data volume.
Increased operations and support expenses in 2014 were primarily due to the following:
· Equipment costs increased $613, reflecting increased sales and customers choosing more expensive smartphones.
· Handset insurance cost increased $283 due to an increase in the cost of replacement phones.
· Network costs increased $222 due to increased lease fees, higher maintenance and energy costs resulting from the
increase in the number of cell sites and expenses related to our network enhancement efforts. These increases were
partially offset by lower interconnect costs resulting from our ongoing network transition to more efficient
Ethernet/IP-based technologies.
· Other cost of service increased $190 primarily due to equipment/device service-related costs associated with home
monitoring services and higher incollect roaming costs resulting from increased data volume, which was partially due to the
acquisition of Leap. These increases were partially offset by incollect roaming fee rate declines.
Partially offsetting these increases in 2014 were lower selling and commission expenses of $253, which were primarily due
to lower average commission rates, including those paid under the AT&T Next program.
Depreciation expense increased $24, or 0.6%, in 2015 and $144, or 3.9%, in 2014. The increase in 2015 was primarily due to
ongoing capital spending for network upgrades and expansion that was largely offset by fully depreciated assets. The
increase in 2014 was primarily due to ongoing capital spending for network upgrades and expansion, as well as the
acquisition of Leap partially offset by fully depreciated assets and extending the estimated useful life of software.
Operating income increased $687, or 7.6%, in 2015 and decreased $964, or 9.6%, in 2014. Our Consumer Mobility segment
operating income margin was 27.8% in 2015, compared to 24.6% in 2014 and 27.6% in 2013. Our Consumer Mobility EBITDA margin
was 38.8% in 2015, compared to 35.0% in 2014 and 37.8% in 2013.
International
Segment Results
Percent Change
2015 2014 2013 2015 vs. 2014 2014 vs. 2013
Segment operating revenues
Video entertainment $ 2,150 $ - $ - - -
Wireless 1,647 - - - -
Equipment 305 - - - -
Total Segment Operating Revenues 4,102 - - - -
Segment operating expenses
Operations and support 3,930 - - - -
Depreciation and amortization 655 - - - -
Total Segment Operating Expenses 4,585 - - - -
Segment Operating Income (Loss) (483) - - - -
Equity in Net Income (Loss) of Affiliates (5) 153 532 - (71.2)
Segment Contribution $ (488) $ 153 $ 532 - (71.2) %
Operating Results
Our International segment consists of the Latin America operations acquired in our July 2015 acquisition of DIRECTV as well
as the Mexican wireless operations acquired earlier in 2015 (see Note 7). For 2015, our International segment operating
income margin was (11.8)% and our International EBITDA margin was 4.2%.
Our 2015 operating revenues were $4,102, with $1,952 attributable to wireless revenues in Mexico and $2,150 in video
services in Latin America. Operations and support expenses consist of costs incurred to provide our products and services,
including costs of operating and maintaining our networks, providing video content and personnel costs, such as
compensation and benefits. Our 2015 operating expenses were $3,930 and operating loss was $483.
Connections Summary
At December 31, 2015, we had approximately 8.7 million wireless subscribers in Mexico and 12.5 million video connections in
Latin America, including 5.4 million in Brazil. Since acquisition, our Mexico wireless business had a net loss of 96,000
subscribers, mainly prepaid customers, and our Latin America operations had a net loss of 147,000 video connections.
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined
domestic wireless operations (AT&T Mobility).
