With Verizon (NYSE:VZ) racing away with its LTE expansion plans, AT&T (NYSE:T) is aggressively ramping up its own LTE roll-out. The second largest wireless carrier in the U.S. recently announced the addition of 5 new markets to its growing LTE coverage, taking its total tally to 370 and boosting its population coverage to 225 million. While this still leaves AT&T some way behind Verizon, which has already covered almost 300 million Americans with its 4G LTE network, the carrier has come a long way since the same time last year when it had less than half the current LTE coverage. By the end of 2013, the carrier plans to reach 270 million Americans with its LTE network; so Verizon’s early LTE lead shouldn’t be a concern to AT&T’s shareholders for long.
However, AT&T has lost postpaid market share to Verizon over the past year, which made it splurge on subsidies and promotions to attract subscribers last quarter. While the promotion drive was successful in drawing as many as 551,000 net postpaid customers in Q2, margins fell by 300 basis points over the same period last year. AT&T may be able to recoup its expenses through rising data usage going forward, but the margin compression shows how big a differentiator LTE has proved to be in a saturated market. As LTE adoption grows and the technology gradually becomes a network standard, AT&T is looking to catch up with Verizon’s far wider LTE network in both coverage and quality as soon as possible.
Saturated wireless market
The U.S. wireless market has become increasingly saturated recently with wireless connections having exceeded the population in mid-2011. This has made the acquisition of new subscribers, especially those that pay for the higher-margin data plans, very tough for the wireless carriers. AT&T’s dismal postpaid net adds in recent quarters is to an extent reflective of this industry-wide phenomenon, but Verizon’s comparatively much better performance shows that LTE coverage is the differentiating factor here. Last year, Verizon added over 5 million postpaid subscribers, more than three and a half times of AT&T. Even in Q2, when AT&T has done a lot better, Verizon’s postpaid net adds outnumber AT&T’s 1.7:1.
As the first carrier in the U.S. to start 4G LTE deployment, Verizon has raced ahead of rivals with LTE coverage in about 500 markets currently – almost the entirety of its 3G footprint. With its initial LTE deployment phase nearly done, the carrier is gearing for a second round of LTE deployment that will see it use its recently acquired AWS airwaves from the cable companies. In comparison, AT&T expects to complete its initial LTE deployment only by the summer of 2014 – almost a full year after Verizon.
Data ARPUs in focus as LTE usage grows
Going forward, one of the big drivers of postpaid ARPUs will be the increasing adoption of AT&T’s Mobile Share plans which allow users to buy a bucket of data to be used across mobile devices. AT&T said that it now has about 13 million subscribers under the Mobile Share program, up by 30% since the end of Q1. More importantly, AT&T is seeing more of its unlimited subscriber base transition to one of its shared data plans, thereby enabling it to better monetize its subscriber base. More than 15% of AT&T’s shared data plan users have switched over from unlimited plans. Currently, more than 70% of AT&T’s postpaid smartphone base is on a tiered data plan (including Mobile Share), up from 45% two years ago.
As the adoption of Mobile Share plans increases and data usage goes up, subscribers are moving up to the higher tiers of their data plans. More than 25% of AT&T’s shared data plan users are subscribing to the higher data tiers – a trend that will only increase going forward as adoption of high-speed LTE grows. The increased adoption of 4G in the long term will also reduce dependence on AT&T’s 3G networks, which are under great strain due to the heavy data usage of smartphones such as the iPhone. Further, LTE as a network technology not only supports higher speeds, but is also more efficient than current 3G networks at handling data, reducing maintenance and handling costs. In the near term, limited LTE coverage may be a deterrent for some, 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.