Telecom Weekly Notes: Verizon and AT&T

The past week was especially busy for the telecom sector with the top players in the U.S. market, Verizon (NYSE:VZ) and AT&T (NYSE:T), making some very important announcements. Verizon announced a $3.6 billion deal that, if sanctioned, could pull the carpet from right under its rivals’, primarily AT&T’s, feet. AT&T released a SEC filing that reaffirmed its fourth quarter guidance and set expectations for a record smartphone sales this quarter.

Verizon

Verizon announced a $3.6 billion deal last Friday that would help it buy a significant chunk of wireless spectrum from SpectrumCo, a joint venture formed by Comcast (NASDAQ:CMCSA), Time Warner (NYSE:TWC) and Bright House Networks. The deal will give Verizon control of 122 advanced wireless services (AWS) spectrum licenses helping it build out its LTE network and reach around 259 million potential customers, or 83% of the U.S. population in other words. In another deal with Leap Wireless Monday, Verizon further bolstered its spectrum position by buying more AWS spectrum licenses for around $188 million. Under this deal, Leap will also be purchasing spectrum from Verizon in the Chicago market for $204 million, which means Verizon will in fact gain $16 million after the spectrum swap deal. (see Verizon Scores Huge Win in $3.6 Billion Spectrum Deal) The announcements come even as AT&T struggles to get approval for its T-Mobile deal, that would give it the spectrum it says it needs to compete effectively.

Later in the week, Verizon pulled a rabbit out of the hat with an announcement that it plans to enter the movie and TV streaming service next year, endangering the relationship it had just forged with the cable operators. ^[1]

Cable and satellite networks have been wary of online content streaming of the kind that Netflix and Hulu currently specialize in, as they believe it incentivizes ‘cord-cutters’ to drop their TV connections in favor of these cheaper web alternatives. A day later, reports came in that Verizon may be seeking a partnership with DVD-rental provider, Redbox, in order to leverage its partnership with studio owners to negotiate favorable content sharing deals. ^[2]

We expect gross margins to take a hit initially as the companies jointly try to increase their customer base and compete with the cable operators as well as existing players in the streaming business such as Netflix, Amazon, Hulu and HBO Go for content. Verizon will be looking to leverage its large wireless customer base to promote its streaming service and as subscribers grow, so will the company’s bargaining power with content providers. This will also have a positive impact on its existing FiOS TV service as the content it packages and sells will gradually get cheaper as relationship with content providers improve.

See our complete analysis for Verizon

AT&T

AT&T (NYSE:T) announced Monday that it is on track to comfortably beat its earlier smartphone sales record of 6.1 million in a single quarter, having already sold around 6 million smartphones with one more month to go for the quarter. ^[3] The company acknowledged that the huge surge in demand was mostly due to the iPhone 4S, 1 million of which it had managed to activate in the first five days of its debut in October this year. AT&T also gave an LTE update, saying that they expect to meet their earlier target of covering 70 million people with its LTE network by the year-end.

See our complete analysis for AT&T

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Verizon to take on Netflix with Web service, Reuters, December 6th, 2011 [↩]
2. Verizon and RedBox Planning Major Partnership For Early 2012 Launch, TechCrunch, December 7th, 2011 [↩]
3. AT&T press release, December 7th, 2011 [↩]