EX-13 10 ex13.htm AT&T INC. 2017 ANNUAL REPORT

Selected Financial and Operating Data
                             
Dollars in millions except per share amounts
                             
                               
At December 31 and for the year ended:
 
2017
   
2016
   
2015
   
2014
   
2013
 
Financial Data
                             
Operating revenues
 
$
160,546
   
$
163,786
   
$
146,801
   
$
132,447
   
$
128,752
 
Operating expenses
 
$
139,597
   
$
139,439
   
$
122,016
   
$
120,235
   
$
98,000
 
Operating income
 
$
20,949
   
$
24,347
   
$
24,785
   
$
12,212
   
$
30,752
 
Interest expense
 
$
6,300
   
$
4,910
   
$
4,120
   
$
3,613
   
$
3,940
 
Equity in net income (loss) of affiliates
 
$
(128
)
 
$
98
   
$
79
   
$
175
   
$
642
 
Other income (expense) - net
 
$
618
   
$
277
   
$
(52
)
 
$
1,581
   
$
596
 
Income tax (benefit) expense
 
$
(14,708
)
 
$
6,479
   
$
7,005
   
$
3,619
   
$
9,328
 
Net Income
 
$
29,847
   
$
13,333
   
$
13,687
   
$
6,736
   
$
18,722
 
   Less: Net Income Attributable to Noncontrolling Interest
 
$
(397
)
 
$
(357
)
 
$
(342
)
 
$
(294
)
 
$
(304
)
Net Income Attributable to AT&T
 
$
29,450
   
$
12,976
   
$
13,345
   
$
6,442
   
$
18,418
 
Earnings Per Common Share:
                                       
   Net Income Attributable to AT&T
 
$
4.77
   
$
2.10
   
$
2.37
   
$
1.24
   
$
3.42
 
Earnings Per Common Share - Assuming Dilution:
                                       
   Net Income Attributable to AT&T
 
$
4.76
   
$
2.10
   
$
2.37
   
$
1.24
   
$
3.42
 
Cash and cash equivalents
 
$
50,498
   
$
5,788
   
$
5,121
   
$
8,603
   
$
3,339
 
Total assets
 
$
444,097
   
$
403,821
   
$
402,672
   
$
296,834
   
$
281,423
 
Long-term debt
 
$
125,972
   
$
113,681
   
$
118,515
   
$
75,778
   
$
69,091
 
Total debt
 
$
164,346
   
$
123,513
   
$
126,151
   
$
81,834
   
$
74,589
 
Capital expenditures
 
$
21,550
   
$
22,408
   
$
20,015
   
$
21,433
   
$
21,228
 
Dividends declared per common share
 
$
1.97
   
$
1.93
   
$
1.89
   
$
1.85
   
$
1.81
 
Book value per common share
 
$
23.13
   
$
20.22
   
$
20.12
   
$
17.40
   
$
18.10
 
Ratio of earnings to fixed charges
   
2.63
     
3.59
     
4.01
     
2.91
     
6.03
 
Debt ratio
   
53.6
%
   
49.9
%
   
50.5
%
   
47.5
%
   
44.1
%
Net debt ratio
   
37.2
%
   
47.5
%
   
48.5
%
   
42.6
%
   
42.1
%
Weighted-average common shares outstanding (000,000)
   
6,164
     
6,168
     
5,628
     
5,205
     
5,368
 
Weighted-average common shares outstanding with dilution (000,000)
   
6,183
     
6,189
     
5,646
     
5,221
     
5,385
 
End of period common shares outstanding (000,000)
   
6,139
     
6,139
     
6,145
     
5,187
     
5,226
 
Operating Data
                                       
Total wireless customers (000)
   
156,666
     
146,832
     
137,324
     
120,554
     
110,376
 
Video connections (000)1
   
38,899
     
38,015
     
37,934
     
5,943
     
5,460
 
In-region network access lines in service (000)
   
11,753
     
13,986
     
16,670
     
19,896
     
24,639
 
Broadband connections (000)
   
15,719
     
15,605
     
15,778
     
16,028
     
16,425
 
Number of employees
   
254,000
     
268,540
     
281,450
     
243,620
     
243,360
 
Prior period amounts are restated to conform to current-period reporting methodology. 
 
1

 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
 
RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico. The following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), our 2015 results include 160 days of DIRECTV-related operations compared with a full year in 2016 and 2017. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

Consolidated Results  Our financial results are summarized in the table below. We then discuss factors affecting our overall results for the past three years. These factors are discussed in more detail in our "Segment Results" section. We also discuss our expected revenue and expense trends for 2018 in the "Operating Environment and Trends of the Business" section.

                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
   
2017
   
2016
   
2015
   
2016
   
2015
 
Operating revenues
                             
   Service
 
$
145,597
   
$
148,884
   
$
131,677
     
(2.2
)%
   
13.1
%
   Equipment
   
14,949
     
14,902
     
15,124
     
0.3
     
(1.5
)
Total Operating Revenues
   
160,546
     
163,786
     
146,801
     
(2.0
)
   
11.6
 
Operating expenses
                                       
   Cost of services and sales
                                       
     Equipment
   
18,709
     
18,757
     
19,268
     
(0.3
)
   
(2.7
)
     Broadcast, programming and operations
   
21,159
     
19,851
     
11,996
     
6.6
     
65.5
 
     Other cost of services
   
37,511
     
38,276
     
35,782
     
(2.0
)
   
7.0
 
   Selling, general and administrative
   
34,917
     
36,347
     
32,919
     
(3.9
)
   
10.4
 
   Asset abandonments and impairments
   
2,914
     
361
     
35
     
-
     
-
 
   Depreciation and amortization
   
24,387
     
25,847
     
22,016
     
(5.6
)
   
17.4
 
Total Operating Expenses
   
139,597
     
139,439
     
122,016
     
0.1
     
14.3
 
Operating Income
   
20,949
     
24,347
     
24,785
     
(14.0
)
   
(1.8
)
Interest expense
   
6,300
     
4,910
     
4,120
     
28.3
     
19.2
 
Equity in net income (loss) of affiliates
   
(128
)
   
98
     
79
     
-
     
24.1
 
Other income (expense) – net
   
618
     
277
     
(52
)
   
-
     
-
 
Income Before Income Taxes
   
15,139
     
19,812
     
20,692
     
(23.6
)
   
(4.3
)
Net Income
   
29,847
     
13,333
     
13,687
     
-
     
(2.6
)
Net Income Attributable to AT&T
 
$
29,450
   
$
12,976
   
$
13,345
     
-
%
   
(2.8
)%

OVERVIEW

Operating revenues decreased $3,240, or 2.0%, in 2017 and increased $16,985, or 11.6%, in 2016.

Service revenues decreased $3,287, or 2.2%, in 2017 and increased $17,207, or 13.1%, in 2016. The decrease in 2017 was primarily due to continued declines in legacy wireline voice and data products and lower wireless service revenues reflecting increased adoption of unlimited plans. Additionally, we waived $243 in service revenues for customers in areas affected by natural disasters during 2017. These decreases were partially offset by increased revenues from video and strategic business services. The increase in 2016 was primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic service revenues, partially offset by declines in our legacy wireline voice and data products and lower wireless service revenues from competitive offerings that entitle customers to lower monthly service rates.
 
2


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
In 2018, we will continue to see some pressure from legacy revenues and some early challenges with wireless service revenues until we lap the first year of unlimited offerings, and then move toward improvements in wireless service revenues.

Equipment revenues increased $47, or 0.3%, in 2017 and decreased $222, or 1.5%, in 2016. The increase in 2017 was primarily due to increased sales volume in Mexico offset by declines in U.S. wireless sales. The decline in 2016 reflects fewer domestic wireless handset sales and additional promotional offers, partially offset by the sale of higher-priced devices. Equipment revenue is becoming increasingly unpredictable as many customers are bringing their own devices or choosing to upgrade devices less frequently.

Operating expenses increased $158, or 0.1%, in 2017 and $17,423, or 14.3%, in 2016.

Equipment expenses decreased $48, or 0.3%, in 2017 and $511, or 2.7%, in 2016. The decrease in 2017 was driven by lower customer premises equipment contracts when compared to the prior year, which was largely offset by increased wireless device sales, despite pressure from customers upgrading less frequently. More promotional offers, and the sale of higher-priced devices during the fourth quarter of 2017, contributed to higher domestic wireless equipment costs, and higher sales volume from our Mexico wireless customers also offset expense declines. Expense decreases in 2016 were primarily driven by lower domestic wireless handset sales, partially offset by increased sales volumes in Mexico.

Broadcast, programming and operations expenses increased $1,308, or 6.6%, in 2017 and $7,855, or 65.5%, in 2016. The increase in 2017 reflected annual content cost increases and additional programming costs. The increase in 2016 was due to our acquisition of DIRECTV.

Other cost of services expenses decreased $765, or 2.0%, in 2017 and increased $2,494, or 7.0%, in 2016. The decrease in 2017 reflected our continued focus on cost management and the utilization of automation and digitalization where appropriate. Expense declines also reflect lower traffic compensation and wireless interconnect costs, partially offset by an increase in amortization of deferred customer fulfillment costs.

The expense increase in 2016 was primarily due to our acquisition of DIRECTV and an increase in noncash financing-related costs associated with our pension and postretirement benefits. The expense increase also reflects a $1,185 change in our annual pension and postemployment benefit actuarial adjustment, which consisted of a loss in 2016 and a gain in 2015. These increases were partially offset by lower comparative network rationalization charges, net expenses associated with our deferral and amortization of customer fulfillment costs, and network and access charges.

Selling, general and administrative expenses decreased $1,430, or 3.9%, in 2017 and increased $3,428, or 10.4%, in 2016. The decrease in 2017 was attributable to our disciplined cost management, lower selling and commission costs from reduced volumes and lower marketing costs. These decreases were partially offset by lower gains on wireless spectrum transactions during 2017 than in 2016, costs arising from natural disasters and a special bonus paid to employees upon enactment of U.S. corporate tax reform.

