Network Companies Execute 2G in the Name of Profits

By Chris Marasco - September 13, 2012 | Tickers: T, DT, VZ | 0 Comments

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Large network companies are working hard to find ways to boost profitability, effectiveness, and efficiency.  AT&T (NYSE: T), Sprint, and German Deutsche Telekom (NYSE: DT) are three prime examples. 

AT&T says that 8.4 million of its wireless customers who have a contract, representing 12% of total customers, used 2G handsets at the end of June.  Most users have 3G phones, and AT&T is working hard to push its customers into 4G handsets.

Why is this important?  According the The Wall Street Journal:

With every network generation the technology becomes more efficient at carrying information.  As a result, companies can get better and more profitable usage from shutting down older networks in favor of newer ones.

It turns out that newer networks are not only more profitable, but they use less spectrum.  Spectrum refers to the electromagnetic spectrum.  Spectrum is broken down into bands, such as 800 Mhz and 1900 Mhz, which are then broken down into blocks.  These blocks of spectrum – or spaces – are licensed to wireless network companies. 

The reason that spectrum is important is because its use is regulated by the FCC.  For example, two carriers in the same geographic region cannot use the same frequency for their phones, otherwise the calls will interfere.  However, a carrier in two different cities can use the same frequency because the signals are too far apart to interfere.

Thus, spectrum is a fixed quantity, and it explains why AT&T plans to phase out its 2G network by January 1, 2017 and also why it no longer sells 2G units to prepaid or contracted customers.

What to Fix

First, networks like Sprint, Deutsche Telekom, AT&T, and Verizon (NYSE: VZ) are coping with increasing data usage on their networks, increasing their costs.  Also, they are faced with a limited quantity of spectrum in which they must fit an ever-increasing customer base – the world’s population is increasing, and this increase brings about a strong demand for mobile phones.

To improve the first problem, trimming extinct networks works well.  Newer networks like 4G use less space and run more efficiently, improving firms’ costs.  Second, companies must find ways to obtain more spectrum.

The first solution is an easier fix that involves migrating existing users to new phones over the next five years.  The more difficult problem, however, is planning to accommodate users 5, 10, or 50 years from now.  For that, companies will need to acquire new technologies and to innovate.

Luckily AT&T and Verizon have already begun this process.  AT&T announced in August that it would purchase NextWave Wireless for $600 million.  NextWave is a holding company that has a portfolio of licensed spectrum in the U.S. and Canada.  Much like a company may hold a broad array of patents, NextWave has rights to spectrum, which can be auctioned off to companies by the FCC.

AT&T’s acquisition comes after its failed attempt at acquiring Deutsche Telekom’s T-Mobile for $39 billion last year.  The acquisition failed to pass regulators’ approval, as regulators were concerned about the combined size of the would-be entity.

Verizon is also on the hunt, hoping to acquire a spectrum firm from a group of cable operators for $3.9 billion.  This move would allow Verizon to stay the course on its plan to watch its 2G mobile phone contracts slowly expire.

In all, these companies are being pinched by limited space on which they will operate their networks.  But the four firms are doing the right thing – they are seeking new technologies that can improve their situations and tap into unused spectrum, and they are acquiring firms that will give them the space they need to accommodate the world’s growing population.

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