Teaching Notes
AT&T’s iPhone Addiction and Potential Withdrawal
Introduction
This case was developed for students who have taken at least one business model course, and
one business strategy course. Further knowledge maybe needed from finance, management
accounting and a minor understanding of the telecommunications industry. Students should be
able to complete the required with the facts in the case.
The first objective of the case is written to test the user’s ability to extract the business strategy
from the case. The second objective is to analyze whether or not the company is creating and
capturing value through analysis of net share gain and return on invested capital. The final
objective is to identify the need for change, and to provide recommendation(s) on how to address
the risks and capitalize on the opportunities.
Learning Objectives




To exercise the ability to extract important business strategy components from a case
To demonstrate the ability to determine whether a company is capturing and/or creating
value
To demonstrate the capability to prioritize a diverse range of issues and opportunities
To exercise the ability to analyze opportunities and use them to address the risks that
AT&T is facing
Case Synopsis
It is early 2010 and the CEO of AT&T, Randall Stephenson, is worried about AT&T’s ability to
maintain its revenue growth, given that AT&T’s exclusivity contract with consumer electronics
giant Apple Inc (Apple) at the end of 2010.
Students are assigned the role of a consultant who will try to understand AT&T and its business.
In addition, students should try to determine AT&T’s performance through SRS and ROIC
analysis. Based on the analysis, students should assess that there is a need for change and
evaluate each of the two options. Students may want to provide further recommendations not
explicitly stated in the case (i.e. drop a product line, or purchase a competitor or invest in a 4G
network) which are encouraged though difficult to fully evaluate given the facts of the case.
Analysis of Assigned and Suggested Questions
1. What is your role?
You are Salim Ponniah, and you are a consultant.
2. What is AT&T’s current business strategy?
Goals
1. To grow the wireless and high speed internet division
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2. “AT&T is also focusing on strengthening communities; investing in people; leading with
integrity; minimizing our environmental impact; connecting people and business; and
leading innovation and technology”
3. To decrease customer churn
4. To be the market leader in every market it competes in
5. To create and capture value
Core Activities
What
Mergers and
acquisitions
Marketing
Bundling
Partnering
Connecting
How
Experienced management team that has been involved in numerous
mergers
Partnering with major sports organizations such as the NBA and USA
swimming and social media
Provides voice, data, IPTV and wireless services packages
Exclusive contracts
G network and experience in building networks through large investments
Product Market Focus
 Majority of the revenue is from the United States
 Revenue Breakdown:
Value Proposition
Feature
Bundled services
Global connectivity – reaches 97% of the
world’s economy
Secure network
Affordable prices
Benefit
Cost savings
Only need to talk to one service provider
One service provider for a multi-national
business
Comfort and ease of mind
Willing to pay
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Variety of Services
Continuously Faster Network (constant
network upgrades)
iPhone
Choices
Increase in upload and download speeds
‘Cool’
Strategy Statement
AT&T’s goal is to be the number one provider of wireless services by providing a variety of
services, a secure network, affordable prices and exclusive phones to its US wireless consumers
by effectively managing contracts, bundling its services and connecting its users through its 3G
network.
Potential PEST: Smartphone growth, need for better networks, growing use of the Internet
3. Is AT&T creating and capturing value?
Creating Value
Use the Statement of Revenue Sources to determine whether or not value is being created for its
customers
Assumptions Needed:
 Growth rate
o Weighted average the revenue segments from the growth rates given; or
o The growth rate of the wireless market since it is AT&T’s core business and focus
 Churn rate – Any of the following are acceptable
o Use the wireless division’s churn rate and assume the same churn rate for the rest
of the revenue segments
o Use the wireless division’s churn rate and assume 0% churn the rest of the
revenue segments
o Assume a churn rate of 0% for all the revenue segments
 No new adjacent or new lines of business since no information was provided in the case
 The weighted growth rate and the churn rate of the wireless division was used in the
analysis
Please see appendix A for the statement of revenue sources
The net share gain is approximately (13B) which means AT&T did not create value in 2009
since more customers’ revenue left for a competitor than came from competitors. This indicates
that competitors’ value propositions are more attractive relative to AT&T’s value proposition.
Capturing Value
NOPLAT
Please see appendix B for detailed NOPLAT calculations
Exclusions:
 Interest Expense: this expense is associated with financing decisions (i.e. the amount of
interest-bearing debt)
 Equity in net income of affiliates: Income from international investments such América
Móvil, Telmex and others which do not affect AT&T’s core operations
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
Other income – net: Other income is related to a gain on sale of investment which is not
part of AT&T’s core operations.