The increase in 2016 was primarily due to our acquisitions in 2015 and increased advertising activity. Expenses also include an increase of $1,991 as a result of recording an actuarial loss in 2016 and an actuarial gain in 2015. These increases were offset by noncash gains of $714 on wireless spectrum transactions, lower wireless commissions and reduced employee separation costs.

Asset abandonments and impairments expense increased $2,553 in 2017 and $326 in 2016. The increase in 2017 was primarily due to a fourth-quarter 2017 noncash charge of $2,883 resulting from the abandonment of certain copper assets that will not be necessary to support future network activity due to fiber deployment plans in particular markets. During 2016, we recorded additional noncash charges for the impairment of wireless and other assets, when compared to 2015. (See Note 6)

Depreciation and amortization expense decreased $1,460, or 5.6%, in 2017 and increased $3,831, or 17.4%, in 2016. Depreciation expense decreased $895, or 4.3%, in 2017. The decreases in 2017 were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $845 of the decrease. Also contributing to lower depreciation
 
3


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars
in millions except per share and per subscriber amounts
 
expenses were network assets becoming fully depreciated. These decreases were partially offset by increases resulting from ongoing capital spending for upgrades and expansion.

Depreciation expense in 2016 increased $1,336, or 6.9%, primarily due to the acquisition of DIRECTV and ongoing capital investment for network upgrades. The increases were partially offset by a $462 decrease associated with our 2016 change in the estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network.

Amortization expense decreased $565, or 10.9%, in 2017 and increased $2,495, or 92.0%, in 2016. The 2017 decrease was due to lower amortization of intangibles for customer lists associated with acquisitions. The 2016 increase was due to the amortization of intangibles from the previously mentioned acquisitions.

Operating income decreased $3,398, or 14.0%, in 2017 and $438, or 1.8%, in 2016. Our operating margin was 13.0% in 2017, compared to 14.9% in 2016 and 16.9% in 2015. Contributing to the decrease in 2017 were asset abandonments and impairments of $2,914 compared to $361 in 2016 and higher costs due to natural disasters. These decreases were partially offset by disciplined cost management and the utilization of digitalization and automation in the business. Contributing $3,176 to the decrease in operating income in 2016 was a noncash actuarial loss of $1,024 compared to an actuarial gain of $2,152 in 2015. These decreases were partially offset by continued efforts to reduce operating costs and achieve merger synergies.

Interest expense increased $1,390, or 28.3%, in 2017 and $790, or 19.2%, in 2016. The increase in 2017 was primarily due to higher debt balances in anticipation of closing our acquisition of Time Warner Inc. (Time Warner) and an increase in average interest rates when compared to the prior year. Financing fees related to pending acquisitions and debt exchange costs also contributed to higher interest expense in 2017. The increase in 2016 was primarily due to higher average interest rates and higher average debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. Interest expense is expected to increase in 2018 due to lower capitalized interest as spectrum associated with our network deployment plans is put into service.

Equity in net income of affiliates decreased $226 in 2017 and increased $19, or 24.1%, in 2016. The decrease in 2017 was predominantly due to losses from our legacy publishing business (which we sold in June 2017). The increase in 2016 was primarily due to the overall growth in income from our investments in video-related businesses. (See Note 8)

Other income (expense) – net increased $341 in 2017 and $329 in 2016. The increases were primarily due to higher net gains from the sale of non-strategic assets and investments of $98 and $271, and growth in interest and dividend income of $261 and $23, respectively. Our interest and dividend income in 2017 includes interest on cash held in anticipation of closing our acquisition of Time Warner.

Income tax expense decreased $21,187 in 2017 and $526, or 7.5%, in 2016. The decrease in 2017 was primarily due to the enactment of U.S. corporate tax reform, resulting in the remeasurement of our deferred tax obligation using the 21% U.S. federal tax rate from the previous 35% rate. The decrease in 2016 was primarily due to a change in income before income taxes. Our effective tax rate was (97.2)% in 2017, 32.7% in 2016 and 33.9% in 2015.

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21% and implements a territorial tax system. Accounting Standards Codification (ASC) 740, "Income Taxes," requires that the effects of changes in tax rates and laws be recognized in the period in which the legislation is enacted. As a result, we decreased our 2017 tax expense by $20,271 primarily related to the remeasurement of the net deferred tax liabilities at the new lower federal tax rate, $816 of which represented the change in statutory rates on items deductible in the fourth-quarter. The effects related to foreign earnings of the one-time transition tax and new territorial tax system do not create material impacts to the effective tax rate and total tax expense. (See Note 11)

The provisions of the Act, which will have a positive impact on our effective tax rate in 2018 and subsequent years, are expected to reduce our effective tax rate in 2018 to approximately 23% (excluding any one-time items).
4


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. Each segment's percentage calculation of total segment operating revenue and income is derived from our segment results table in Note 4, and may total more than 100 percent due to losses in one or more segments. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

The Business Solutions segment accounted for approximately 43% of our 2017 total segment operating revenues compared to 44% in 2016 and 54% of our 2017 total Segment Contribution as compared to 52% in 2016. This segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products; FlexWare, a service that relies on Software Defined Networking (SDN) and Network Functions Virtualization (NFV) to provide application-based routing, and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete communications solution to our business customers.

The Entertainment Group segment accounted for approximately 32% of our total segment operating revenues in 2017 and 2016 and 18% of our 2017 total Segment Contribution as compared to 19% in 2016. This segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our IP-based and copper wired network and our satellite technology.

The Consumer Mobility segment accounted for approximately 20% of our total segment operating revenues in 2017 and 2016 and 29% of our 2017 total Segment Contribution as compared to 31% in 2016. This segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet and home monitoring services over wireless devices.

The International segment accounted for approximately 5% of our 2017 total segment operating revenues as compared to 4% in 2016. This segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as our satellite fleet. Our domestic communications business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment. In expectation of the close of our acquisition of Time Warner, we are beginning to realign our operations and strategies. We are pushing down administrative activities into the business units to better manage costs and serve our customers.
 
5



Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

Business Solutions
                             
Segment Results
                             
                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
   
2017
   
2016
   
2015
   
2016
   
2015
 
Segment operating revenues
                             
     Wireless service
 
$
31,902
   
$
31,850
   
$
30,687
     
0.2
%
   
3.8
%
     Fixed strategic services
   
12,227
     
11,431
     
10,383
     
7.0
     
10.1
 
     Legacy voice and data services
   
13,931
     
16,370
     
18,546
     
(14.9
)
   
(11.7
)
     Other service and equipment
   
3,451
     
3,566
     
3,559
     
(3.2
)
   
0.2
 
     Wireless equipment
   
7,895
     
7,771
     
7,952
     
1.6
     
(2.3
)
Total Segment Operating Revenues
   
69,406
     
70,988
     
71,127
     
(2.2
)
   
(0.2
)
                                         
Segment operating expenses
                                       
     Operations and support
   
42,929
     
44,330
     
44,946
     
(3.2
)
   
(1.4
)
     Depreciation and amortization
   
9,326
     
9,832
     
9,789
     
(5.1
)
   
0.4
 
Total Segment Operating Expenses
   
52,255
     
54,162
     
54,735
     
(3.5
)
   
(1.0
)
Segment Operating Income
   
17,151
     
16,826
     
16,392
     
1.9
     
2.6
 
Equity in Net Income (Loss) of Affiliates
   
(1
)
   
-
     
-
     
-
     
-
 
Segment Contribution
 
$
17,150
   
$
16,826
   
$
16,392
     
1.9
%
   
2.6
%

The following tables highlight other key measures of performance for the Business Solutions segment:
     
                           
                   
Percent Change
 
                   
2017 vs.
 
2016 vs.
 
At December 31 (in 000s)
 
2017
   
2016
   
2015
 
2016
 
2015
 
Business Wireless Subscribers
                         
Postpaid
   
51,811
     
50,688
     
48,290
     
2.2
%
   
5.0
%
Reseller
   
87
     
65
     
85
     
33.8
     
(23.5
)
Connected devices 1
   
38,534
     
30,649
     
25,284
     
25.7
     
21.2
 
Total Business Wireless Subscribers
   
90,432
     
81,402
     
73,659
     
11.1
     
10.5
 
                                         
Business IP Broadband Connections
   
1,025
     
977
     
911
     
4.9
%
   
7.2
%
 
                   
Percent Change
 
                   
2017 vs.
 
2016 vs.
 
(in 000s)
 
2017
   
2016
   
2015
   
2016
   
2015
 
Business Wireless Net Additions2, 4
                             
Postpaid
   
147
     
759
     
1,203
     
(80.6
)%
   
(36.9
)%
Reseller
   
7
     
(33
)
   
13
     
-
     
-
 
Connected devices1
   
9,639
     
5,330
     
5,315
     
80.8
     
0.3
 
Business Wireless Net Subscriber Additions
   
9,793
     
6,056
     
6,531
     
61.7
     
(7.3
)
                                         
Business Wireless Postpaid Churn 2, 3, 4
   
1.04
%
   
1.00
%
   
0.99
%
4 BP
 
1 BP
 
                                         
Business IP Broadband Net Additions
   
48
     
66
     
89
     
(27.3
)%
   
(25.8
)%
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.
 
4 2017 excludes the impact of the 2G shutdown, which is reflected in beginning of period subscribers.
 
 
6


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
Operating revenues decreased $1,582, or 2.2% in 2017 and $139, or 0.2%, in 2016. Revenue declines in 2017 reflect technological shifts away from legacy products. These decreases were partially offset by fixed strategic services, which represented 41% of non-wireless revenues in 2017 and 36% in 2016. The decrease in 2016 was driven by continued declines in our legacy voice and data services and lower wireless equipment revenues, partially offset by continued growth in fixed strategic and wireless services. Our revenues continued to be pressured by slow fixed business investment, although we expect that trend to change with the enactment of corporate tax reform.

