Porter's Five Forces Analysis: AT&T Inc.

AT&T Inc. is the leading wireless telecommunications provider, as well as the largest telecommunications company on the basis of revenue in the U.S. market. AT&T was established in 1876 by Alexander Graham Bell, who was one of the primary inventors of the telephone. Ever since its inception in 1876, AT&T has been a leader in innovation and optical communications system. It continues to be on the forefront in providing optimal services in the market and has gone on to successfully adapt to the ever changing business landscape. The merger between AT&T and Bellsouth Corporation, which is estimated to be worth 86$ billion, made AT&T the largest telecommunications company in the United States of America
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AT&T has divided its business operations into four operating segments: 

1. Wireless Division, including cell phone and internet services.

2. Wireline Division, which comprises of voice product lines for both local and long-distance services for businesses, government, and consumers. As well as data product lines, including Internet access, video services, and other various business services provided by the company.

3. Advertising Solutions Divisions, comprising of print directory advertising.

4. Other Subsidiaries, including operating services, payphones, and other business services.

Porter five forces analysis is a framework to analyze level of competition within an industry and business strategy development. n the following paragraphs, the elements of Porter’s Five Forces relative to AT&T has been analyzed and explained:

Degree of Competitive Rivalry (HIGH)
Before the patents expired in 1890s, AT&T was the only company providing telecommunications services, but after the patents, 6000 new companies entered the market and hence the degree of competitive rivalry was high. But AT&T was still a monopoly in the industry till the 1980s when the US government and the Justice department split up AT&T into smaller companies. Currently, there are four major companies in the telecommunications industry: AT&T, Verizon, Sprint and T-Mobile. AT&T’s main rival would be Verizon, which has currently more wireless subscribers than AT&T. The wireless market is highly saturated with 91% of users already using cell phones and the only way to increase sales is by poaching clients from competitors.

Threat of substitute products/services (Moderately High)

The main service AT&T provides is communication and over the years, people have used different tools of communication. The direct substitute of traditional wireline telephones would be the wireless cellphone communication. With the emergence of internet, many forms of internet voice communications services have become popular like VOIPs, Skype, Viber, and Whatsapp. Even Facebook can be considered as a tool for communication. For AT&T’s other products like cable TV, the internet has become a big substitute, as people can stream TV shows, news, podcasts directly from any devices that have internet connection, hence the number of cable subscribers are also dropping.

Bargaining power of buyers (High)

Previously, the telecomm industry was a monopoly with AT&T having majority of the market share, but over time, patents held by AT&T expired and US government split up AT&T into smaller companies which lead to them losing market share and increasing competition in the industry. With more competitors in the market, the customers had more option to choose from and are also price sensitive, looking for better subscription plans. The customer base has also grown from 300k subscribers to over 3 million. To try and keep consumers from subscribing to other telecomm companies, most companies have started using long term contracts that makes its beneficial for consumers to stay with the company and also increases their switching costs.

Threat of New Entrants (Low)

During AT&T’s early days, they faced little challenge from other competitors since they had patents and hence the Threat of new entrants was higher. But after 1890s, when the patents expired, there was an influx of new competitors, around 6000, coming into the industry. The capital requirements for starting a business in this industry are also high, because there is a huge capital required to setup the network towers. Currently, the wireless network market is also heavily saturated at 91%, so it’s not profitable for new companies to enter the market.

Bargaining power of Supplier (Moderate):

For the wireline/landline business, transmission line constructors are important for which they need copper wires, while for the wireless business, they need suppliers for building network towers. AT&T employs two network equipment suppliers, Alcatel-Lucent and Ericsson and this strategic alliance has helped them enjoy economies of scale. These suppliers hold a great deal of leverage over AT&T, since they need quality materials in building the networks. So bargaining power of Suppliers is relatively moderate.

References:

1. J.D. Power Consumer Center “Business Wireless Ratings.” Retrieved November 20, 2014 from the World Wide Web:   http://consumercenter.jdpower.com

2. By Associated Press, Wired News: Cell-Phone Industry Courts VOIP, Published April 9, 2006.  Retrieved on November 20, 2014 on the World Wide Web

http://www.wired.com/news/wireservice/0,70629-0.html?tw=wm_wn_index_7

3. (n.d.). Retrieved 11 16, 2014, from AT&T Inc.: http://www.att.com/