AT&T Disputes Network Criticism

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AT&T is disputing a financial analyst's criticism of its wireless capital spending, saying there is more to its mobility investments than was represented in the report.

On a conference call Tuesday, Gerard Hallaren of TownHall Investment Research said the carrier is investing disproportionately in its wired network even as its wireless service lags behind other carriers. AT&T would have to invest an additional US$5 billion to bring its cellular service up to the level of its biggest competitor, Verizon Wireless, Hallaren said.

Figures on wireless investment between 2006 and September 2009 show the difference between the carriers, according to TownHall: AT&T made $21.6 billion in capital expenditures on its wireless network, compared with $25.4 billion for Verizon, Hallaren said. That worked out to $308 per subscriber for AT&T, well below the $353 spent by Verizon, he said. This shortfall is reflected in poor results for AT&T on some measures, such as reliability, in studies by Consumer Reports and PC World, according to TownHall.

AT&T said the capital expense figures on which TownHall based its analysis paint an incomplete picture of the carrier's commitments to wireless. Counting spectrum purchases and acquisitions along with network capital expenses, AT&T invested about US$19 billion in its wireless infrastructure just in 2008 and the first three months of 2009, said company spokeswoman McCall Butler.

In addition, the carrier disputed Hallaren's interpretation of its reported investments in wired and wireless networks. Using regulatory filings by AT&T, Hallaren said wireless services contribute 57 percent of AT&T's operating income but the company only makes 34 percent of its capital investments in that network. The wired side of the business, including the emerging U-Verse fast broadband and video service, takes up 65 percent of the carrier's network capital expenditure but contributes only 35 percent of its operating income, according to TownHall.

Those figures ignore significant investments by AT&T in its backhaul network, the wired links that carry the fast-growing traffic from the wireless network onto faster wired infrastructure and the Internet.

"Fiber and bandwidth to cell sites are the most significant investments for mobile broadband, but they are booked to wireline," Butler said. AT&T does not publicly break out backhaul spending from other investments in its wireline network.

TownHall's Hallaren said that to make a fair comparison with Verizon's wireless spending, he had to leave out capital investment in backhaul because neither carrier reveals its backhaul investment. If wireless backhaul investments were as big a part of wireline spending as AT&T implied, the company would have to disclose that in regulatory filings, he said.

According to PCWorld's test, conducted by Novarum, AT&T came in last place for reliability behind Verizon and Sprint in all 13 cities tested, tying with Verizon in just one location, Boston. However, its mobile download speed beat the other two carriers in two cities -- Boston and Phoenix -- and its upload speed led the pack in 10 of the sites. Two cities where it did not were the places where AT&T has faced its most intense criticism, San Francisco and New York City.

Analysts at investment bank Piper Jaffray found last month that AT&T's iPhone beat Verizon's Motorola Droid in download speed in six out of nine cities. Continuing problems in the high-profile San Francisco and New York markets affected the carrier's reputation, according to Piper Jaffray. "AT&T's network is finally starting to show the investments the company is making and performance is improving," the analysts wrote.

Real or perceived weakness in its wireless network doesn't appear to have hurt AT&T's business. In the third quarter ended last September, the company reported it gained 2 million wireless subscribers, a record for that part of the year, to end the period with 81.6 million. The churn, or turnover, among its postpaid subscribers was 1.17 percent, also a record for a third quarter, AT&T said. Meanwhile, its wireless data revenue grew 33.6 percent to $3.6 billion. The company's 1.6 percent drop in overall revenue was caused by declines in other businesses, such as wireline voice and directories.

Today, AT&T's profit margin in wireless may be even wider than those of its rivals, Hallaren said. But the carrier's results have probably been buoyed by its exclusive deal to sell the popular Apple iPhone, Hallaren warned. That arrangement is widely expected to end around the middle of this year.

"AT&T has so underspent that they're going to get hit with a double whammy" when iPhone exclusivity ends, Hallaren said.

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