AT&T provided much-needed clarity around its 4G strategy at the Consumer Electronics Show (CES) on January 5. The company’s plans show that it is clearly feeling pressured to move forward with LTE to counter Verizon’s widespread LTE deployment, and to fend off an increasingly competitive T-Mobile USA, which is aggressively pitching its HSPA+ network as having “4G”-equivalent speeds. While AT&T is taking a strong stance entering the new year, TBR believes the operator is in an unenviable position: it will continue to lag Verizon Wireless in LTE deployment for the next three years, while in HSPA+ it will operate at a disadvantage to T-Mobile USA, which is able to provide faster throughput and more robust backhaul support compared to AT&T, at least through 2012. However, the company will remain a leader in both new devices and in driving innovative applications to monetize higher network speeds.
Most significantly, AT&T committed to a rollout timetable for LTE service, which will launch in mid-2011, cover up to 75 million POPs by the end of this year and be deployed nationwide by the end of 2013. Previously, AT&T’s stance had been to stick with its HSPA+ network; however, the company ultimately was forced to accelerate its LTE plans in response to competitive pressures. By comparison, Verizon Wireless now provides LTE service to 110 million POPs but will be deployed to all of the company’s 285 million POPs around the same time as AT&T.
As AT&T waits for LTE technology to be deployed, it will rely on increased speeds on its HSPA+ network, now fully deployed, to drive data revenue in 2011. However, while it has joined with T-Mobile USA in referring to “4G” speeds, AT&T remains at a disadvantage to T-Mobile’s HSPA+ network, which promises 21 Mbps peak download speeds versus AT&T’s 14.4 Mbps. The peak speed difference lies in QAM modulation: T-Mobile has upgraded its HSPA+ network to 64 QAM modulation while AT&T overlaid 16 QAM modulation.
Additionally, T-Mobile made a strategic decision to deploy fiber backhaul as it rolled out HSPA+ infrastructure, which reduces traffic bottlenecks and boosts realized speeds (to an average of 6 Mbps by some studies). Conversely, AT&T did not roll out fiber backhaul to accompany its HSPA+ deployment and is now playing catch-up, with plans to extend fiber backhaul to two-thirds of its HSPA+ footprint by the end of this year and the remaining third in 2012. TBR believes that until AT&T can get backhaul to every cell site, it will continue to suffer from lower throughput speeds, and more troublingly, will continue to suffer from the connectivity issues that have left many iPhone users on AT&T’s network disgruntled.
In devices, AT&T plans to have more than 20 “4G” offerings in 2011, which includes smartphones as well as data cards. Though the iPhone remains AT&T’s bread and butter, the operator will push to broaden its Android offerings to give consumers more choices and better compete with rivals. The Motorola Atrix, HTC Inspire and Samsung Infuse (all Android devices) will all join the handset portfolio in early 2011. The vast majority of these offerings will be HSPA+ devices, with just a handful of LTE devices likely to be deployed this year.
One area where AT&T has been visionary is in applications, where the company is pushing its “Apps for All” mantra and announced it will invest $70 million to build three innovation centers focused on application development and support. AT&T is arguably more aggressive than any of its peers in developing an alternative ecosystem of “emerging devices,” non-traditional mobile devices which range from tablets and e-readers to connected vehicles and medical devices. Through its innovation centers it works with developers to help them create and bring new ideas and applications to market that integrate wireless connectivity into existing and new devices. The innovation centers provide a place for those developers to work closely with AT&T and its partners to improve their application and move from the drawing board to market more quickly. AT&T is opening innovation centers in Plano, Texas, Silicon Valley, and in Tel Aviv, Israel. The first office, in Plano, originally intended to be opened in 2010, will be completed in 1Q11, with the other two offices to follow later.
From an investment perspective, AT&T is clearly behind in network evolution. With Verizon, MetroPCS, and Sprint (via Clearwire) already commanding expansive 4G networks and T-Mobile USA with a superior HSPA+ network, AT&T will need to play catch up, which will require billions more in capex spend. In the near-term, this will crimp AT&T's ability to raise dividends.