AT&T's Death by a Thousand (Service) Cuts

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In 2007, AT&T (NYS: T) negotiated exclusive U.S. distribution rights for the iPhone, perhaps the telecom's only intelligent decision in decades. Much to the dismay of those who wanted iPhones and good wireless service, AT&T paid up to retain that exclusive deal until January 2011, when Verizon (NYS: VZ) began offering the iPhone. Sprint Nextel (NYS: S) may join the fray as early as October.

iPhone to the rescue
Let's take a look at AT&T's revenue and profits since the iPhone was introduced in June 2007:

AT&T Segment Financials

2007

2008

2009

2010

Revenue

 

 

 

 

Wireless

$42,684

$49,174

$53,504

$58,500

Total

$118,928

$123,443

$122,513

$124,280

Wireless % of Total

36%

40%

44%

47%

Operating Profit Before Tax

    

Wireless

$7,020

$11,619

$13,830

$15,257

Total

$20,404

($1,690)

$21,000

$19,573

Wireless % of Total

34%

NM

66%

78%

Net Profit Before Tax

    

Wireless

$7,036

$11,625

$13,839

$15,266

Total

$18,399

($4,572)

$18,518

$18,238

Wireless % of Total

38%

NM

75%

84%

Source: Capital IQ.

In less than four years, wireless went from 34% to 78% of the company's operating profit, and from 38% to a whopping 84% of pre-tax profit. That owes only partially to rising revenue and profit in the wireless division. The other divisions have experienced a steady decline in revenue and net income, dragging down total company profits.

AT&T Segment Financials

2007

2010

Change

Revenue

 

 

 

Wireless

$42,684

$58,500

37%

Wireline

$71,583

$61,202

(15%)

Advertising Solutions

$5,851

$3,935

(33%)

Other

$2,229

$643

(71%)

Corporate

($3,419)

-

-

Total Revenues

$118,928

$124,280

5%

Operating Profit Before Tax

   

Wireless

$7,020

$15,257

117%

Wireline

$11,990

$7,823

(35%)

Advertising Solutions

$1,861

$855

(54%)

Other

$189

($1,841)

NM

Corporate

($656)

($2,521)

NM

Total Operating Profit Before Tax

$20,404

$19,573

(4%)

Net Profit Before Tax

   

Wireless

$7,036

$15,266

117%

Wireline

$12,021

$7,834

(35%)

Advertising Solutions

$1,861

$855

(54%)

Other

$834

($1,099)

NM

Corporate

($3,353)

($4,618)

NM

Total Net Profit Before Tax

$18,399

$18,238

(1%)

Source: Capital IQ.

Can AT&T continue to rely on the iPhone to make up for its declining businesses, now that the coveted smartphone is available elsewhere? Only time will tell. It can't help that ChangeWave research attributed AT&T's notorious dropped calls to the carrier, not the phone.

U-verse to the rescue?
In pursuit of other growth opportunities, AT&T is investing heavily in expensive fiber optic networks to support its U-verse business, offering digital TV, high-speed Internet access and voice. That may have slowed its revenue and profit decline outside of wireless, but the trend is not AT&T's friend.

Anecdotal evidence suggests  a service issue lurking at the heart of the telecom's woes. AT&T's customer service, or lack thereof, inspires the kind of passionate hatred I haven't seen since ticked-off consumers abandoned Dell in the years after the dot-com bust. Dell's consumer business never recovered.

Earlier this year, I signed up for AT&T's high-speed Internet and voice (U-Verse) service. Big, big mistake. It took more than five days after service was scheduled to start to get even one line working. That service call lasted from about noon until past 9 p.m. I needed a second service call, lasting about an hour and a half, just to get a second line working. I spent hours on hold trying to set up those appointments. That would have taken even longer if I hadn't persuaded one AT&T rep to share the secret of speeding through the company's systems.

Less than four months later, the new router provided by AT&T failed. Two phone calls to AT&T, lasting more than an hour, resulted in tech support promising to deliver a new router within two days. Four service-less days later, no router had arrived. At that point, the company's customer service said its records showed that my earlier call was to ask how to get faster service (pure hogwash) and made no mention of service being down. The representative suggested I call Cisco (NAS: CSCO) , the maker of the "broken" router. Less than 15 minutes and one reboot later, Cisco had me back online.

If I want a refund for the days I haven't had service -- about 7.5% of the time -- I have to call another number and waste more time. I think my time is better spent switching service providers and complaining to the Public Utilities Commission.

When I mention AT&T customer service to friends and family, the response is often either a passionate I-had-an-even-worse-experience rant, or a quiet what-did-you-expect-it's-AT&T. Thankfully, the what-did-you-expect group doesn't call me a dunce (to my face) for signing up with AT&T.

Bad management
Perhaps the most surprising lesson from my experience with AT&T service is what the dedicated technician that made the nine-plus hour service call said. To get information necessary to do his job, he has to use the same 800 number that customers call and wait on hold with the rest of us poor souls. That's got to be costing the company -- and shareholders -- a bundle. It's just bad management.

What's more, the company's computer systems are so disjointed that its personnel spend excessive time bouncing customers from one rep to another trying to get the right person. That creates not only unhappy customers, but also more needless costs.

Great dividend ... for now
According to my Foolish colleague Eric Bleeker, the consistent cash flow that comes from legacy telephony services such as wireline helps AT&T pay its hefty dividend. AT&T has increased that payout at an average annual rate of less than 4% since the iPhone's introduction, even though it had an exclusive on the coveted smartphone for most of that period.

It currently has a dividend yield of 5.9% and a P/E ratio of 8.5. But Eric has suggested dividend investors might be better off owning Frontier Communications (NYS: FTR) , CenturyLink (NYS: CTL) , or Windstream (NAS: WIN) .

Foolish takeaway
Back in the days when the phone company was a regulated monopoly, it boosted profits by boosting revenue. With no competition, customer service didn't matter. At AT&T (NYS: T) , it seems that customers still don't matter. In my view, lousy management, dropped calls, shameful tech support, and DSL customer downtime will slowly erode AT&T's customer base, profits, and dividend.

What do you think? Will AT&T pull out of its downward spiral? An easy way to stay on top of these market developments is the Motley Fool's free new My Watchlist feature. You can get up-to-date news and analysis by adding these stocks to your Watchlist now:

At the time this article was published Fool contributorCindy Johnsondoes not own shares of any company in this story. She does not own an iPhone, but will probably get a Verizon iPhone 5 later this year. The Motley Fool owns shares of Apple. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Dell, AT&T, Apple, and Cisco Systems.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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