Wireless service revenues increased $52, or 0.2%, in 2017 and $1,163, or 3.8%, in 2016. The increase in 2017 was primarily due to the migration of customers from our Consumer Mobility segment, partially offset by customers shifting to our unlimited plans. The increase in 2016 reflected smartphone and tablet gains as well as customer migrations from our Consumer Mobility segment. In 2018, we will continue to see some early challenges with wireless service revenue until we lap the first year of unlimited plans, and then move toward wireless service revenue improvements.

Business wireless subscribers increased 11.1%, to 90.4 million subscribers at December 31, 2017 compared to 10.5%, to 81.4 million subscribers at December 31, 2016. Postpaid subscribers increased 2.2% in 2017 compared to 5.0% in 2016 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 churn, increased 25.7% from the prior year reflecting growth in our connected car business and other data-centric devices that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT).

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 1.04% in 2017 from 1.00% in 2016 and 0.99% in 2015.

Fixed strategic services revenues increased $796, or 7.0%, in 2017 and $1,048, or 10.1%, in 2016. Our revenues increased in 2017 and 2016 due to: Ethernet increases of $275 and $226, VoIP increases of $205 and $205, and Dedicated Internet services increases of $198 and $231, respectively.

Due to advances in technology, our most advanced business solutions are subject to change periodically. We review and evaluate our fixed strategic service offerings annually, which may result in an updated definition and the recast of our historical financial information to conform to the current-period presentation. Any modifications will be reflected in the first quarter.

Legacy voice and data service revenues decreased $2,439, or 14.9%, in 2017 and $2,176, or 11.7%, in 2016. Traditional data revenues in 2017 and 2016 decreased $1,130 and $1,186 and long-distance and local revenues decreased $1,309 and $990, respectively. 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 and equipment revenues decreased $115, or 3.2%, in 2017 and increased $7, or 0.2%, in 2016. 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 decrease in 2017, and increase in 2016, were primarily due to the timing of nonrecurring customer premises equipment contracts.

Wireless equipment revenues increased $124, or 1.6%, in 2017 and decreased $181, or 2.3%, in 2016. The increase in 2017 was primarily due to an increase in device upgrades and increased sales of higher-priced smartphones, largely offset by a change in customer buying habits and promotional offers. The decrease in 2016 was primarily due to a decrease in handsets sold and increased promotional offers, partially offset by an increase in sales under our equipment installment agreements, including our AT&T NextSM (AT&T Next) program. We expect wireless equipment revenues to be pressured in 2018 as customers are retaining their handsets for longer periods of time.

Operations and support expenses decreased $1,401, or 3.2%, in 2017 and $616, or 1.4%, in 2016. 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 2017 were primarily due to efforts to automate and digitalize our support activities, improving results $723. As of December 31, 2017, approximately 55% of our network functions have been moved to software-based systems. Expense reductions also reflect lower traffic compensation and wireless interconnect costs,
 
7


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
resulting in declines of $233. Lower administrative costs also contributed to decreased expenses in 2017. Partially offsetting the decreases were higher marketing cost and increased wireless handset insurance cost.

Decreased operations and support expenses in 2016 were primarily due to legacy product declines, workforce reductions, and other cost-reduction initiatives that improved results $283, and net expense reductions associated with fulfillment cost deferrals, which reduced expenses $219. Lower wireless sales volume and average commission rates, including those paid under the equipment installment programs, combined with fewer handset upgrade transactions reduced expenses $225, and lower wireless handset volumes, which were partially offset by the sale of higher-priced wireless devices and higher-priced customer premises equipment, reduced equipment cost $186. Partially offsetting the decreases were higher wireless handset insurance costs of $195 resulting from increased claim rates and costs per claim and the impact of Connect America and High Cost Funds' receipts.

Depreciation expense decreased $506, or 5.1%, in 2017 and increased $43, or 0.4%, in 2016. The decrease in 2017 was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.

The increase in 2016 was primarily due to ongoing capital spending for network upgrades and expansion and accelerating depreciation related to the shutdown of our U.S. 2G network, partially offset by fully depreciated assets. The increase in 2016 was largely offset by the change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network.

Operating income increased $325, or 1.9%, in 2017 and $434, or 2.6%, in 2016. Our Business Solutions segment operating income margin was 24.7% in 2017, compared to 23.7% in 2016 and 23.0% in 2015. Our Business Solutions EBITDA margin was 38.1% in 2017, compared to 37.6% in 2016 and 36.8% in 2015.

Entertainment Group
                             
Segment Results
                             
                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
   
2017
   
2016
   
2015
   
2016
   
2015
 
Segment operating revenues
                             
     Video entertainment
 
$
36,728
   
$
36,460
   
$
20,271
     
0.7
%
   
79.9
%
     High-speed internet
   
7,674
     
7,472
     
6,601
     
2.7
     
13.2
 
     Legacy voice and data services
   
3,920
     
4,829
     
5,914
     
(18.8
)
   
(18.3
)
     Other service and equipment
   
2,376
     
2,534
     
2,508
     
(6.2
)
   
1.0
 
Total Segment Operating Revenues
   
50,698
     
51,295
     
35,294
     
(1.2
)
   
45.3
 
                                         
Segment operating expenses
                                       
     Operations and support
   
39,420
     
39,338
     
28,345
     
0.2
     
38.8
 
     Depreciation and amortization
   
5,623
     
5,862
     
4,945
     
(4.1
)
   
18.5
 
Total Segment Operating Expenses
   
45,043
     
45,200
     
33,290
     
(0.3
)
   
35.8
 
Segment Operating Income (Loss)
   
5,655
     
6,095
     
2,004
     
(7.2
)
   
-
 
Equity in Net Income (Loss) of Affiliates
   
(30
)
   
9
     
(4
)
   
-
     
-
 
Segment Contribution
 
$
5,625
   
$
6,104
   
$
2,000
     
(7.8
)%
   
-
%

 
8


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
The following tables highlight other key measures of performance for the Entertainment Group segment:

                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
At December 31 (in 000s)
 
2017
   
2016
   
2015
   
2016
   
2015
 
Video Connections
                             
   Satellite
   
20,458
     
21,012
     
19,784
     
(2.6
)%
   
6.2
%
   U-verse
   
3,631
     
4,253
     
5,614
     
(14.6
)
   
(24.2
)
   DIRECTV NOW1
   
1,155
     
267
     
-
     
-
     
-
 
Total Video Connections
   
25,244
     
25,532
     
25,398
     
(1.1
)
   
0.5
 
                                         
Broadband Connections
                                       
   IP
   
13,462
     
12,888
     
12,356
     
4.5
     
4.3
 
   DSL
   
888
     
1,291
     
1,930
     
(31.2
)
   
(33.1
)
Total Broadband Connections
   
14,350
     
14,179
     
14,286
     
1.2
     
(0.7
)
                                         
Retail Consumer Switched Access Lines
   
4,774
     
5,853
     
7,286
     
(18.4
)
   
(19.7
)
U-verse Consumer VoIP Connections
   
5,222
     
5,425
     
5,212
     
(3.7
)
   
4.1
 
Total Retail Consumer Voice Connections
   
9,996
     
11,278
     
12,498
     
(11.4
)%
   
(9.8
)%
Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on free-trial.

                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
(in 000s)
 
2017
   
2016
   
2015
   
2016
   
2015
 
Video Net Additions
                             
   Satellite1
   
(554
)
   
1,228
     
240
     
-
%
   
-
%
   U-verse1
   
(622
)
   
(1,361
)
   
(306
)
   
54.3
     
-
 
   DIRECTV NOW2
   
888
     
267
     
-
     
-
     
-
 
Net Video Additions
   
(288
)
   
134
     
(66
)
   
-
     
-
 
                                         
Broadband Net Additions
                                       
   IP
   
574
     
532
     
973
     
7.9
     
(45.3
)
   DSL
   
(403
)
   
(639
)
   
(1,130
)
   
36.9
     
43.5
 
Net Broadband Additions
   
171
     
(107
)
   
(157
)
   
-
%
   
31.8
%
Includes disconnections for customers that migrated to DIRECTV NOW. 
Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on free-trial.

Operating revenues decreased $597, or 1.2%, in 2017 and increased $16,001, or 45.3% in 2016. The decrease in 2017 was largely due to lower revenues from legacy voice, data products, and other services, partially offset by growth in revenues from video and IP broadband services. The increase in 2016 was largely due to our acquisition of DIRECTV in July 2015 and continued growth in consumer IP broadband, which offset lower revenues from legacy voice and data products.

As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite and AT&T U-verse® (U-verse) subscribers. In November 2016, we launched DIRECTV NOW, our video streaming option that does not require either satellite or U-verse service (commonly called over-the-top video service).

Video entertainment revenues increased $268, or 0.7%, in 2017 and $16,189, or 79.9%, in 2016. These increases reflect a 2.7% and 5.6% increase in average revenue per linear (combined satellite and U-verse) video connection. Advertising revenues also increased $111, or 7.3%, in 2017 and $367, or 32.1%, in 2016. As of December 31, 2017, about 85% of our linear video subscribers were on the DIRECTV platform, compared to 80% at December 31, 2016. The increase in 2016 was primarily related to our acquisition of DIRECTV.

Linear video subscriber losses and associated margin pressure continued their recent trend, with some of the losses due to the impact from hurricanes as well as tightening of our credit policies. We are also seeing the impact of customers wanting
 
9


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
mobile and over-the-top offerings, which is contributing to growth in DIRECTV NOW connections and partially offsetting linear video subscriber losses. DIRECTV NOW connections continue to grow as we add eligible devices and increase content choices. Our strategy to bundle services has positively impacted subscriber trends and churn, with customers who bundle our wireless and video services having nearly half the rate of churn as satellite customers with a single service.