Invested Capital
Please see appendix B for detailed Invested Capital calculations
Exclusions:
 Deferred Income Taxes: Too difficult to recalculate NOPLAT taking into consideration
deferred income taxes
 Investments in Equity Affiliates: Investments relating to international investments such
América Móvil, Telmex and others which do not affect AT&T’s core operations
 Debt maturing within One Year: This represents the portion of long-term debt that is
within payable but the debt is related to a long-term financing decision as a opposed to
operational activities.
 Dividends Payable: This is a financing decision similar to interest payable.
Summary of Calculations
ROIC
6%
WACC
6.5%
Spread
(0.5%)
Therefore, AT&T is not capturing value for investors because its 2009 ROIC is less than its 2009
WACC.
4. Is there a need for change?
Based on the above analysis and the current situation with the iPhone, it should be clear
that there is a need for change.
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5. If there is a need for change, what option should AT&T pursue?
Fit with
Fit with
Fit with
Fit with
Proposal
Organizational
management
Environment
Resources
Capabilities
preferences
It is a market with
Ability to
Experience in
DISH Network
nearly 10% growth generate
acquisitions and
is the second
Purchase rate for the next
financing since
takeovers
largest satellite
DISH
five years.
its debt to equity
service provider
Network
is lower than
Verizon
Fit
Fit
Fit
Fit
A new market
Network is
Experience in
First to market
Exclusive (offering data on
already in place
forming exclusive which means
Contract
tablet devices) and
due to wireless
contracts with
market leader
with
given Apple’s past
market and
Apple
Apple
history, success is
experience with
Tablet
highly probable
Apple
Fit
Fit
Fit
Fit
Note: other answers are acceptable as long as analysis is supported with case facts.
Option 1: Purchase DISH Network
Potential Benefits:
 Growing subscriber base
 Will expand AT&T’s service offering
 Complements AT&T’s U-verse Offering
 Aligns with AT&T’s strategy of affordable pricing
 Growing industry – 9.7% in 2009
 Will improve AT&T’s video efforts to allow it to compete more with cable companies
 Management is experienced in acquisitions
Potential Disadvantages:
 Failed negotiations in the past because of DISH Network’s management was waiting for
increases in the offer price
 Will need to obtain financing and will increase debt to equity ratio. This will result in
reduced flexibility to pursue further acquisitions
 The cost of purchasing DISH Network could cost up to approximately 9 billion dollars
for a 100% acquisition
Note that further benefits and disadvantage may be discovered by students
Option 2: Exclusive Contract with Apple
Potential Benefits:
 First to market by offering data services to the tablet market
 Lots of marketing and hype for the Apple Tablet
 Leverage Apple’s strong reputation and following
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




Apple tablet has signed an agreement with Electronic Arts to offer games which will
increase need for data services
Applications available will increase the need for data services to download them
Large potential revenue stream (see calculations below)
Wireless network infrastructure can be leveraged to provide data to the tablet
Ability to bundle with AT&T wireless phone users
Potential Disadvantages:
 User interface with the Apple Tablet has been said to have a steep learning curve
 Low bargaining power with Apple
 Verizon has a stronger network which may appeal to Apple and its customers more
 Uncertainty if Apple will offer exclusive partnership with AT&T
Increase in Revenue Projections for Year 1
Low
High
Tablet Revenue
$20,000,0001
$800,000,0002
Data Plan Revenue
$360,000,0003
$2,700,000,0004
Total Revenue
$380,000,000
$3,500,000,000
5
NOPLAT Margin
12%
12%
Incremental NOPLAT
$45,600,000
$420,000,000
Therefore it is expected that the project will have an incremental impact of $45,600,000 to
$420,000,000 on NOPLAT for the first year.
Note that further benefits and disadvantage may be discovered by students
6. If applicable, what are some barriers to implementation?
Option 1 – Purchase DISH Network
 Employee culture clash because DISH network would go from a company to a division
within the telecommunication giant
 Raising enough financing to purchase DISH Network
 Failed negotiation in the past
Option 2 – Exclusive Contract with Apple
 Negotiating issues with Apple. It took 18 months to negotiate the initial iPhone contract
and it came at many concessions for AT&T
 Can the current and future network handle the additional data usage capacity of tablets on
the 3G network?