AT&T Mobility Results
Percent Change
2015 2014 2013 2015 vs. 2014 2014 vs. 2013
Operating revenues
Service $ 59,837 $ 61,032 $ 61,552 (2.0) % (0.8) %
Equipment 13,868 12,960 8,347 7.0 55.3
Total Operating Revenues 73,705 73,992 69,899 (0.4) 5.9
Operating expenses
Operations and support 45,789 48,348 44,508 (5.3) 8.6
EBITDA 27,916 25,644 25,391 8.9 1.0
Depreciation and amortization 8,113 7,744 7,249 4.8 6.8
Total Operating Expenses 53,902 56,092 51,757 (3.9) 8.4
Operating Income $ 19,803 $ 17,900 $ 18,142 10.6 % (1.3) %
The following table highlights other key measures of performance for AT&T Mobility:
Percent Change
2015 2014 2013 2015 vs. 2014 2014 vs. 2013
(in 000s)
Wireless Subscribers 1
Postpaid smartphones 58,073 56,644 51,874 2.5 % 9.2 %
Postpaid feature phones and data-centric devices 19,032 19,126 20,764 (0.5) (7.9)
Postpaid 77,105 75,770 72,638 1.8 4.3
Prepaid 5 11,548 9,965 5,817 15.9 71.3
Reseller 13,774 13,855 14,028 (0.6) (1.2)
Connected devices 2 26,213 20,964 17,893 25.0 17.2
Total Wireless Subscribers 128,640 120,554 110,376 6.7 9.2
Net Additions 3
Postpaid 1,666 3,290 1,776 (49.4) 85.2
Prepaid 5 1,364 (311) 377 - -
Branded Net Adds 3,030 2,979 2,153 1.7 38.4
Reseller (155) (346) (1,074) 55.2 67.8
Connected devices 2 5,184 2,975 1,642 74.3 81.2
Net Subscriber Additions 8,059 5,608 2,721 43.7 -
Branded smartphones 67,200 62,443 54,262 7.6 15.1
Mobile Share connections 61,275 52,370 21,143 17.0 -
Smartphones under our installment program at end of period 26,670 15,308 1,488 74.2 -
Smartphones sold under our installment program during period 17,320 15,268 1,540 13.4 % -
Total Churn 4 1.39% 1.45% 1.37% (6) BP 8 BP
Postpaid Churn 4 1.09% 1.04% 1.06% 5 BP (2) BP
1 Represents 100% of AT&T Mobility wireless subscribers.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
3 Excludes acquisition-related additions during the period.
4 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number
of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for
each month of that period.
5 In 2015, session-based tablets were reclassified to connected devices. Prior period amounts reflect the current period presentation.
Operating income increased $1,903, or 10.6%, in 2015 and decreased $242, or 1.3%, in 2014. The operating income margin of
AT&T Mobility was 26.9% in 2015, compared to 24.2% in 2014 and 26.0% in 2013. AT&T Mobility's EBITDA margin was 37.9% in
2015, compared to 34.7% in 2014 and 36.3% in 2013. AT&T Mobility's EBITDA service margin was 46.7% in 2015, compared to
42.0% in 2014 and 41.3% in 2013. (EBITDA service margin is operating income before depreciation and amortization, divided
by total service revenues.)
Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our
ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to
support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing
market, we have launched a wide variety of plans, including Mobile Share and AT&T Next.
ARPU
Postpaid phone-only ARPU (average revenue per average wireless subscriber) decreased 4.0% in 2015 and 6.6% in 2014
reflecting subscribers' continued adoption of AT&T Next and Mobile Share plans. Postpaid phone-only ARPU plus AT&T Next
subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) increased 3.4% in 2015 due to the continuing
growth of the AT&T Next program. Postpaid phone-only ARPU plus AT&T Next decreased 2.4% in 2014.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and
improve margins. Total churn was lower in 2015. Postpaid churn was slightly higher in 2015 reflecting continuing
competitive pressure in the industry.
Postpaid
Postpaid subscribers increased 1.8% and 4.3% in 2015 and 2014, respectively. At December 31, 2015, 87% of our postpaid
phone subscriber base used smartphones, compared to 83% at December 31, 2014 and 77% at December 31, 2013. About 98% of our
postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such
subscribers tend to have higher retention and lower churn rates. A growing percentage of our postpaid smartphone
subscribers are on usage-based data plans, with approximately 51.1 million subscribers on these plans as compared to 48.5
million and 38.7 million, respectively, in the prior two years. About half of our Mobile Share accounts have chosen data
plans with 10 gigabytes or higher. Device connections on our Mobile Share plans now represent over 79% of our postpaid
customer base. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add
connected devices, attract subscribers from other providers and minimize subscriber churn.
During 2015, we offered postpaid wireless service under two alternatives: (1) for subscribers purchasing a device on
installments under the AT&T Next program or for those that bring their own device, no annual service contract is signed;
however, the device must be paid in full under the AT&T Next contract if the customer chooses to drop their service from
AT&T; and (2) for subscribers who purchase their equipment under the traditional device subsidy model, service contracts
are for two-year periods with an increasing portion of these subscribers receiving unlimited voice and texting services in
conjunction with data services purchased through our Mobile Share plans. Approximately 69% of all postpaid smartphone gross
ads and upgrades during 2015 chose AT&T Next. While BYOD customers do not generate equipment revenue or incur additional
expenses for device subsidy, the service revenue helps improve our margins. In late December 2015, we announced an end to
offering subsidized handsets for most of our customers.