High-speed internet revenues increased $202, or 2.7%, in 2017 and $871, or 13.2%, in 2016. Average revenue per IP broadband connection (ARPU) decreased 1.9% in 2017 and increased 7.3% in 2016. When compared to 2016, IP broadband subscribers increased 4.5%, to 13.5 million subscribers at December 31, 2017. When compared to 2015, IP broadband subscribers increased 4.3%, to 12.9 million subscribers at December 31, 2016. Our bundling strategy is also helping to lower churn for broadband subscribers, with subscribers who bundle broadband with another AT&T service having about half the churn of broadband-only subscribers. To compete more effectively against other broadband providers in the midst of ongoing declines in DSL subscribers, we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates. We also expect our planned 5G national deployment to aid our ability to provide more locations with competitive broadband speeds.

Legacy voice and data service revenues decreased $909, or 18.8%, in 2017 and $1,085, or 18.3%, in 2016. For 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 9% for 2016 and 17% for 2015 and reflect decreases of $610 and $663 in local voice and long-distance, and $299 and $422 in traditional data revenues. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At December 31, 2017, approximately 6% of our broadband connections were DSL compared to 9% at December 31, 2016.

Operations and support expenses increased $82, or 0.2%, in 2017 and $10,993, or 38.8%, in 2016. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, which include costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.

Increased operations and support expenses in 2017 were primarily due to annual content cost increases, deferred customer fulfillment cost amortization and video platform development costs. Offsetting these increases were the impacts of our ongoing focus on cost efficiencies and merger synergies, as well as workforce reductions and lower marketing costs.

Increased operations and support expenses in 2016 were primarily due to our 2015 acquisition of DIRECTV, which increased expenses by $11,748, and reflected pressure from cost increases for the NFL SUNDAY TICKET®. The DIRECTV-related increases were also due to higher content costs, customer support and service-related charges, and advertising expenses.

Depreciation expenses decreased $239, or 4.1%, in 2017 and increased $917, or 18.5%, in 2016. The decrease in 2017 was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, offset by ongoing capital spending for network upgrades and expansion.

The increase in 2016 was primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets and a change to the estimated useful lives and salvage value of certain assets associated with our transition to an IP-based network.

Operating income decreased $440 in 2017 and increased $4,091 in 2016. Our Entertainment Group segment operating income margin was 11.2% in 2017, 11.9% in 2016 and 5.7% in 2015. Our Entertainment Group EBITDA margin was 22.2% in 2017, 23.3% in 2016 and 19.7% in 2015.
10


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
Consumer Mobility
                             
Segment Results
                             
                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
   
2017
   
2016
   
2015
   
2016
   
2015
 
Segment operating revenues
                             
     Service
 
$
26,053
   
$
27,536
   
$
29,150
     
(5.4
)%
   
(5.5
)%
     Equipment
   
5,499
     
5,664
     
5,916
     
(2.9
)
   
(4.3
)
Total Segment Operating Revenues
   
31,552
     
33,200
     
35,066
     
(5.0
)
   
(5.3
)
                                         
Segment operating expenses
                                       
     Operations and support
   
18,966
     
19,659
     
21,477
     
(3.5
)
   
(8.5
)
     Depreciation and amortization
   
3,507
     
3,716
     
3,851
     
(5.6
)
   
(3.5
)
Total Segment Operating Expenses
   
22,473
     
23,375
     
25,328
     
(3.9
)
   
(7.7
)
Segment Operating Income
   
9,079
     
9,825
     
9,738
     
(7.6
)
   
0.9
 
Equity in Net Income of Affiliates
   
-
     
-
     
-
     
-
     
-
 
Segment Contribution
 
$
9,079
   
$
9,825
   
$
9,738
     
(7.6
)%
   
0.9
%

The following tables highlight other key measures of performance for the Consumer Mobility segment:
 
               
             
Percent Change
 
             
2017 vs.
 
2016 vs.
 
At December 31 (in 000s)
2017
 
2016
 
2015
 
2016
 
2015
 
Consumer Mobility Subscribers
                   
   Postpaid
   
26,064
     
27,095
     
28,814
     
(3.8
)%
   
(6.0
)%
   Prepaid 2
   
15,335
     
13,536
     
11,548
     
13.3
     
17.2
 
Branded
   
41,399
     
40,631
     
40,362
     
1.9
     
0.7
 
Reseller
   
9,279
     
11,884
     
13,690
     
(21.9
)
   
(13.2
)
Connected devices1,2
   
457
     
942
     
929
     
(51.5
)
   
1.4
 
Total Consumer Mobility Subscribers
   
51,135
     
53,457
     
54,981
     
(4.3
)%
   
(2.8
)%
1 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes postpaid 
   tablets. See (2) below.  
2 Beginning in 2017, we are reporting prepaid IoT connections, which primarily consist of connected cars, as a component of  
   prepaid subscribers.  
 
11



Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

                   
Percent Change
 
                   
2017 vs.
 
2016 vs.
 
(in 000s)
 
2017
   
2016
   
2015
 
2016
 
2015
 
Consumer Mobility Net Additions1, 4
                         
  Postpaid
   
447
     
359
     
463
     
24.5
%
   
(22.5
)%
  Prepaid 5
   
1,013
     
1,575
     
1,364
     
(35.7
)
   
15.5
 
Branded Net Additions
   
1,460
     
1,934
     
1,827
     
(24.5
)
   
5.9
 
Reseller
   
(1,878
)
   
(1,813
)
   
(168
)
   
(3.6
)
   
-
 
Connected devices2,5
   
52
     
19
     
(131
)
   
-
     
-
 
Consumer Mobility Net Subscriber Additions
   
(366
)
   
140
     
1,528
     
-
%
   
(90.8
)%
                                         
Total Churn1, 3, 4
   
2.36
%
   
2.15
%
   
1.94
%
21 BP
 
21 BP
 
Postpaid Churn1, 3, 4
   
1.17
%
   
1.19
%
   
1.25
%
(2) BP
 
(6) BP
 
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. 
2 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes postpaid 
   tablets. See (5) below. 
Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total  
   number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the  
   churn rate for each month of that period.  
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which is reflected in beginning  
   of period subscribers.  
5 Beginning in 2017, we are reporting prepaid IoT connections, which primarily consist of connected cars, as a component of  
   prepaid subscribers, resulting in 153 additional prepaid net adds in the year.  

Operating revenues decreased $1,648, or 5.0%, in 2017 and $1,866, or 5.3%, in 2016. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited plans, 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.

Service revenue decreased $1,483, or 5.4%, in 2017 and $1,614, or 5.5%, in 2016. The decreases were largely due to postpaid customers continuing to shift to discounted monthly service charges under our unlimited plans and the migration of subscribers to Business Solutions. Revenues from postpaid customers declined $1,783, or 9.0%, in 2017 and $2,285, or 10.4%, in 2016. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 5.0% and 5.6%, respectively. The decreases were partially offset by higher prepaid service revenues of $715, or 12.7%, in 2017 and $953, or 20.4%, in 2016 primarily from growth in Cricket and AT&T PREPAIDSM subscribers. In 2018, we will continue to see some early challenges with wireless service revenue until we lap the first year of unlimited plans, and then move toward wireless service revenue improvements.

Equipment revenue decreased $165, or 2.9%, in 2017 and $252, or 4.3%, in 2016. The decreases in equipment revenues resulted from lower handset sales and upgrades, partially offset by the sale of higher-priced devices. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

Operations and support expenses decreased $693, or 3.5%, in 2017 and $1,818, or 8.5%, in 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

Decreased operations and support expenses in 2017 were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment and selling and commission costs, lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising and other operational efficiencies.

Decreased operations and support expenses in 2016 were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment and selling and commission costs, lower network costs attributable to transitioning to more efficient Ethernet/IP-based technologies and other operational efficiencies.
 
12



Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
Depreciation expense decreased $209, or 5.6%, in 2017 and $135, or 3.5%, in 2016. The decreases in both years were primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased $746, or 7.6%, in 2017 and increased $87, or 0.9%, in 2016. Our Consumer Mobility segment operating income margin was 28.8% in 2017, 29.6% in 2016 and 27.8% in 2015. Our Consumer Mobility EBITDA margin was 39.9% in 2017, 40.8% in 2016 and 38.8% in 2015.

International
                             
Segment Results
                             
                     
Percent Change
 
   
2017
   
2016
   
2015
   
2017 vs.
2016
   
2016 vs.
2015
 
Segment operating revenues
                             
     Video entertainment
 
$
5,456
   
$
4,910
   
$
2,151
     
11.1
%
   
-
%
     Wireless service
   
2,047
     
1,905
     
1,647
     
7.5
     
15.7
 
     Wireless equipment
   
766
     
468
     
304
     
63.7
     
53.9
 
Total Segment Operating Revenues
   
8,269
     
7,283
     
4,102
     
13.5
     
77.5
 
                                         
Segment operating expenses
                                       
     Operations and support
   
7,404
     
6,830
     
3,930
     
8.4
     
73.8
 
     Depreciation and amortization
   
1,218
     
1,166
     
655
     
4.5
     
78.0
 
Total Segment Operating Expenses
   
8,622
     
7,996
     
4,585
     
7.8
     
74.4
 
Segment Operating Income (Loss)
   
(353
)
   
(713
)
   
(483
)
   
50.5
     
(47.6
)
Equity in Net Income (Loss) of Affiliates
   
87
     
52
     
(5
)
   
67.3
     
-
 
Segment Contribution
 
$
(266
)
 
$
(661
)
 
$
(488
)
   
59.8
%
   
(35.5
)%

The following tables highlight other key measures of performance for the International segment:

                     
Percent Change
 
At December 31 (in 000s)
 
2017
   
2016
   
2015
   
2017 vs.
2016
   
2016 vs.
2015
 
Mexico Wireless Subscribers
                             
   Postpaid
   
5,498
     
4,965
     
4,289
     
10.7
%
   
15.8
%
   Prepaid
   
9,397
     
6,727
     
3,995
     
39.7
     
68.4
 
Branded
   
14,895
     
11,692
     
8,284
     
27.4
     
41.1
 
Reseller
   
204
     
281
     
400
     
(27.4
)
   
(29.8
)
Total Mexico Wireless Subscribers
   
15,099
     
11,973
     
8,684
     
26.1
     
37.9
 
                                         
Latin America Satellite Subscribers
                                       
   PanAmericana
   
8,270
     
7,206
     
7,066
     
14.8
     
2.0
 
   SKY Brazil1
   
5,359
     
5,249
     
5,444
     
2.1
     
(3.6
)
Total Latin America Satellite Subscribers
   
13,629
     
12,455
     
12,510
     
9.4
%
   
(0.4
)%
Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico 
  had 8.0 million subscribers at September 30, 2017, 8.0 and 7.3 million subscribers at December 31, 2016 and 2015, respectively. 
 
