In a bid to avoid a spectrum crunch, AT&T (NYSE: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.
This move, coupled with its earlier announcement to acquire spectrum licenses from NextWave Wireless (OTC:WAVE), Comcast (NASDAQ:CMCSA) 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 (NYSE: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.
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.
However, this risk may 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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