The iPhone is Driving AT&T’s Capital Expenditures

AT&T (NYSE:T), which competes with Verizon (NYSE:VZ) and Sprint (NYSE:S), in the mobile phone business, has faced network challenges since 2007 as its iPhone subscriber base has grown rapidly.  The iPhone has helped AT&T gain market share but has also led to skyrocketing data traffic on AT&T’s network and the associated challenges of managing network congestion.

We believe that the iPhone has been a primary factor driving increases in AT&T’s capital expenditures and that the company’s capital expenditures will continue to rise even after AT&T’s iPhone exclusivity ends.  There are indications that the increased capital expenditure has paid off in terms of improving network download speeds.  We believe that such improvements will help AT&T to remain competitive and diminish the impact of eventually losing iPhone exclusivity.

Download speed and network reliability have taken a tremendous jump

According to a recent test conducted in December 2009 and January 2010 by PCWorld, AT&T’s 3G network download speed has increased by 74%.  PCWorld indicates that AT&T’s 3G network is about 61% faster than Verizon’s network and 77% faster than Sprint’s network.

AT&T’s network reliability has also risen significantly to 94% compared to only 68% based on prior results.  According to the PCWorld tests, AT&T’s reliability is 2% greater than Verizon and about comparable to Sprint.

Improvements in AT&T’s network have come as a result of capital expenditures that have risen since the introduction of the iPhone in 2007.

Rapid Rise in Capital Expenditures

AT&T’s mobile capital expenditures have increased from $4 billion in 2007 (15% of mobile gross profits) to $5.9 billion in 2009 (18% of mobile gross profits).  Mobile capital expenditures constituted 34% of all of AT&T’s capital expenditures in 2009, up from about 23% in 2007.  We expect that AT&T’s mobile capital expenditures will continue to rise to 22% of mobile gross profits (45% of total capital expenditures) by the end of our forecast period.

New Investments for Smartphones

AT&T has been upgrading its 3G network by deploying HSPA 7.2 technology to enable faster speeds and increase network efficiency.  This is likely to make the 3G network twice as fast after the full network upgrade is complete.  Such investments will position the AT&T network for rising smartphone demand and the associated increases in network data traffic.

You can modify our forecast for AT&T’s mobile capital expenditures above to see how AT&T’s stock would be impacted if mobile capital expenditures were to increase more than we forecast.

For additional analysis and forecasts, here is our complete model for AT&T’s stock.