In a bid to avoid a spectrum crunch, AT&T (
T
) plans to gradually phase out its older 2G networks and free
up space for newer 4G technologies. The second largest wireless
carrier said Friday that it will work over the next four years to
transition its existing 2G base to more advanced 3G/4G devices and
expects to shut down its 2G network completely by the start of
2017. The process seems to have been already set in motion with
customers in New York reporting earlier this year that they had
received cautionary letters from AT&T urging them to swap
out their 2G-only phones for newer 3G devices, else risk not being
"able to make or receive calls" or suffering from a "degradation"
of wireless service in certain areas. ((
AT&T urges customers to upgrade from 2G
networks
, MarketWatch, March 1st, 2012))
This move, coupled with its earlier announcement to acquire
spectrum licenses from NextWave Wireless, Comcast and Horizon
Wi-com, gives AT&T room to expand 3G capacity while building
out a nationwide 4G LTE network. LTE is a next-gen networking
technology that offers higher speeds and is also more efficient at
transferring data. However, AT&T is currently
behind Verizon (
VZ
), which has an LTE network that is available to about 230 million
Americans in 337 markets across the U.S. By the year-end, Verizon
expects the network to cover around 260 million people
in more than 400 markets across the country. In comparison,
AT&T's LTE network covers only about 80 million Americans
presently and the carrier plans to add another 70 million people by
the year-end.
See our complete analysis for AT&T
AT&T's spectrum woes
In order to bridge the gap and build a LTE network robust enough
to compete with Verizon, AT&T needs 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.
As an answer to its spectrum woes, AT&T tried to
acquire T-Mobile last year. But anti-competitive concerns caused
the FCC to block the deal, forcing AT&T to back out and fork
over $1 billion of spectrum in addition to $3 billion in cash to
T-Mobile. At the same time, Verizon moved quickly to sign a couple
of spectrum deals with the cable companies that keeps a huge swathe
of unused spectrum out of AT&T's reach.
Spectrum auction not a near-term solution
The recent Congressional approval for wireless spectrum auctions
should help address AT&T's needs but it is subject to the FCC's
judgement of how much TV spectrum AT&T will be allowed to bid
for in order 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 may not happen for another year or
two.
With spectrum getting scarcer by the day and little by the way
of a near-term solution available, AT&T is being forced to
consider a few of the harder alternatives. With 2G technology on
the wane as demand for 3G smartphones continues to rise and 2G
usage mostly limited to 2G-only phones, AT&T is looking to
transition the remaining 2G users to 3G completely and re-farm the
2G spectrum for 3G/4G purposes. However, it risks losing the
customers completely if they choose to jump to a rival carrier's
network - a big risk given that intense competition in a highly
saturated U.S. wireless industry has made every subscriber
critical.
This risk may however be mitigated to an extent by the fact that
only about 12% of its postpaid subscriber base use 2G currently and
AT&T has given itself more than four years to transition them
to 3G/4G; so the subscriber loss may not be huge. Moreover,
AT&T could offset whatever subscriber loss it might incur with
higher data revenues from the rest that have transitioned to a
higher-speed 3G/4G network. Further, continuing to support 2G would
limit its 4G LTE expansion plans while adding to its costs of
maintaining an aging network. Given a lack of better options,
the opportunity costs of maintaining an under-utilized 2G network
seem to be too great for AT&T now.
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