AT&T: Improving 3G network the major focus of 2010

Verizon Wireless’ (NYSE:VZ, NYSE:VOD) attempts to derail AT&T’s smartphone momentum over the holidays with a barrage of critical advertising apparently had little effect. AT&T (NYSE:T) added 2.7 million net subscribers in the fourth quarter, the second highest total in the carrier’s history, and it even managed to lower its churn rate slightly over the previous year. But on its earnings call today, AT&T made a point of addressing the issue at the heart of both VZW’s ads and the growing consternation among AT&T’s mobile data users: its 3G network.

AT&T President and CEO of operations John Stankey spent much of the call giving detailed accounts of how AT&T is adding coverage and capacity to its 3G network as well as discussing the onslaught of new data demands and increased expectations new integrated data devices like the iPhone have created among its customer base. Stankey even raised the possibility of moving earlier on long-term evolution than its planned 2011 launch date, saying if the ecosystem rapidly matures AT&T is prepared to execute on its 4G strategy sooner, but he added that he found that possibility highly unlikely.

“We’re past the assessment phase,” Stankey said of AT&T’s LTE plans. “We know where we’re going on the technology and how we’re going to deploy it.”

AT&T has already tested multiple vendors equipment (though it has made no announcement on its final selections) and is running live LTE trials in two unnamed markets, Stankey said. In addition, much of the work AT&T is now putting into its 3G network is laying the ground work for LTE, including site acquisition in data-traffic-heavy areas and a nationwide fiber-to-the-cell backhaul upgrade, which would account for much of the capital expenditures in deploying a 4G network.

Just because AT&T could launch LTE sooner, however, doesn’t mean AT&T is itching to pull the trigger, Stankey said. Unlike Verizon Wireless, which is launching its service this year with a handful of laptop data cards, AT&T is waiting for handsets—not just one but a variety of devices that it can use to offer a service beyond basic broadband data access. Stankey, along with many others in the industry, believe that won’t happen until 2011 at the earliest. If device vendors get their act together early and create a rich ecosystem of handsets and embedded devices this year, AT&T will certainly reconsider, Stankey said, but he considers that a long-shot.

Though an AT&T LTE deployment is unlikely in 2010, AT&T is still going to be spending a lot on network infrastructure. AT&T projected $18 billion to $19 billion in capex in 2010, up almost 10% from 2009 spending levels of 17.3 billion, and much of that will go to wireless upgrades, Stankey said. One of the biggest initiatives AT&T will engage in is upgrading its backhaul network with Ethernet and fiber. AT&T already added the equivalent of 100,000 new T1 circuits to its backhaul transport network, four times the amount in added in 2008, Stankey said. This year, the focus will be on converting copper fed-connections to fiber, which will be critical in supporting the 50 Mb/s plus capacities of future LTE cells as well as boosting performance in the current high-speed packet access (HSPA) network, Stankey said.

“We anticipate that the majority of our data traffic will be carried by the new fiber-based backhaul network by the end of the year,” Stankey said.
AT&T has already implemented two major phases of its 3G upgrade: the deployment of new HSPA carriers over the 850 MHz cellular spectrum, which adds both capacity and range to its cell sites, in key markets, and the complete overhaul of all of its base station to support 7.2 Mb/s HSPA, doubling the capacity available in each cell. While those improvements have added considerable capacity to the access network, and have improved consistency and session volumes, AT&T can’t take full advantage of those gains until the backhaul network is fully upgraded, Stankey said. It doesn’t matter how much traffic the new upgrades can accommodate if it runs into a bottleneck as soon as it leaves the base station.

Stankey also addressed specific problems AT&T has had in New York and San Francisco, two key markets where data usage and customer complaints loudest. In dense urban canyons of Manhattan in particular, AT&T is having particular trouble keeping up with demand. “There are periods during the week when nearly 70% of the handsets on the network are data intensive devices,” Stankey said. To address the problem, AT&T just couldn’t add cell sites and HSPA carriers, it had to overhaul the entire radio access network, getting its vendors to replace its radio network controllers-- key choke points on the network--before it could even think of adding radio capacity, Stankey said. In the next 90 days, AT&T will add its third and sometimes even fourth HSPA carrier to many of its cell sites in New York, meaning as much of 40 MHz in Manhattan—the world’s most expensive wireless spectrum—is now being devoted to 3G.

In San Francisco, AT&T faced zoning issues that impacted its coverage footprint, but it has managed to add new sites as well as add upgrade its radio controller capacity. In all, AT&T added 1900 new cell sites to its footprint in 2009 and plans to add another 2000 sites in 2010, Stankey said.

Since the launch of the Apple (NASDAQ:AAPL) iPhone, AT&T has seen its mobile data traffic spike dramatically, increasing 5000% in the last three years. Yet its revenues have not kept up. In Q4, data revenues rose from a $3.1 billion to $3.9 billion, an increase of 26.3% over the year. Yet, data traffic on the network has risen more than 200% and AT&T almost doubled the number of 3G data devices on its network, to 30.2 million, in the same time frame. On Wednesday, Apple revealed AT&T would remain its partner for its much-ballyhooed new Internet tablet, the iPad, which is sure to further strain its network. Instead of requiring data contracts, though, AT&T is trying new business models with the device, selling tiered prepaid plans.

Stankey said that many of AT&T’s upgrades have been designed to close that gap between data usage and revenue. The upgrade to 7.2 Mb/s HSPA not only adds gross capacity but greatly improves the 3G network’s spectral efficiency, and investments it is making throughout the network allow it to deliver the same data services far more cheaply. “Today a dollar in wireless investment yields twice the capacity than it did a year ago,” Stankey said, adding that efficiency will continue to improve as AT&T moves to LTE.

Though AT&T has come under attack for its network quality, Stankey implied that AT&T’s 3G problems are more a matter of perception than the result in a degradation of quality. As smartphones and other integrated devices become more powerful and more prevalent, customers begin to rely on them more and become much less tolerant of any fluctuation in connection quality. “It’s a high-class problem,” Stankey said. “Their expectations are higher because value and utility are higher.”

AT&T’s financials improved as much as its subscriber base. It posted a $3 billion profit for the third quarter, up 26% year-over-year. But Bernstein Research senior analyst pointed out that there were reasons for concern hidden behind the impressive numbers. AT&T’s subscribers grew by 2.7 million to 85.1 million subscribers, but Moffett pointed out that only 910,000 were postpaid net adds. The biggest customer driver in Q4 was the new Amazon Kindle DX and other ebook readers, which as a wholesale connection likely garnered only a few dollars a month per subscription for AT&T, Moffett said.

And, like Verizon in Q4, AT&T’s wireline division continues to suffer. While access line losses continue to mount, wired broadband connections increased by 151,000, much lower than in the previous years, and AT&T’s enterprise division continues to contract, Moffett said. The only bright spot was with U-Verse, which added 247,000 subscribers, in line with the industry’s expectations, Moffett said.