13



Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

                     
Percent Change
 
(in 000s)
 
2017
   
2016
   
2015
   
2017 vs.
2016
   
2016 vs.
2015
 
Mexico Wireless Net Additions
                             
  Postpaid
   
533
     
677
     
177
     
(21.3
)%
   
-
%
  Prepaid
   
2,670
     
2,732
     
(169
)
   
(2.3
)
   
-
 
Branded Net Additions
   
3,203
     
3,409
     
8
     
(6.0
)
   
-
 
Reseller
   
(77
)
   
(120
)
   
(104
)
   
35.8
     
(15.4
)
Mexico Wireless
  Net Subscriber Additions
   
3,126
     
3,289
     
(96
)
   
(5.0
)
   
-
 
                                         
Latin America Satellite Net Additions1
                                       
  PanAmericana
   
232
     
140
     
76
     
65.7
     
84.2
 
  SKY Brazil
   
(190
)
   
(195
)
   
(223
)
   
2.6
     
12.6
 
Latin America Satellite
  Net Subscriber Additions2
   
42
     
(55
)
   
(147
)
   
-
%
   
62.6
%
1 In 2017, we updated the methodology used to account for prepaid video connections, which were reflected in beginning of period
 
   subscribers.
 
2 SKY Mexico had net subscriber losses of 11 in the nine months ended September 30, 2017 and additions of 742 and 646 for the year
 
   ended December 31, 2016 and 2015, respectively.
 

Operating Results
Our International segment consists of the Latin American operations acquired with DIRECTV as well as our Mexican wireless operations. Video entertainment services are provided to primarily residential customers using satellite technology. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

Operating revenues increased $986, or 13.5%, in 2017 and 3,181, or 77.5%, in 2016. The increase in 2017 includes higher revenues of $546 from video services in Latin America and $440 from wireless service and equipment revenues in Mexico. The increase in 2016 includes higher revenues of $2,759 from video services in Latin America and $422 from wireless service and equipment revenues in Mexico. The growth in Latin America was primarily due to price increases driven primarily by macroeconomic conditions with mixed local currencies. Mexico wireless revenue improvements were primarily due to growth in equipment revenues as we have increased our subscriber base, partially offset by competitive pricing for services.

Operations and support expenses increased $574, or 8.4%, in 2017 and $2,900, or 73.8%, in 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits.

The increases in 2017 reflect higher charges in Latin America primarily due to higher programming and other operating costs, partially offset by foreign currency exchange rates and our reassessment of operating tax contingencies in Brazil. Increases in Mexico were primarily driven by higher operational costs, including expenses associated with our network expansion and foreign currency pressures.

The increases in 2016 were largely attributable to operations in Latin America reflecting our mid-2015 DIRECTV acquisition.

Depreciation expense increased $52, or 4.5%, in 2017 and $511, or 78.0%, in 2016. The increases were primarily due to updating the estimated asset lives for video equipment in Latin America and higher capital spending in Mexico.

Operating income increased $360, or 50.5%, in 2017 and decreased $230, or 47.6%, in 2016, and was negatively impacted by foreign exchange pressure. Our International segment operating income margin was (4.3)% in 2017, (9.8)% in 2016 and (11.8)% in 2015. Our International EBITDA margin was 10.5% in 2017, 6.2% in 2016 and 4.2% in 2015.
 
14


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
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). See "Discussion and Reconciliation of Non-GAAP Measure" for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.

AT&T Mobility Results
                             
                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
   
2017
   
2016
   
2015
   
2016
   
2015
 
Operating revenues
                             
     Service
 
$
57,955
   
$
59,386
   
$
59,837
     
(2.4
)%
   
(0.8
)%
     Equipment
   
13,394
     
13,435
     
13,868
     
(0.3
)
   
(3.1
)
Total Operating Revenues
   
71,349
     
72,821
     
73,705
     
(2.0
)
   
(1.2
)
                                         
Operating expenses
                                       
     Operations and support
   
43,255
     
43,886
     
45,789
     
(1.4
)
   
(4.2
)
EBITDA
   
28,094
     
28,935
     
27,916
     
(2.9
)
   
3.7
 
     Depreciation and amortization
   
8,027
     
8,292
     
8,113
     
(3.2
)
   
2.2
 
Total Operating Expenses
   
51,282
     
52,178
     
53,902
     
(1.7
)
   
(3.2
)
Operating Income
 
$
20,067
   
$
20,643
   
$
19,803
     
(2.8
)%
   
4.2
%

The following tables highlight other key measures of performance for AT&T Mobility:
 
                     
                     
Percent Change
 
                     
2017 vs.
   
2016 vs.
 
At December 31 (in 000s)
 
2017
   
2016
   
2015
   
2016
   
2015
 
Wireless Subscribers1
                             
    Postpaid smartphones
   
59,874
     
59,096
     
58,073
     
1.3
%
   
1.8
%
    Postpaid feature phones and data-centric devices
   
18,001
     
18,687
     
19,032
     
(3.7
)
   
(1.8
)
Postpaid
   
77,875
     
77,783
     
77,105
     
0.1
     
0.9
 
Prepaid3
   
15,335
     
13,536
     
11,548
     
13.3
     
17.2
 
Branded
   
93,210
     
91,319
     
88,653
     
2.1
     
3.0
 
Reseller
   
9,366
     
11,949
     
13,774
     
(21.6
)
   
(13.2
)
Connected devices2, 3
   
38,991
     
31,591
     
26,213
     
23.4
     
20.5
 
Total Wireless Subscribers
   
141,567
     
134,859
     
128,640
     
5.0
     
4.8
 
                                         
Branded smartphones
   
72,924
     
70,817
     
67,200
     
3.0
     
5.4
 
Smartphones under our installment programs at
  end of period
   
32,438
     
30,688
     
26,670
     
5.7
%
   
15.1
%
1 Represents 100% of AT&T Mobility wireless subscribers.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes
 
   postpaid tablets. See (3) below.
 
3 Beginning in 2017, we are reporting prepaid IoT connections, which primarily consist of connected cars, as a component of
 
   prepaid subscribers.
 
 
15



Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

                   
Percent Change
 
                   
2017 vs.
 
2016 vs.
 
(in 000s)
 
2017
   
2016
   
2015
 
2016
 
2015
 
Wireless Net Additions1, 4
                         
    Postpaid
   
594
     
1,118
     
1,666
     
(46.9
)%
   
(32.9
)%
    Prepaid5
   
1,013
     
1,575
     
1,364
     
(35.7
)
   
15.5
 
Branded Net Additions
   
1,607
     
2,693
     
3,030
     
(40.3
)
   
(11.1
)
Reseller
   
(1,871
)
   
(1,846
)
   
(155
)
   
(1.4
)
   
-
 
Connected devices2, 5
   
9,691
     
5,349
     
5,184
     
81.2
     
3.2
 
Wireless Net Subscriber Additions
   
9,427
     
6,196
     
8,059
     
52.1
     
(23.1
)
                                         
Smartphones sold under our installment
   programs during period
   
16,667
     
17,871
     
17,320
     
(6.7
)%
   
3.2
%
                                         
Total Churn3, 4
   
1.36
%
   
1.48
%
   
1.39
%
(12) BP
 
9 BP
 
Branded Churn3, 4
   
1.68
%
   
1.62
%
   
1.63
%
6 BP
 
(1) BP
 
Postpaid Churn3, 4
   
1.08
%
   
1.07
%
   
1.09
%
1 BP
 
(2) BP
 
Postpaid Phone-Only Churn3, 4
   
0.85
%
   
0.92
%
   
0.99
%
(7) BP
 
(7) BP
 
1 Excludes acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes
 
   postpaid tablets. See (5) below.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number
 
   of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for
 
   each month of that period.
 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which is reflected in beginning
  
   of period subscribers.
 
5 Beginning in 2017, we are reporting prepaid IoT connections, which primarily consist of connected cars, as a component of
 
   prepaid subscribers, resulting in 153 additional prepaid net adds in the year.
 

Operating income decreased $576, or 2.8%, in 2017 and increased $840, or 4.2%, in 2016. The operating income margin of AT&T Mobility was 28.1% in 2017, 28.3% in 2016 and 26.9% in 2015. AT&T Mobility's EBITDA margin was 39.4% in 2017, 39.7% in 2016 and 37.9% in 2015. AT&T Mobility's EBITDA service margin was 48.5% in 2017, 48.7% in 2016 and 46.7% in 2015. (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)

Subscriber Relationships
As the wireless industry has matured, future wireless growth will increasingly depend on our ability to offer innovative services, plans, devices and to provide these services in bundled product offerings to best utilize 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 mature and highly competitive market, we have launched a wide variety of plans, including unlimited, as well as equipment installment programs. Beginning in 2017, we expanded our unlimited wireless data plans to make them available to customers that do not subscribe to our video services.

