With the wireless market getting saturated and new high-speed technologies gaining prominence, AT&T (NYSE:T) is looking to bolster its high growth data businesses with more infrastructure spending and spectrum acquisitions. The largest telecom provider in the U.S. recently announced a 3-year $14 billion network investment plan that will not only help expand its 4G LTE network to new markets but also improve network quality and increase spectrum efficiency.  While a majority of the investment will be towards supporting the burgeoning wireless data growth, almost $6 billion has been earmarked for expanding and upgrading the speeds of its U-Verse wireline network.
The huge investment plan is a bet on the growing customer demand for high-speed networks that can efficiently transfer large amounts of data without clogging up. In addition to spending on infrastructure upgrades, AT&T is bolstering its spectrum position with a host of spectrum deals that will help it expand 4G LTE to new markets as well as increase network capacity. These moves seem to be motivated by its failed bid to acquire T-Mobile last year, an attempt that would have given the carrier enough spectrum and scale to build a robust LTE network and fend off competition from Verizon (NYSE:VZ) and Sprint (NYSE:S), but was thwarted by the FCC on anti-competitive concerns.
- Why Is AT&T Interested In Yahoo’s Internet Assets?
- How Is AT&T’s Business Solutions Revenue Expected To Trend?
- Can AT&T’s Wireless Margins Continue To Expand?
- How Is AT&T’s International Business Expected To Trend?
- How Much Can AT&T’s Revenues Grow Over The Next 5 Years?
- How Is AT&T’s Revenue Mix Expected To Change Over The Next 5 Years?
AT&T’s spectrum woes
AT&T’s investment in network infrastructure and additional spectrum capacity will go toward augmenting 3G capacity as well as laying out a nationwide LTE network that will help it catch up with closest competitor, Verizon, which is currently well ahead in the LTE race. Having started deploying LTE much earlier than AT&T, Verizon now has a LTE network that is available to more than 260 million Americans in close to 420 markets across the U.S. In comparison, AT&T’s LTE network covers about 80 million Americans presently and the carrier plans to add another 70 million people to its coverage by the year-end.
But, in order to bridge the gap and build a LTE network robust enough to compete with Verizon, it will need all the spectrum it can get its hands on. At the same time, rising smartphone penetration and the burgeoning data needs of subscribers using mobile devices such as the iPhone is putting a lot of strain on its 3G network that needs more investment and additional spectrum for strengthening. However, with Verizon acquiring a huge swathe of AWS spectrum from the cable companies and the FCC maintaining a hawkish stance on any large-scale spectrum consolidation, AT&T is targeting a number of smaller deals/acquisitions to meet its spectrum needs.
CapEx investment will help improve data ARPUs
AT&T has already signed more than 40 spectrum deals with various parties this year, with many yet to receive regulatory approval. (see AT&T Continues Acquisition Spree To Meet LTE Spectrum Needs) The FCC has also granted permission to a plan, jointly filed by AT&T and Sirius XM, that could lift restrictions and make WCS spectrum bands conducive for wireless broadband services such as LTE. With AT&T planning on buying out most of the WCS spectrum through these spectrum deals, AT&T’s long-term LTE needs will be largely met. We expect most of AT&T’s spectrum transactions to receive approval, and if so, the carrier will have about 118Mhz of spectrum nationwide. With the newly disclosed investment plan to boot, AT&T will be able to blanket 300 million Americans with LTE by the end of 2014.
The high capital expenditures will however have a negative impact on cash flow in the near-term, and hence on the company’s fair valuation. But if the investment helps AT&T improve its network capacity and speeds, it will be able to monetize the high amount of data that its revamped network will be able to carry. With the wireless market increasingly saturated, most of the growth in the coming years will come from carriers’ ability to increase their ARPU (Average Revenue Per User) by increasing data usage. AT&T’s recent move to introduce tiered data-share plans, that help families add more number of devices to one account, is a step in this direction. As an increasing number of connected devices are added to the network and the high-speed 4G LTE causes customers to use more data, AT&T will be able to recoup the high investment it is planning through higher data ARPUs in the long term.Notes:
- AT&T to Invest $14 Billion to Significantly Expand Wireless and Wireline Broadband Networks, Support Future IP Data Growth and New Services, AT&T Press Release, November 7th, 2012 [↩]