AT&T (NYSE:T) has agreed to purchase spectrum licenses from Qualcomm (Nasdaq:QCOM) for $1.925 billion. This will add capacity for AT&T's planned high-speed 4G mobile broadband network. (For background reading, see Dial Up Choice Telecom Stocks.)
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What AT&T Bought
AT&T will get spectrum licenses now owned by Qualcomm in the lower 700 Mhz frequency band. This band has been used by Qualcomm for its subsidiary FLO TV, Inc., which allowed subscribers access to multiple-channel TV on cell phones. Qualcomm is expected to close the FLO TV business next year, as consumer interest was weak. Costs for FLO TV were $132 million last quarter.
Why AT&T Bought It
AT&T, which plans to build out its 4G mobile broadband next year, already has bandwidth spectrum close to the band it's buying from Qualcomm. The spectrum AT&T bought will cover 300 million people nationwide in the U.S., including five of the top 15 metropolitan areas. AT&T plans to deploy the spectrum as a supplemental downlink once the technology is in place. As part of the planned 4G network, the higher speeds should allow for faster video and website downloading on mobile phones.
As the current exclusive carrier of the iPhone, AT&T has felt the sting of consumer unhappiness. Its mobile phone service was christened the worst compared to its competitors by Consumer Reports. AT&T's current 3G network is strained, and the company needs to boost its service as its strong rival, Verizon Communications (NYSE:VZ), is expected to offer the iPhone next year. With 4G networks from Verizon and other competitors like Sprint (NYSE:S) and Clearwire (Nasdaq:CLWR) either up or in the works, AT&T is already behind in the high-speed game. Recently, Sprint and Clearwire worked together to begin offering 4G service in Denver.
The 4G battle is part of the ongoing long-term showdown between AT&T and Verizon. The iPhone may simply be the early salvo in the next round. Verizon's 4G, which it calls Long Term Evolution, is already gaining hold, so AT&T can't afford any further lag or problems in its rollout. Assuming Verizon does offer the iPhone next year, potential activations should initially still be greater for AT&T, but AT&T's early lead may be fragile and not hold up, given customer unrest.
Verizon may be able to exploit another advantage, as many consumers who wanted to purchase iPhones would have preferred Verizon as their carrier in the first place, yet they had no choice. AT&T will have to fight hard to overcome its poor image as a mobile carrier.
The Move AT&T Had to Make
With two dominant domestic telecoms such as AT&T versus Verizon, there was no strategic alternative but for them to travel in lockstep with each other. AT&T is responding as best it can by expanding its potential strength in high-speed 4G with the Qualcomm deal. Now, successful implementation rests on how well these companies execute and convince consumers to hop on board. (For related reading about telecoms, see Dial Up Choice Telecom Stocks.)
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