ARPU
Postpaid phone-only ARPU was $58.00 in 2017, compared to $59.45 and $60.45 in 2016 and 2015, respectively. Postpaid phone-only ARPU plus equipment installment billings was $68.75 in 2017, compared to $69.76 and $68.03 in 2016 and 2015, respectively. ARPU has been affected by customers shifting to unlimited plans, which decreases overage revenues; however, customers are adding additional devices helping to offset that decline.

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 2017. Postpaid churn was higher in 2017, driven by higher tablet churn. Postpaid phone-only churn was lower in 2017, despite competitive pressure in the industry.
 
16



Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

Branded Subscribers
Branded subscribers increased 2.1% in 2017 and 3.0% in 2016. These increases reflect growth of 13.3% and 17.2% in prepaid subscribers and 0.1% and 0.9% in postpaid subscribers, respectively. Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of connected cars where customers actively subscribe for vehicle connectivity, as a component of prepaid subscribers.

At December 31, 2017, 93% of our postpaid phone subscriber base used smartphones, compared to 91% at December 31, 2016, with the majority of phone sales during the last three years attributable to smartphones. Virtually all 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. Device connections on our Mobile Share and unlimited wireless data plans now represent 87% of our postpaid customer base compared to 84% at December 31, 2016. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.

Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a specified period of time. Once certain conditions are met, AT&T Next subscribers may be eligible to trade in the original device for a new device and have the remaining unpaid balance paid or settled. For 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 choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. At December 31, 2017, about 54% of the postpaid smartphone base is on an equipment installment program compared to nearly 52% at December 31, 2016. The majority of postpaid smartphone gross adds and upgrades for all periods presented were either equipment installment plans or Bring Your Own Device (BYOD). While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

Connected Devices
Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Connected device subscribers increased 23.4% during 2017 and 20.5% in 2016. During 2017, we added approximately 6.4 million wholesale connected cars through agreements with various carmakers, and experienced strong growth in other IoT connections as well. 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

In 2018, excluding the impact of new revenue recognition rules (see Note 1) and pending acquisitions, we expect the following trends.

2018 Revenue Trends We expect our operating environment to remain highly competitive, as companies and consumers continue to demand instant connectivity, higher speeds and an integrated experience across their devices for both video and data. The recent U.S. federal tax law changes and current regulatory environment contribute to a more favorable landscape for investment in broadband services. The decrease in U.S. corporate tax rates as well as incentives for equipment investment should stimulate the economy and increase business investment overall. In 2018, we expect consolidated operating revenue pressure, driven by the ongoing shift from linear video to over-the-top and other on-demand services. We believe the intensely competitive wireless environment will continue, with service revenues improvements later in the year, and that our ability to offer integrated wireless, video and wireline services, along with continued growth in fixed strategic services, will largely offset revenue pressure. We expect legacy voice and data services will continue to decline.

2018 Expense Trends We intend to continue our focus on cost reductions, driving savings through automation, supply chain, benefit design, digitalizing transactions and optimizing network costs. In addition, the ongoing transition of our network to a more efficient software-based technology is expected to continue driving favorable expense trends over the next several years. However, expenses related to growth areas of our business including new video platforms and our deployment of 5G wireless service will place offsetting pressure on our operating income margin.

Market Conditions During 2017, the U.S. stock market experienced strong gains but general business investment remained slow, affecting our business customers. However, we expect that corporate tax reform, enacted in December 2017, will stimulate business investment and job growth, and, therefore increase demand for our services. Residential customers continue to be price sensitive in selecting offerings, especially in the wireless area, and continue to focus on products that
 
 
17


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
give them efficient access to video and broadcast services. We expect ongoing pressure on pricing during 2018 as we respond to the competitive marketplace, especially in wireless and video services.

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 2018. In September 2017, we agreed not to call the preferred equity interest until at least 2022, which increased the value of the preferred equity interests by approximately $1,245. We expect only minimal ERISA contribution requirements to our pension plans for 2018. Investment returns on these assets depend largely on trends in the U.S. securities markets and the U.S. economy, and 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. 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 2018 (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. 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. The new leadership at the FCC is charting a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. Based on their public statements, we expect the FCC to continue to eliminate antiquated, unnecessary regulations and streamline processes. In addition, 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.

On December 14, 2017, the FCC voted to return broadband internet access service to its prior classification as an information service, and reinstate the private mobile service classification of mobile broadband internet access service. The order also eliminated the FCC's Internet Conduct Standard, along with the bright-line rules and included transparency requirements related to network management. The order will be effective after it's published in the Federal Register. As a result of the FCC Order, state legislators and governors are introducing individual state laws and executive orders to reinstate portions of the net neutrality regulations vacated by the FCC order. We will continue to support congressional action to codify a set of standard consumer rules for the internet.

On April 20, 2017, the FCC adopted an order that maintains light touch pricing regulation of packet-based services, extends such light touch pricing regulation to high-speed Time Division Multiplex (TDM) transport services and to most of our TDM channel termination services, based on a competitive market test for such services. For those services that do not qualify for light touch regulation, the order allows companies to offer volume and term discounts, as well as contract tariffs. Several parties appealed the FCC's decision. These appeals were consolidated in the U.S. Court of Appeals for the Eighth Circuit, where they remain pending.

In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and Facebook. On April 3, 2017, the president signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of
 
18


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress.

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC's authority to regulate broadband internet access services, as well as internet interconnection arrangements. AT&T and several other parties appealed the FCC's order. In June 2016, a divided panel of the District of Columbia Court of Appeals upheld the FCC's rules by a 2-1 vote, and petitions for rehearing en banc were denied in May 2017. Petitions for a writ of Certiorari at the U.S. Supreme Court remain pending. Meanwhile, on December 14, 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. The order will take effect after the Office of Management and Budget approves the new disclosure requirements.

We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide IP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.

We provide wireless services in robustly competitive markets, but are subject to substantial governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers' prices and offerings are generally not subject to state or local regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the areas of consumer protection and the deployment of cell sites and equipment. The anticipated industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of "small cell" equipment and therefore increase the need for a quick permitting process.

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government to make more spectrum available. The FCC finished its most recent auction in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").

In May 2014, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs.

As the wireless industry has matured, future wireless growth will increasingly depend on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:
·
Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum in the AWS-3 Auction.
·
Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks.
·
Secured the First Responder Network Authority (FirstNet) contract, which provides us with access to a nationwide low band 20 MHz of spectrum.
·
Invested in 5G and millimeter-wave technologies with our 2018 acquisition of Fiber-Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (28 GHz and 39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services.
 
 
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

Tax Reform  On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. We expect it to stimulate investment, job creation and economic growth which should result in increased demand for our services. Upon enactment, we made $800 of voluntary contributions to employee healthcare plans, paid $220 for a special one-time bonus to more than 200,000 front-line employees and announced our plan to invest an additional $1,000 of capital in the United States in 2018. We anticipate the legislation will have a positive impact on our consolidated operations and cash flows in 2018 and subsequent years. (See Note 11)

Expected Growth Areas
Over the next few years, we expect our growth to come from international operations, IP-based broadband services and advertising and data insights (especially with Time Warner). With our 2015 acquisitions of DIRECTV and wireless properties in Mexico, our revenue mix is much more diversified. We can now provide integrated services to diverse groups of customers in the U.S. on different technological platforms, including wireless, satellite and wireline. In 2018, our key initiatives include:
·
Building a premier gigabit network. FirstNet, combined with our fiber and 5G deployment, provide a powerful platform to accelerate our move to a ubiquitous gigabit world.
·
Growing profitability in Mexico.
·
Creating a new platform for targeted advertising, using data, content and talent to build an automated advertising platform that can transform premium video and TV advertising.
·
Launching a next generation video streaming platform, adding additional enhancements and user interfaces to our video services.
·
Continuing to develop a competitive advantage through our industry-leading cost-structure.

Integration of Data/Broadband and Entertainment Services  As the communications industry continues to move toward internet-based technologies that are capable of blending wireline, satellite and wireless services, we plan to offer services that take advantage of these new and more sophisticated technologies. In particular, we intend to continue to focus on expanding our high-speed internet and video offerings and on developing IP-based services that allow customers to integrate their home or business fixed services with their mobile service. During 2018, we will continue to develop and provide unique integrated video, mobile and broadband solutions. In late 2017, we expanded our offering of DIRECTV NOW, an over-the-top video service; data usage from DIRECTV NOW will not count toward data limits for customers who bundle this product with our wireless service. We believe this offering facilitates our customers' desire to view video anywhere on demand and encourages customer retention.

Wireless  We expect to deliver revenue growth in the coming years. We are in a period of rapid growth in wireless video usage and believe that there are substantial opportunities available for next-generation converged services that combine technologies and services. For example, we have agreements with many automobile manufacturers and began providing vehicle-embedded security and entertainment services.

As of December 31, 2017, we served 157 million wireless subscribers in North America, with nearly 142 million in the United States. Our LTE technology covers over 400 million people in North America. In the United States, we cover all major metropolitan areas and over 320 million people. We also provide 4G coverage using another technology (HSPA+), and when combined with our upgraded backhaul network, we are able to enhance our network capabilities and provide superior mobile broadband speeds for data and video services. Our wireless network also relies on other GSM digital transmission technologies for 3G data communications.

Our acquisition of two Mexican wireless providers in 2015 brought a GSM network covering both the U.S. and Mexico and enabled our customers to use wireless services without roaming on other companies' networks. We believe this seamless access will prove attractive to customers and provide a significant growth opportunity. We also announced in 2015 our plan to invest $3,000 to upgrade our network in Mexico to provide LTE coverage to 100 million people and businesses by year-end 2018. As of year-end 2017, this LTE network covered approximately 96 million people and businesses in Mexico.

