AT&T's Ready For Data Pay Dirt After Speedy LTE Rollout

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With Verizon ( VZ ) racing away with its LTE expansion plans, AT&T ( T ) doesn't want to be left too far behind. The second largest U.S. wireless carrier made a series of launches late last week that helped it reach its targeted year-end LTE coverage of 150 million Americans more than a month ahead of schedule. This came only a month after Verizon announced that it exceeded its year-end target of covering 400 markets and 250 million Americans with LTE. With 2013 expected to be a big year for high-speed LTE, AT&T has also drawn up an elaborate plan that will see it spend as much as $14 billion on network upgrades over the next few years to not only improve network quality and spectrum efficiency but also expand its 4G LTE network to new markets.

The huge investment plan is a bet on the growing customer demand for high-speed networks that can efficiently transfer large amounts of data without clogging up. In addition to spending on infrastructure upgrades, AT&T is bolstering its spectrum position with a host of spectrum deals that will help it expand 4G LTE coverage and increase network capacity. (see AT&T Continues Acquisition Spree To Meet LTE Spectrum Needs ) As LTE adoption grows and the technology gradually becomes a network standard, AT&T needs to catch up with Verizon's far wider LTE network in both coverage and quality to avoid losing market share in an increasingly saturated wireless market.

See our complete analysis for AT&T here

Saturated wireless market

The U.S. wireless market has become increasingly saturated 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, highly tough for the wireless carriers. AT&T's postpaid additions this year have been pitifully low. Last quarter, AT&T added only about 151,000 postpaid wireless connections, a figure that represents a sequential as well as y-o-y decrease of more than 50%. While the company laid part of the blame on iPhone 5 supply constraints, the dismal showing is also reflective of the broader industry-wide phenomenon of slowing subscriber growth.

With the wireless industry getting more saturated, the focus has shifted from acquiring new subscribers to increasing the data usage of the existing subscriber base, and hence data ARPUs. Increasing smartphone penetration is one way, but it entails huge margin-eating subsidies. Increasing the coverage of its higher-speed LTE network - while launching data share plans that make it easier for the users to add more such devices to the carrier's wireless network - is another way. Data share plans will make it easier for users to add more connected devices to AT&T's network while 4G LTE, a high-speed network, will make subscribers use a lot more data than they used to on 3G.

AT&T starting to get serious about LTE

AT&T will therefore look to rapidly build out a nationwide LTE network and catch up with Verizon as soon as it can. In the long term, we do not see AT&T's lack of LTE network with country-wide presence impacting it much since LTE adoption has been sluggish so far. As of last quarter, Verizon had converted only 16.5% of its subscriber base to LTE despite having such a wide lead in terms of LTE coverage over others. AT&T plans to complete its initial LTE roll-out and be on par with Verizon's LTE coverage by the end of 2013. We expect LTE adoption to start picking up only now that the iPhone 5 is launched, and strengthen in 2013. So, longer term, AT&T may not miss out by a lot as long as it continues to deliver on its current roll-out plans.

An increased adoption of 4G in the long term will 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, 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , DISH , S , T , VZ

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