With data usage exploding and 4G LTE fast becoming the wireless standard for the future, spectrum consolidation in the wireless space has picked up pace over the past year. After Verizon (NYSE:VZ) and Sprint (NYSE:S), it is now AT&T’s (NYSE:T) turn to snap up some spectrum for its LTE network. The second largest wireless carrier in the U.S. recently received approval from the FCC for its spectrum purchase in the WCS and AWS bands from a host of sources that it signed deals with this year. In all, the spectrum acquisitions cover a total of 608 markets and about 82% of the U.S. population. Most of the acquired spectrum will however be used by AT&T to add capacity to its LTE network in the longer term. For its initial LTE buildout, AT&T is using 700MHz spectrum which it is also looking to complement with a few other deals lined up for approval.
AT&T had tried to acquire T-Mobile last year to boost its spectrum holdings but after that failed to receive regulatory approval, the carrier has concentrated on multiple small-scale spectrum acquisitions for its long-term LTE needs. The approval puts AT&T on a much better competitive footing with Verizon, which is not only the current LTE leader by a big margin but has also bolstered its future LTE prospects by buying a big chunk of AWS spectrum from the cable companies.
AT&T’s spectrum woes
The additional spectrum will help AT&T in its bid to build out a nationwide LTE network and catch up with Verizon, which is currently well ahead in the LTE race. Having started deploying LTE much earlier than AT&T, Verizon has a LTE network available to more than 250 million Americans in over 440 markets across the U.S. By the year-end, Verizon expects to cover around 260 million Americans with its LTE network. In comparison, AT&T’s LTE network covers only about 160 million Americans presently but the carrier plans to add another 90 million people to its coverage by the end of next year.
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 additional spectrum for strengthening. As a result, AT&T has been throttling data usage of the top 5% of its unlimited data users in a bid to ease the load on its network and avoid widespread discontent with its data services.
The recent Congressional approval for wireless spectrum auctions is a welcome relief for the carrier. But it is subject to the FCC’s judgement of how much TV spectrum AT&T will be allowed to bid for to avoid anti-competitive concerns. (see Wireless Industry Cheers as Spectrum Auctions Seem Likely) Moreover, the biggest showstopper could be the TV broadcasters’ reluctance to part with their spectrum, so AT&T cannot rely solely on the auctions either. Even if the two obstacles are somehow overcome, the auctions are not going to happen any time soon. Meanwhile, competition is moving aggressively to acquire spectrum with the likes of Sprint poised to become the owner of the most spectrum in the U.S. if its Clearwire deal receives FCC approval.
How small acquisitions make sense
To meet its long-term spectrum needs, AT&T is planning to transition the remaining 2G users to 3G gradually and re-farm the 2G spectrum for 4G purposes. (see AT&T Looks to Address Spectrum Crunch by Re-Farming 2G Network) But, then, it risks losing customers if they choose to jump to another carrier. Intense competition in a highly saturated U.S. wireless industry, where penetration exceeded 100% in 2011, has made every subscriber critical.
In such a scenario, stitching together multiple spectrum deals can provide AT&T some succor, especially after the FCC has made it clear that any big-scale consolidation will be met with stiff opposition. Comcast or Nextwave’s spectrum holdings alone may not be big enough to satiate all of AT&T’s needs but it has definitely made it easier for AT&T to overcome regulatory hurdles.
The AWS and 700MHz spectrum licenses that AT&T seeks will most likely be used to meet its near-term needs since it complements its existing spectrum resources in the same band, some of which it had to part with as a break-up fee for not being able to close the T-Mobile deal last year. The WCS spectrum is, on the other hand, more of a long-term plan since the resource cannot be used for wireless service currently due to interference concerns with adjacent satellite radio bands. However, the FCC has already approved a proposal submitted by AT&T and Sirius XM that aims to fix the issue with guard bands. It will however take AT&T at least three years to implement the plan and deploy LTE on WCS bands. With the industry facing a looming spectrum crunch, AT&T’s decision to invest in a long-term spectrum resource could prove crucial in the long term.