ADT: AT&T Security Entry More A Validation Than Threat

Summary:

This morning AT&T announced it is launching a home security and automation service in 15 cities known as "Digital Life".  The package will be sold at retail locations in major cities including LA, Chicago, San Francisco and Miami with a plan to further expand the offering to 50 cities by year-end.   We continue to believe that an effective security sale, requires a "kitchen table" discussion.  While the stores might be helpful for lead generation, we are skeptical of AT&T's strategy.  AT&T's entry is not a surprise given similar moves by cable/telco peers including Comcast and Verizon over the last few years.  Large cable/telco's are actively looking for ways to expand their customer base and increase ARPUs and customer stickiness.  We view this as positive confirmation of ADT's Pulse strategy and believe the market is large enough at ~$18 billion annually to support multiple players.  Moreover, in markets where ADT has seen direct cable/telco competition, its customer take rate is actually higher than fleet average - this is likely attributable to an increased advertising presence driving more consumer awareness and share gains from smaller local service providers, which still make up >60% of the market.