Our AT&T Next program allows for postpaid subscribers to purchase certain devices in installments over a period of up to 30
months. Additionally, after a specified period of time, they also have the right to trade in the original device for a new
device with a new installment plan and have the remaining unpaid balance satisfied. For customers who elect these
installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net
of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers on the
AT&T Next program pay a lower monthly service charge, which results in lower service revenue recorded for these
subscribers.
Prepaid
In 2015, we updated our definition of prepaid subscribers to exclude session-based tablets, which are now included with
connected devices. Prepaid subscribers now consist primarily of phone users. Prepaid subscribers increased 15.9% and 71.3%
in 2015 and 2014, respectively.
Connected Devices
Connected devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems.
Connected device subscribers increased 25.0% and 17.2% in 2015 and 2014, respectively. During 2015, we added approximately
3.9 million "connected" cars through agreements with various carmakers. We believe that these connected car agreements give
us the opportunity to create future retail relationships with the car owners.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
2016 Revenue Trends We expect our operating environment in 2016 to be very competitive, especially in the wireless area,
as companies and consumers continue to demand instant connectivity and yet we face a regulatory environment that appears
increasingly unfriendly to investment in broadband services. Despite these challenges, we expect to grow our consolidated
operating revenues in 2016, driven by our ability to offer integrated wireless, video and wireline services, as well as
continuing growth in fixed strategic services. We expect that robust competition in the wireless industry will continue to
pressure service revenue and ARPU. Our AT&T Next program is expected to generate continued growth in equipment revenue,
which has the corresponding impact of lowering service revenues. In late December 2015, we announced an end to offering
subsidized handsets for most of our customers. We expect that all our major customer categories will continue to increase
their use of Internet-based broadband/data services. We expect continuing declines in traditional telephone service
revenues. We expect our 2015 acquisitions of DIRECTV and wireless properties in Mexico to increase revenues, although we
expect to incur significant integration costs in the same period.
2016 Expense Trends We expect stable consolidated operating income margins in 2016 as growth in AT&T Next is reducing
subsidized handset costs over time and we lower our marginal cost of providing video services and operating our network. We
expect to continue our focus on cost reductions, driving savings through automation, supply chain, benefits, digitizing
transactions and optimizing network costs. In addition, the transition of our network to a more efficient software-based
technology is expected to contribute to favorable expense trends over the next several years. Expenses related to growth
areas of our business, including wireless data, and integration of DIRECTV's operations, will apply offsetting pressure to
our operating income margin.
Market Conditions During 2015, the ongoing slow recovery in the general economy continued to negatively affect our
customers. Certain industries, such as energy and export-driven businesses are being especially cautious while residential
customers continue to be price sensitive in selecting offerings, especially in the wireless area, and continue to focus on
offerings that give them efficient access to video and broadcast services. We expect continued pressure on pricing during
2016 as we respond to this intense competition, especially in the wireless business.
Included on our consolidated balance sheets are assets held by benefit plans for the payment of future benefits. Our
pension plans are subject to funding requirements of the Employee Retirement Income Security Act of 1974, as amended
(ERISA). In September 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC to the
trust used to pay pension benefits. The trust is entitled to receive cumulative annual cash distributions of $560, which
will result in a $560 contribution during 2016. In addition, we will contribute $175 no later than the due date for our
federal income tax return for 2015. We do not have significant additional contribution requirements to our pension plans
for 2016. However, a weakness in the equity, fixed income and real asset markets could require us in future years to make
contributions to the pension plans in order to maintain minimum funding requirements as established by ERISA. Investment
returns on these assets depend largely on trends in the U.S. securities markets and the U.S. economy. In addition, our
policy of recognizing actuarial gains and losses related to our pension and other postretirement plans in the period in
which they arise subjects us to earnings volatility caused by changes in market conditions. Changes in our discount rate,
which are tied to changes in the bond market, and changes in the performance of equity markets, may have significant
impacts on the valuation of our pension and other postretirement obligations at the end of 2016 (see "Accounting Policies
and Estimates").
OPERATING ENVIRONMENT OVERVIEW
AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T
subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory
authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the
benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening
all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare.
However, since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory
commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional
wireline subsidiaries when they operated as legal monopolies. We are pursuing, at both the state and federal levels,
additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive
telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by
our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same
time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are
subject to vigorous competition.
In February 2015, the FCC released an order reclassifying both fixed and mobile consumer broadband Internet access services
as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC's decision significantly
expands the FCC's existing authority to regulate the provision of fixed and mobile broadband Internet access services. AT&T
and other providers of
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