AT&T’s 3G Network Upgrades Can Help it Compete, Even With 4G

AT&T (NYSE:T), which primarily competes with other mobile operators like Verizon (NYSE:VZ), Sprint (NYSE:S) and T-Mobile, has recently been upgrading its 3G network.

Although 4G technologies such as Long Term Evolution (LTE) and WiMax are expected to be the foundation of next generation wireless networks, AT&T has chosen to invest in upgrading its 3G network rather than investing more in 4G in the near term.  We believe that AT&T’s 3G upgrade will help it to achieve wireless network speeds approaching that of 4G and that near term upgrades to its network can help it to attract more data-heavy smartphone users.

Mobile Phone Business is 43% of AT&T’s Stock

We estimate that mobile phones and plans (including voice and data plans) form the most important division for AT&T’s business and contribute about 43% to the $37 Trefis price estimate for AT&T’s stock.  Given the importance of the wireless business for AT&T, the right infrastructure investments can have a significant impact if they can help AT&T attract more mobile phone subscribers.

Long Lead Time for Full 4G Network Deployment

Although AT&T and Verizon are both investing in LTE technology for 4G, there is a long lead time for building out a full 4G network.  It is estimated that LTE deployment will require investment of about $8 billion over next 3 to 5 years, excluding the costs of spectrum acquisition, which could be even higher.

LTE networks will only be available in selected markets initially and the 3G network will still hold its importance for wireless careers.  Juniper, a telecom hardware maker, estimates that 3G networks will have more traffic than 4G networks as far out as 2014.

3G Upgrades Important for Near Term

AT&T has been upgrading its 3G network by deploying HSPA 7.2 technology to enable faster speeds and to increase network efficiency.  AT&T’s improved 3G speed could match Verizon’s expected initial 4G LTE speeds.  It is estimated that AT&T’s upgraded 3G network can deliver speeds of up to 7Mbps for certain mobile phones enabled to work with such speed, while Verizon expects initial LTE speeds of about 5 to 12 Mbps.

How much AT&T spends on network upgrades can have a significant impact on the stock.  You can modify the forecast below to see how an increase in AT&T’s mobile capital expenditures (as % of gross profits) can impact AT&T’s stock.

For additional analysis and forecasts, here is our complete model for AT&T’s stock.