REGULATORY DEVELOPMENTS

Set forth below is a summary of the most significant regulatory proceedings that directly affected our operations during 2017. Industry-wide regulatory developments are discussed above in Operating Environment Overview. While these issues may apply only to certain subsidiaries, the words "we," "AT&T" and "our" are used to simplify the discussion. The following discussions are intended as a condensed summary of the issues rather than as a comprehensive legal analysis and description of all of these specific issues.
 
20


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

International Regulation  Our subsidiaries operating outside the United States are subject to the jurisdiction of regulatory authorities in the market where service is provided. Our licensing, compliance and advocacy initiatives in foreign countries primarily enable the provision of enterprise (i.e., large business), wireless and satellite television services. AT&T is engaged in multiple efforts with foreign regulators to open markets to competition, foster conditions favorable to investment and increase our scope of services and products.

The General Data Protection Regulation goes into effect in Europe in May of 2018. AT&T processes and handles personal data of its customers, employees of its enterprise customers and its employees. This regulation creates a range of new compliance obligations and significantly increases financial penalties for noncompliance. AT&T must implement operational changes to comply with this regulation.

Federal Regulation  In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services subject to extensive public utility-style regulation under the Telecom Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC's authority to regulate broadband internet access services, as well as internet interconnection arrangements. AT&T and several other parties appealed the FCC's order. In June 2016, a divided panel of the District of Columbia Court of Appeals upheld the FCC's rules by a 2-1 vote, and petitions for rehearing en banc were denied in May 2017. Petitions for a writ of certiorari at the U.S. Supreme Court remain pending. Meanwhile, on December 14, 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. The order will take effect after the Office of Management and Budget approves the new disclosure requirements.

On April 20, 2017, the FCC adopted an order bringing to an end a decade-long proceeding regarding pricing of high capacity data services by incumbent local telephone companies, like AT&T. The order declines to require advanced approval of rates for packet-based services like Ethernet, opting instead to continue the existing regime under which such rates are presumed lawful but may be challenged in a complaint. In addition, the order extends this "light touch" approach to high-speed TDM transport services and to most of our TDM channel termination services, based on the application of a competitive market test for such services. For those services that do not qualify for light touch regulation, the order continues to subject the services to price cap regulation but allows companies to offer volume and term discounts, as well as contract tariffs. Several parties appealed the FCC's decision. These appeals were consolidated in the U.S. Court of Appeals for the Eighth Circuit, where they remain pending.

In November 2017, the FCC updated and streamlined certain rules governing pole attachments, copper retirement, and service discontinuances. These changes should facilitate our ability to replace legacy facilities and services with advanced broadband infrastructure and services.

COMPETITION

Competition continues to increase for communications and digital entertainment services. Technological advances have expanded the types and uses of services and products available. In addition, lack of or a reduced level of regulation of comparable legacy services has lowered costs for these alternative communications service providers. As a result, we face heightened competition as well as some new opportunities in significant portions of our business.

We face substantial and increasing competition in our wireless businesses. Under current FCC rules, multiple licensees, who provide wireless services on the cellular, PCS, Advanced Wireless Services, 700 MHz and other spectrum bands, may operate in each of our U.S. service areas, which results in the potential presence of multiple competitors. Our competitors include brands such as Verizon Wireless, Sprint, T-Mobile/Metro PCS, a larger number of regional providers of cellular, PCS and other wireless communications services, resellers of those services and certain cable companies also launching wireless service to their subscribers. In addition, we face competition from providers who offer voice, text messaging and other services as applications on data networks. More than 98% of the U.S. population lives in areas with at least three mobile telephone operators, and almost 94% of the population lives in areas with at least four competing carriers. We are one of three providers in Mexico, with the most significant market share controlled by América Móvil. We may experience significant competition from companies that provide similar services using other communications technologies and services. While some of these technologies and services are now operational, others are being developed or may be developed. We compete for customers based principally on service/device offerings, price, network quality, coverage area and customer service.
 
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

Our subsidiaries providing communications and digital entertainment services will face continued competitive pressure in 2018 from multiple providers, including wireless, satellite, cable and other VoIP providers, online video providers, and interexchange carriers and resellers. In addition, the desire for high-speed data on demand, including video, are continuing to lead customers to terminate their traditional wired services and use our or competitors' wireless, satellite and internet-based services. In most U.S. markets, we compete for customers, often on pricing of bundled services, with large cable companies, such as Comcast Corporation, Cox Communications Inc. and Charter Communications (marketed as Spectrum), for high-speed internet, video and voice services and other smaller telecommunications companies for both long-distance and local services. In addition, in Latin American countries served by our DIRECTV subsidiary, we also face competition from other video providers, including América Móvil and Telefónica.

Our Entertainment Group and Business Solutions segments generally remain subject to regulation for certain legacy wireline wholesale services by state regulatory commissions for intrastate services and by the FCC for interstate services. Under the Telecom Act, companies seeking to interconnect to our wireline subsidiaries' networks and exchange local calls enter into interconnection agreements with us. Many unresolved issues in negotiating those agreements are subject to arbitration before the appropriate state commission. These agreements (whether fully agreed-upon or arbitrated) are often then subject to review and approval by the appropriate state commission.

Our Entertainment Group and Business Solutions segments operate portions of their business under state-specific forms of regulation for retail services that were either legislatively enacted or authorized by the appropriate state regulatory commission. Some states regulate prices of retail services, while others adopt a regulatory framework that incorporates deregulation and price restrictions on a subset of our services. Some states may impose minimum customer service standards with required payments if we fail to meet the standards.

We continue to lose legacy voice and data subscribers due to competitors (e.g., wireless, cable and VoIP providers) who can provide comparable services at lower prices because they are not subject to traditional telephone industry regulation (or the extent of regulation is in dispute), utilize different technologies, or promote a different business model (such as advertising based). In response to these competitive pressures, for a number of years we have used a bundling strategy that rewards customers who consolidate their services (e.g., telephone, high-speed internet, wireless and video) with us. We continue to focus on bundling services, including combined packages of wireless data and voice and video service through our satellite and IP-based services. We will continue to develop innovative and integrated services that capitalize on our wireless and IP-based network and satellites.

Additionally, we provide local and interstate telephone and switched services to other service providers, primarily large internet service providers using the largest class of nationwide internet networks (internet backbone), wireless carriers, other telephone companies, cable companies and systems integrators. These services are subject to additional competitive pressures from the development of new technologies, the introduction of innovative offerings and increasing satellite, wireless, fiber-optic and cable transmission capacity for services. We face a number of international competitors, including Orange Business Services, BT, Singapore Telecommunications Limited and Verizon Communications Inc., as well as competition from a number of large systems integrators.

ACCOUNTING POLICIES AND STANDARDS

Critical Accounting Policies and Estimates  Because of the size of the financial statement line items they relate to or the extent of judgment required by our management, some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others. The following policies are presented in the order in which the topics appear in our consolidated statements of income.

Allowance for Doubtful Accounts  We record expense to maintain an allowance for doubtful accounts for estimated losses that result from the failure or inability of our customers to make required payments. When determining the allowance, we consider the probability of recoverability based on past experience, taking into account current collection trends as well as general economic factors, including bankruptcy rates. Credit risks are assessed based on historical write-offs, net of recoveries, as well as an analysis of the aged accounts and installment receivable balances with reserves generally increasing as the receivable ages. Accounts receivable may be fully reserved for when specific collection issues are known to exist, such as pending bankruptcy or catastrophes. The analysis of receivables is performed monthly, and the allowances for doubtful accounts are adjusted through expense accordingly. A 10% change in the amounts estimated to be uncollectible would result in a change in the provision for uncollectible accounts of approximately $164.
 
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

Pension and Postretirement Benefits  Our actuarial estimates of retiree benefit expense and the associated significant weighted-average assumptions are discussed in Note 12. Our assumed weighted-average discount rate for pension and postretirement benefits of 3.80% and 3.70%, respectively, at December 31, 2017, reflects the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants. We determined our discount rate based on a range of factors, including a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date and corresponding to the related expected durations of future cash outflows for the obligations. These bonds were all rated at least Aa3 or AA- by one of the nationally recognized statistical rating organizations, denominated in U.S. dollars, and neither callable, convertible nor index linked. For the year ended December 31, 2017, when compared to the year ended December 31, 2016, we decreased our pension discount rate by 0.60%, resulting in an increase in our pension plan benefit obligation of $4,609 and decreased our postretirement discount rate by 0.60%, resulting in an increase in our postretirement benefit obligation of $1,605. For the year ended December 31, 2016, we decreased our pension discount rate by 0.20%, resulting in an increase in our pension plan benefit obligation of $2,189 and decreased our postretirement discount rate by 0.20%, resulting in an increase in our postretirement benefit obligation of $906.

Our expected long-term rate of return on pension plan assets is 7.00% for 2018 and 7.75% for 2017. Our expected long-term rate of return on postretirement plan assets is 5.75% for 2018 and 2017. Our expected return on plan assets is calculated using the actual fair value of plan assets. The lower expected rate of return on pension plan assets also reflects changes in plan asset mix. If all other factors were to remain unchanged, we expect that a 0.50% decrease in the expected long-term rate of return would cause 2018 combined pension and postretirement cost to increase $244, which under our accounting policy would be adjusted to actual returns in the current year as part of our fourth-quarter remeasurement of our retiree benefit plans. In 2017, the actual return on our combined pension and postretirement plan assets was 14.1%, resulting in an actuarial gain of $3,140.

We recognize gains and losses on pension and postretirement plan assets and obligations immediately in our operating results. These gains and losses are generally measured annually as of December 31 and accordingly will normally be recorded during the fourth quarter, unless an earlier remeasurement is required. Should actual experience differ from actuarial assumptions, the projected pension benefit obligation and net pension cost and accumulated postretirement benefit obligation and postretirement benefit cost would be affected in future years. Note 12 also discusses the effects of certain changes in assumptions related to certain medical trend rates on projected retiree healthcare costs.