 Will the network be fast enough to satisfy Apple and consumer needs?
 Further concessions may need to made for the Apple Tablet in order to win the contract
similar to those made for the iPhone contract
Note that further barriers maybe identified
1
4,000,000 Tablets *500 Price*1% of Revenue
10,000,000 Tablets *800 Price*10% revenue sharing
3
4,000,000 Tablets *15 per Month*12 months*50% of tablets having a data plan
4
10,000,000 Tablets*30 per month*12 months*75% of tablets having a data plan
5
NOPLAT/Revenue=14,528,000/123,018,000
2
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Appendix A – Statement of Revenue Sources (Million’s)
Total Revenue
Adjacent market
New Line of Business
Revenue
Revenue from Core Business
Market Rate Growth
Revenue from Market Growth
Revenue Net of Market
Growth
Customer Churn Rate
Revenue Lost from Churn
Base Retention Revenue
Revenue from Gain Share
Net Gain Share
Wireless
Wireline
Advertising
Data Services
AT&T Growth Rate
FY 2008
124,028.00
FY 2009
$
123,018.00
$
-
% of 2008 Rev
99.2%
0%
$
$
123,018.00
0%
99%
$
12,526.83
10.1%
$
110,491.17
89.1%
$
$
$
102,000.63
8,490.54
(13,536.83)
82%
6.8%
10.1%
18%
-$22,027.37
Market Growth
Weight
Growth
45%
18.5%
25%
-0.3%
5%
12.0%
25%
5.0%
Weighted Growth
8%
0%
1%
1%
10%
Appendix B – Return On Invested Capital
NOPLAT (Million’s)
Operating Revenues
Wireless service
Voice
Data
Directory
Other
Total operating revenues
Operating Expenses
Cost of services and sales
Selling, general and
administrative
Depreciation and amortization
Total Operating Expenses
Net Operating Profit
Effective Taxes
NOPLAT
Effective Tax Rate
$ 48,563.00
$ 32,314.00
$ 25,454.00
$ 4,724.00
$ 11,963.00
$123,018.00
$ 44,249.00
$ 37,321.00
$ 24,373.00
$ 5,416.00
$ 12,669.00
$124,028.00
$ 38,568.00
$ 40,798.00
$ 23,206.00
$ 4,806.00
$ 11,550.00
$118,928.00
$ 50,405.00
$ 49,556.00
$ 46,801.00
$ 31,407.00
$ 19,714.00
$101,526.00
$ 21,492.00
$ 6,963.77
$ 14,528.23
$ 31,526.00
$ 19,883.00
$100,965.00
$ 23,063.00
$ 8,047.57
$ 15,015.43
$
$
$
$
$
$
32%
35%
30,146.00
21,577.00
98,524.00
20,404.00
6,933.30
13,470.70
34%
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Invested Capital (Million’s)
Working Cash
Accounts receivable
Prepaid expenses
Other current assets
Total Current Operating Assets
Accounts payable and accrued
liabilities
Advanced billing and customer
deposits
Accrued taxes
Total Current Operating
Liabilities
Operating Working Capital
Property, Plant and Equipment
Goodwill
Licenses
Customer Lists and
Relationships
Other Intangible Assets
Postemployment benefit
Other Assets
Total Invested Capital
Investments in Equity Affiliates
Nonworking Cash
Total Funds Invested
Invested Capital - Financing
Method
Debt maturing within one year
Dividends payable
Long-term Debt
Postemployment benefit
obligation
Other noncurrent liabilities
Common stock
Additional paid-in capital
Retained earnings
Treasury shares
Accumulated other
comprehensive loss
Noncontrolling interest
Deferred taxes: net
(asset)/liability
Total Funds Invested
check funds invested balances
2009
$ 2,460.36
$ 14,978.00
$ 1,572.00
$ 2,708.00
$ 21,718.36
2008
$ 1,792.00
$ 16,047.00
$ 1,538.00
$ 2,165.00
$ 21,542.00
2007
$ 1,970.00
$ 16,185.00
$ 1,524.00
$ 2,963.00
$ 22,642.00
$ 20,999.00
$ 20,032.00
$ 21,399.00
$
$
$
$
3,849.00
1,874.00
$
$
3,571.00
5,027.00
$ 26,865.00
$ (5,146.64)
$100,093.00
$ 73,259.00
$ 48,759.00
$
$
$
$
$
25,755.00
(4,213.00)
99,088.00
71,829.00
47,306.00
$
$
$
$
$
29,997.00
(7,355.00)
95,890.00
70,713.00
37,985.00
$ 7,420.00
