AT&T Chases Verizon As LTE Coverage Becomes A Differentiating Factor

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 14 new markets to its growing LTE coverage, taking its total tally to 175 and boosting its population coverage to over 170 million. While this still leaves AT&T some way behind Verizon, which has already covered over 270 million Americans with its 4G LTE network, the carrier has come a long way since the start of 2011 when it had less than half the current LTE coverage. By the end of 2013, the carrier plans to reach 250 million Americans with its LTE network; so Verizon’s big LTE lead shouldn’t be a concern to AT&T’s shareholders for long.

With 2013 shaping up to be a big year for high-speed LTE, AT&T has also drawn an elaborate plan that will see it spend as much as $14 billion on network upgrades over the next few years. The investment will not only go towards expanding LTE coverage to new markets but also improve network quality and spectrum efficiency. In addition to spending on infrastructure upgrades, AT&T is bolstering its spectrum position with a host of spectrum deals that will help it increase network capacity and expand 4G LTE coverage. (see AT&T Continues Acquisition Spree To Meet LTE Spectrum Needs) Like other carriers, AT&T is betting on the growing customer demand for data in order to recoup the high CapEx costs over the long term. 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 to avoid losing market share in an increasingly saturated wireless market.

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Saturated wireless market

The U.S. wireless market has become increasingly saturated with wireless connections having exceeded the population in 2011 itself. This has made the acquisition of new subscribers, especially those that pay for higher-margin data plans, tough for the wireless carriers. Last year, AT&T added only about 3.7 million subscribers overall, less than half the net adds it had reported in 2011. As for postpaid subscribers, the growth remained nearly flat y-o-y. This compares poorly to Verizon which managed to leverage its wide LTE lead over AT&T to show a growth of more than 20% in net postpaid additions for the year.

AT&T will therefore look to rapidly build out a nationwide LTE network and catch up with Verizon as soon as it can. However, while there may be a near-term advantage to Verizon, we do not see AT&T’s lack of LTE network with country-wide presence impacting it much in the long run. This is because LTE adoption is still in a very early stage. As of last quarter, Verizon had converted only 23% of its subscriber base to LTE despite having such a wide lead in terms of LTE coverage over others. LTE adoption seems to have started picking up only recently with the launch of the iPhone 5 and other high-profile Android smartphones during the holiday season in 2012. With the bulk of the LTE transition yet to happen and AT&T looking to complete its initial LTE roll-out and be largely on par with Verizon’s LTE coverage by the end of 2013, AT&T may not miss out by a lot as long as it continues to deliver on its current roll-out plans.

Data ARPUs in focus as LTE usage grows

With the wireless industry getting more saturated, the transition to high-speed 4G LTE will help AT&T mitigate the impact of a slowing market share growth with higher data ARPUs. So far, carriers have relied on increasing smartphone penetration as a way of increasing data ARPUs but it entails huge margin-eating subsidies. Increasing the coverage of higher-speed LTE networks, while incentivizing users to add more such devices to the carrier’s wireless network through data share plans, seems like a better way to drive data ARPUs. 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. Also, LTE as a network technology not only supports higher speeds but is also more efficient than current 3G networks at handling data, thereby reducing maintenance and handling costs. Further, higher LTE speeds will see subscribers increasingly use data-intensive applications on their smartphones.

This will drive data revenues, thereby increasing ARPU levels for AT&T over the coming years. In the near term, 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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