AT&T Expanding Its LTE Network As Juicy Data Revenues Flow

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AT&T (NYSE:T) on Monday announced the addition of seven more markets to its growing LTE footprint that now covers a total of 80 million people in the U.S. The nation’s second largest wireless carrier is lagging Verizon (NYSE:VZ) in terms of LTE coverage but has its more widespread HSPA+ network as an interim high-speed solution for its subscribers. Together, both of AT&T’s high-speed networks cover more than 260 million Americans in all, which is well ahead of Verizon’s LTE coverage. However, with LTE being more efficient and faster than other ’4G’ technologies and the growing availability of LTE capable smartphones, AT&T will be looking to increase its LTE coverage to catch up with Verizon soon.

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AT&T’s burgeoning capital expenses…

AT&T has been investing heavily in its LTE infrastructure, rapidly rolling it out in new markets to make up for its relatively late entry into the space. Verizon, the country’s largest wireless carrier, started building out its LTE network in 2010 and launched its first LTE devices at CES 2011 before AT&T had even jumped on the bandwagon. Since then, AT&T’s LTE network has grown to reach around 80 million Americans currently, a huge step forward but still paling in comparison to the 200 million that Verizon’s network covers.

At the same time, Verizon has made its aggressive LTE intentions clear by announcing that it plans to only introduce phones this year that support its high-speed network. Moreover, it has also increased its year-end LTE coverage target to 260 million Americans from the 250 million target earlier. AT&T, on its part, plans to nearly double its coverage to 150 million by the year end, but even then it will fall well short of Verizon. We expect that AT&T will continue its heavy spending in an attempt to close that gap.

…to be offset by rise in data ARPU

With AT&T’s LTE coverage expected to lag Verizon’s well into the next year, the former is looking to make up for its coverage with the launch of popular smartphones and marketing them well. The ‘hero’ launch of Lumia and a strong line-up of LTE-capable smartphones such as Samsung’s Galaxy S III thereafter have helped AT&T promote its LTE network despite less than optimum availability. The expected launch of the iPhone 5 later this year and AT&T’s traditional stronghold on iPhone sales should help further AT&T’s LTE ambitions in the short-term.

There is also the fact that LTE adoption rates have been slow so far. As of last quarter, Verizon had converted only 9% of its subscriber base to LTE despite having such a wide lead in terms of LTE coverage over others. AT&T plans to complete its LTE roll-out and be on par with Verizon’s LTE coverage by the end of 2013. We expect LTE adoption to pick up after the iPhone 5′s launch and strengthen in 2013. So, longer-term, AT&T may not miss out by a lot so long as it continues to deliver on its current roll-out plans.

As LTE adoption rises, higher LTE speeds will see subscribers increasingly using data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPU levels for AT&T over the coming years. We expect AT&T to also launch shared data plans, a la Verizon, which should help bolster data revenues further. (see AT&T Looks To Reduce Subsidy Pressures While Boosting Revenues Through Shared Data Plans) Meanwhile, limited LTE coverage may be a deterrent for many but a fallback option in the form of the carrier’s HSPA+ network, which provides higher speeds than 3G and has a wider coverage area than its LTE network, should offer an interim solution.

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