$ 5,644.00
$
$ 6,322.00
$236,350.36
$ 2,921.00
$ 1,341.64
$240,613.00
$ 10,582.00
$ 5,824.00
$
$ 5,728.00
$236,144.00
$ 2,332.00
$
$238,476.00
$ 14,505.00
$ 5,912.00
$ 17,291.00
$ 6,392.00
$241,333.00
$ 2,270.00
$
$243,603.00
$ 7,361.00
$ 2,479.00
$ 64,720.00
$ 14,119.00
$ 2,416.00
$ 60,872.00
$ 6,860.00
$ 2,417.00
$ 57,255.00
$ 27,849.00
$ 13,350.00
$ 6,495.00
$ 91,707.00
$ 39,366.00
$ (21,260.00)
$ 31,930.00
$ 14,207.00
$ 6,495.00
$ 91,728.00
$ 36,591.00
$ (21,410.00)
$ 24,011.00
$ 14,798.00
$ 6,495.00
$ 91,638.00
$ 33,297.00
$ (15,683.00)
$ (14,408.00)
$
425.00
$ (17,057.00)
$
403.00
$
$
$ 22,529.00
$240,613.00
$ 18,182.00
$238,476.00
$ 22,895.00
$243,603.00
$
$
$
4,170.00
1,696.00
-
-
(380.00)
-
-
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ROIC
2009
14,528
2008
15,015
236,247
6.1%
238,739
6.3%
Decomposition of ROIC
After tax operating margin (NOPAT/Revenue)
Pre-tax operating margin (NOP / Revenue)
Average capital turns (Revenue / Avg IC)
Pre-tax ROIC
Effective tax rate
ROIC
12%
17%
0.52
8%
32%
6%
12%
19%
0.52
8%
35%
6%
Analysis of operating margin
Cost of services and sales
Selling, general and administrative
Depreciation and amortization
Net Operating Profit (NOP before taxes)
41%
26%
16%
17%
40%
25%
16%
19%
(26.29)
1.24
1.70
2.56
(21.27)
1.26
1.73
2.88
13.67
21.45
20.42
0.52
9.81
20.96
20.30
0.52
NOPAT
Average IC
ROIC (NOPAT/Average IC)
Analysis of capital productivity (Revenue/ Avg IC)
Operating WC turns (Rev / Avg Ops WC)
Property & equipment turns (Rev / Avg P&E)
Goodwill Turns (Rev/Avg Goodwill)
Licenses Turns (Rev/Avg Licenses)
Customer Lists and Relationships (Rev / Avg Customer
Lists)
Other Intangible turns (Rev / Avg Intangibles)
Other Assets turns (Rev / Avg Other Assets )
Average capital turns (Revenue / Avg IC)
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Appendix C - Potential Rubric
Capabilities
Relevant & Credible
Balanced & Logical
Thorough
understanding of
strategy and how each
of the components
Includes a strategy
complements one
statement.
another or do not
complement one
another. Addresses
the ‘so what’
Appropriately
Makes appropriate
concludes: (a) is
assumptions about
business creating
growth rates, and
value for customers?
churn with reasonable (b) is business
support through use of capturing value?
case facts.
Business Strategy
Components
Demonstrates
appropriate
description of four (4)
business strategy
components
Creating and
Capturing Value
Analysis
Appropriately
determines Revenue
Growth, ROIC,
Operating Margin,
and Capital Turns
performance trends
Need for Change and
Analysis of Options
Addresses that there is
a need for change or
addresses that there
isn’t a need for
change.
Uses the creating and
capturing value
analysis to support
decision.
Barriers to
Implementation
Provides 3+ potential
barriers to
implementation for
option(s) selected
Addresses how the
barriers to
implementation can
be overcome.
Communication Skills Solution is clear and
and Conclusion
written well.
Grading Scale
66
C- to C+
Deep & Significant
Solution integrates
different components
to help support an
overall conclusion.
B- to B+
Uses current situation
to determine that there
is a need for change
(i.e. iPhone Contract
and slower Network)
Ties AT&T’s strategic
position and current
performance to
identify and address
implementation
issues.
Solution provides
further insight beyond
the teaching notes6
A- to A+
Adjusted Version of Week 1 ACC 684 PowerPoint Slide 19 , Nancy Vanden Bosch
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