More Spectrum, Better Customer Satisfaction

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AT&T (NYSE: T) will be purchasing spectrum from competitor Verizon (NYSE: VZ) for $1.9 billion in a deal that will help improve AT&T’s spectrum position.  It is a good deal for AT&T and makes the company’s 4G network much more competitive with the leader, Verizon.

Spectrum deals

The announcement was that AT&T would be buying Verizon’s holdings in the lower 700 MHz B-block which would add a population of 42 million to AT&T’s LTE coverage.  The spectrum Verizon is selling suits AT&T’s existing network and did not fit in with Verizon’s network.  Thus, both companies are positioned to operate separate 4G networks that other subscribers cannot access.

This deal with Verizon comes on the heels of AT&T closing its $600 million purchase of NextWave Wirless which ends up giving AT&T an addition 2.3 GHz of spectrum for its LTE network.  Also, AT&T announced earlier this month that it was planning to buy Atlantic Tele-Network’s retail wireless business for $780 million.  This deal will also add spectrum in the 700 MHz band and compliments the company’s existing network.  These deals follow 50 deals in 2012 which increased the company’s spectrum holdings by a third.  

More spectrum = better customer satisfaction

This means that AT&T is going to better positioned to provide good reliable high speed wireless to its customers, an area that they have fared poorly.  In a recent Consumer Reports survey AT&T ranked last in customer satisfaction amongst wireless carriers.  The company received poor marks for its voice and data services. 

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Focusing on improving spectrum coverage will go a long way towards improving customer perception about AT&T wireless service.  While AT&T will still be in a materially worse spectrum position than Verizon that gap is narrowing.  Analysts at Moody’s Investors Service note that Verizon’s competitive advantage over AT&T is due to the former’s more advance LTE network deployment and perceived network quality.  These factors have led Verizon to gain market share over recent quarters and have resulted in AT&T seeing far weaker subscriber additions.  A J.D. Power and Associates report found that improving network performance can translate into revenue growth in two ways.  First, customers will be more willing to spend more money on networks that deliver the data that they want.  Second, customers are less likely to switch carriers when network performance is strong. 

The first point is evidenced by the fact that Verizon Wireless has superior profit margins to AT&T Wireless.  In the last quarter Verizon Wireless posted a profit margin of just under 42% while AT&T Wireless saw a margin of just over 29%.  The superior network performance resulting from Verizon’s spectrum advantage likely played a substantial role in this disparity.  The second point is evidenced by Verizon’s low “churn rate” – the number of subscribers who switch to another provider.  Verizon posted a churn rate in 2012 of 0.84% compared to AT&T’s 0.97% more evidence that AT&T would do well to improve its network performance. 

Smaller competitors focused on expanding spectrum

While the spectrum deals are important in gaining ground on Verizon they also signal that AT&T is not going to stand by and simply watch as other carriers make deals that expand their spectrum coverage.  Wireless carriers are in a mad dash to expand spectrum as wireless data usage increases every year.  Sprint (NYSE: S) is attempting to purchase the remaining shares of Clearwire in an effort to become the largest holder of spectrum in the United States.  If that deal goes through Sprint would instantly hold a competitive advantage over AT&T by virtue of its large spectrum holdings.  Deutsche Telekom’s T-Mobile is also moving to increase its spectrum position.  The company recently announced a merger with MetroPCS Communications (PCS) which will result in almost doubling the spectrum holdings of either company separately.

Sprint CEO Dan Hesse is on the prowl for wireless spectrum after Verizon Wireless and AT&T overtake more and more of this valuable resource. Sprint had agreed to $2.6 billion in purchases shortly after the Softbank agreement, mostly in an attempt to gain control of Clearwire. Sprint spent almost nothing in the 12 months leading up to this period, while AT&T and Verizon gobbled up more than $5 billion in purchases.

According to Hesse,“Clearwire would give us a strong spectrum position for a period of time. But we also have a very long-term view, and we would want to acquire more spectrum.”

With its increased spectrum ownership, AT&T is not only making sure it continues to compete with Verizon but also that is does not allow smaller carriers to gain ground on its leadership position.  While the company is playing catch-up, to some extent, with Verizon it still remains significantly ahead of the smaller carriers.  While Sprint may become the leading owner of spectrum if its deal to buy out Clearwire is approved there is still going to be significant lag time in developing and implementing the infrastructure necessary to get the network online.  In addition, smartphone manufacturers will need to produce phones and chips that will work with the band of spectrum that Clearwire currently owns.  Such difficulties are not faced by AT&T with its recent spectrum deals.  The company can begin using its new spectrum almost immediately after FCC approval, which is almost assured to be granted.

Conclusion

While increasing spectrum will probably not push AT&T ahead of Verizon in the number of subscribers this year, it will most definitely improve AT&T’s competitive position with Verizon.  Better coverage will result in fewer customers lost and more net subscribers in 2013.  The deals also show that the company is focused on what is important to its customers and an understanding that spectrum is where the wireless carriers are going to fight it out in the near future. 


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