Depreciation  Our depreciation of assets, including use of composite group depreciation and estimates of useful lives, is described in Notes 1 and 6.

If all other factors were to remain unchanged, we expect that a one-year increase in the useful lives of our plant in service would have resulted in a decrease of approximately $3,191 in our 2017 depreciation expense and that a one-year decrease would have resulted in an increase of approximately $4,484 in our 2017 depreciation expense.

Asset Valuations and Impairments  We record assets acquired in business combinations at fair value. Goodwill and other indefinite-lived intangible assets are not amortized but tested at least annually for impairment. For impairment testing, we estimate fair values using models that predominantly rely on the expected cash flows to be derived from the use of the asset. The fair values of the domestic reporting units discussed below do not reflect the enactment of U.S. corporate tax reform, which will positively impact future cash flows.

We test goodwill on a reporting unit basis by comparing the estimated fair value of each reporting unit to its book value. If the fair value exceeds the book value, then no impairment is measured. We estimate fair values using an income approach (also known as a discounted cash flow) and a market multiple approach. The income approach utilizes our 10-year cash flow projections with a perpetuity value discounted at an appropriate weighted average cost of capital. The market multiple approach uses the multiples of publicly traded companies whose services are comparable to those offered by the reporting units. In 2017, the calculated fair value of the reporting units exceeded book value in all circumstances, and no additional testing was necessary. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values would still be higher than the book value of the goodwill. In the event of a 10% drop in the fair values of the reporting units, the fair values would have still exceeded the book values of the reporting units, except for Brazil where the fair value exceeded the book value by approximately 7%. The amount of goodwill assigned to the Brazil reporting unit was $2,673.

We assess fair value for wireless licenses using a discounted cash flow model (the Greenfield Approach) and a corroborative market approach based on auction prices, depending upon auction activity. The Greenfield Approach
 
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
assumes a company initially owns only the wireless licenses and makes investments required to build an operation comparable to current use. Inputs to the model include subscriber growth, churn, revenue per user, capital investment and acquisition costs per subscriber, ongoing operating costs, and resulting EBITDA margins. We based our assumptions on a combination of average marketplace participant data and our historical results, trends and business plans. These licenses are tested annually for impairment on an aggregated basis, consistent with their use on a national scope for the United States and Mexico. For impairment testing, we assume subscriber and revenue growth will trend up to projected levels, with a long-term growth rate reflecting expected long-term inflation trends. We assume churn rates will initially exceed our current experience, but decline to rates that are in line with industry-leading churn. For the U.S. licenses, EBITDA margins are assumed to trend toward 45% annually. We used a discount rate of 8.25% for the United States and 9.25% for Mexico, based on the optimal long-term capital structure of a market participant and its associated cost of debt and equity, to calculate the present value of the projected cash flows. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values of the wireless licenses would still be higher than the book value of the licenses. The fair value of the wireless licenses in the United States and Mexico each exceeded the book value by more than 10%.

Orbital slots are also valued using the Greenfield Approach. The projected cash flows are based on various factors, including satellite cost, other capital investment per subscriber, acquisition costs per subscriber and usage per subscriber, as well as revenue growth, subscriber growth and churn rates. For impairment testing purposes, we assumed sustainable long-term growth assumptions consistent with the business plan and industry counterparts in the United States. We used a discount rate of 9% to calculate the present value of the projected cash flows. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values of the orbital slots would still be higher than the book value of the orbital slots. The fair value of the orbital slots exceeded the book value by more than 10%.

We review customer relationships and other finite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable over their remaining life. For this analysis, we compare the expected undiscounted future cash flows attributable to the asset to its book value.

We periodically assess our network assets for impairment (see Note 6).

We review our investments to determine whether market declines are temporary and accordingly reflected in accumulated other comprehensive income, or other-than-temporary and recorded as an expense in "Other income (expense) – net" in the consolidated statements of income. This evaluation is based on the length of time and the severity of decline in the investment's value.

Income Taxes  Our estimates of income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 11 and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax law or the final review of our tax returns by federal, state or foreign tax authorities.

We use our judgment to determine whether it is more likely than not that we will sustain positions that we have taken on tax returns and, if so, the amount of benefit to initially recognize within our financial statements. We regularly review our uncertain tax positions and adjust our unrecognized tax benefits (UTBs) in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. These adjustments to our UTBs may affect our income tax expense. Settlement of uncertain tax positions may require use of our cash.

The Tax Cuts and Jobs Act (Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, we remeasured substantially all of our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future as a result of the reduction in federal tax rate and recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries. We continue to analyze certain aspects of the Act and refine our calculations, which could potentially affect the measurement of these balances. The Securities and Exchange Commission has issued guidance that provides a "measurement period" whereby registrants can provide a reasonable estimate of the tax reform impact in their financial
 
24


 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
 
statements but can adjust that amount during the measurement period (expected to be a year or less). Our future results could include additional adjustments, and those adjustments could be material. (See Note 11)

New Accounting Standards

Beginning with 2018 interim and annual reporting periods, we will adopt the FASB's new accounting guidance related to revenue recognition and the deferral of customer contract acquisition and fulfillment costs. As a result of modified retrospective application, the guidance only impacts our financial statements for periods beginning after December 31, 2017, affecting the comparability of our financial statements.

See Note 1 for discussion of the impacts of the standard. We expect the new revenue recognition accounting standard will have a positive impact on our near-term financial results. Several items will be impacted, but the more significant of these are the deferral of commission expenses, which will increase operating income; re-characterization of service to equipment revenues for equipment provided with multi-year service contracts, which is expected to have an impact on service revenue, but not a material impact on total revenue; and offsetting Universal Service Fund (USF) and other regulatory fee revenues against related expenses, which will significantly reduce both revenues and expenses, but have little impact on operating income. Our preliminary estimate of the impacts to 2018 diluted earnings per share is an increase of $0.10 to $0.15. Our estimates reflect our expectation of the success of our equipment installment programs to gain subscriber contracts, and the level of promotional activities and commissions paid in 2018.

OTHER BUSINESS MATTERS

Time Warner Inc. Acquisition  In October 2016, we announced an agreement (Merger Agreement) to acquire Time Warner in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. The cash portion of the purchase price will be financed with debt and cash. See Note 7 for additional details of the transaction and "Liquidity" for a discussion of our financing arrangements.

On November 20, 2017, the United States Department of Justice (DOJ) filed a complaint in the U.S. District Court, District of Columbia seeking a permanent injunction to prevent AT&T from acquiring Time Warner, alleging that the effect of the transaction "may be substantially to lessen competition" in violation of federal antitrust law. AT&T disputes the government allegations, and believes the merger is pro-consumer, pro-competitive and ultimately will be approved. The Court has scheduled trial to begin on March 19, 2018. In light of the trial date and expected timing of a decision, both AT&T and Time Warner elected to further extend the termination date of the merger agreement to June 21, 2018.

FirstNet On March 30, 2017, FirstNet announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. By January 2018, all 56 jurisdictions, including 50 states, the District of Columbia and five U.S. territories, have elected to participate in the network. Under the awarded 25-year agreement, FirstNet will provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000, in part recoverable from FirstNet, over the life of the 25-year contract to build, operate and maintain the network. The spectrum provides priority use to first responders, which are included as wireless subscribers and contribute to wireless revenues. As allowed under the agreement, excess capacity on the spectrum is used for any of AT&T's subscriber base.

Under the agreement, we are required to construct a network that achieves coverage and nationwide interoperability requirements. We have a contractual commitment to make sustainability payments of $18,000 over the 25-year contract. These sustainability payments represent our commitment to fund FirstNet's operating expenses and future reinvestments in the network which we will own and operate. FirstNet has a statutory requirement to reinvest funds that exceed the agency's operating expenses, which are anticipated to be in the $75-$100 range annually, and when including increases for inflation, we expect to be in the $3,000 or less range over the life of the 25-year contract. Being subject to federal acquisition rules, FirstNet is prohibited from contractually committing to a specific vendor for future network reinvestment. However, it is highly probable that AT&T will receive substantially all of the funds reinvested into the network since AT&T will own and operate the infrastructure and have exclusive rights to use the spectrum as all states have opted in. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. (See Note 17)
 
 
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

Litigation Challenging DIRECTV's NFL SUNDAY TICKET  More than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL SUNDAY TICKET package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. In June 2017, the court granted the NFL defendants' motion to dismiss the complaint without leave to amend, finding that: (1) the plaintiffs did not plead a viable market; (2) the plaintiffs did not plead facts supporting the contention that the exclusive agreement between the NFL and DIRECTV harms competition; (3) the claims failed to overcome the fact that the NFL and its teams must cooperate to sell broadcasts; and (4) the plaintiffs do not have standing to challenge the horizontal agreement among the NFL and the teams. In light of the order granting the motion to dismiss, the court denied DIRECTV's motion to compel arbitration as moot. In July 2017, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit, which is pending. We anticipate that, following the briefing, the oral argument will occur in the fall of 2018.

Federal Trade Commission Litigation Involving DIRECTV  In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We vigorously dispute these allegations. A bench trial began on August 14, 2017, and was suspended on August 25, 2017, after the FTC rested its case, so that the court could consider DIRECTV's motion for judgment. The hearing on the motion occurred on October 25, 2017, and the judge took it under advisement.

Unlimited Data Plan Claims  In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and, on August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC asked the Court of Appeals to reconsider the decision "en banc," which the Court agreed to do. The en banc hearing was held on September 19, 2017. We do not expect a decision until early or mid-2018. In addition to the FTC case, several class actions were filed challenging our MBR program. We have secured dismissals in each of these cases, although in one of the cases, we do not yet know whether the plaintiff will seek further appellate review.

Labor Contracts As of January 31, 2018, we employed approximately 252,000 persons. Approximately 46% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
 
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts

A summary of labor contract settlements reached in 2017, by region or employee group, is as follows: