January 19, 2010, 5:10 PM — AT&T would need to spend about US$5 billion on its wireless network to catch up with the coverage offered by Verizon Wireless, a financial research firm said Tuesday.
The public's perception of AT&T's network is poor and declining, apparently because of real shortcomings when compared with Verizon Wireless and Sprint Nextel, said Gerard Hallaren, director of research at TownHall Investment Research. The company hosted a conference call about AT&T for investors in conjunction with WJB Capital Group. TownHall announced it has reduced its rating of AT&T from "Favorable" to "Neutral."
The second-largest U.S. mobile operator has been buoyed by its exclusive deal to sell the popular Apple iPhone -- an edge that is expected to disappear soon -- but has been shortchanging its wireless infrastructure at the expense of its wired network, Hallaren said.
"It has a choice to spend or suffer," Hallaren said.
According to TownHall, AT&T's capital expenditures on its wireless network from 2006 through September 2009 totaled about $21.6 billion, compared with $25.4 billion for Verizon and $16 billion for Sprint (including Sprint's investments in WiMax operator Clearwire). Over that time, Verizon has spent far more per subscriber: $353, compared with $308 for AT&T, Hallaren said. Even Sprint has outspent AT&T per subscriber, laying out $310 for network capital expenditure.
That investment shortfall has been the major cause of AT&T's poor network performance, which has been reflected in tests by Consumer Reports and PC World, Hallaren said. Nine months ago, when TownHall first examined the issue, AT&T itself didn't understand how bad the situation was, he said. Top management now seems to understand the issue, though it's not certain AT&T will actually make the necessary investments, he said.
AT&T's 3G network is based on HSPA (High-Speed Packet Access) 7.2, a system designed to deliver as much as 7.2M bps (bits per second). Verizon uses EV-DO (Evolution-Data Optimized), which that carrier said offers as much as 1.4M bps in real-world performance. The speed of the network for individual subscribers depends on a variety of factors. The PC World test, conducted by Novarum last year, found mixed results for network speeds among AT&T, Verizon and Sprint but showed AT&T in last place for reliability in all 13 cities tested.
AT&T covers 97 percent of the U.S. population and has the nation's fastest 3G network, company spokesman Mark Siegel said.
Part of the problem is that AT&T invests more in its wired infrastructure than in its wireless network, even though the wireless business contributes a majority of the carrier's profit, Hallaren said. AT&T gets 57 percent of its operating income from wireless and only 35 percent from wired services, but wireless only gets 34 percent of the capital expenditures, with the wired network taking up 65 percent of that spending, according to TownHall. It's not clear that the investments in the U-Verse network, which in most cases takes fiber to a neighborhood and relies on copper lines to reach individual homes, will pay off, Hallaren said. Verizon's FiOS uses fiber all the way to homes and can deliver higher speeds, though at a higher deployment cost per home.
The $5 billion investment gap could expand to $7 billion because of the need for new backhaul capacity to link AT&T's wireless network into the wired Internet, Hallaren said. Backhaul is a problem for all mobile operators that will get worse as they increase wireless speeds, he said. Another looming problem for AT&T is that its E911 emergency calling system, which works on its older GSM (Global System for Mobile communications) network, hasn't been adapted to use 3G and is unlikely to make the migration soon, he said. That means AT&T will have to maintain that old network for the foreseeable future, including possibly more capital investment for more power-efficient GSM equipment, according to Hallaren.
Even as AT&T makes these investments, the carrier is likely to lose some subscribers after the end of its exclusive deal for the iPhone, which Hallaren expects to come in May or June. That deal has helped the carrier both to attract subscribers and to generate healthy profit margins, he said.
"This is going to be a juggling act for them," Hallaren said.
