Spectrum crunch forces AT&T to re-farm 2G
Aging 2G network is a drag on wireless carrier's 4G LTE expansion.
AT&T's spectrum problems are well-documented. It has been throttling the data usage of the top 5% of its unlimited data users in a bid to ease the load on its network and avoid widespread discontent with its data services. Recently, it clarified that unlimited data usage will be subject to a soft cap of 3GB for 3G data plans and 5GB for Long Term Evolution (LTE).
While data-hungry 3G smartphones, like Apple's (AAPL) iPhone, continue to plunder its limited 3G spectrum resources, AT&T has had to find additional spectrum for its LTE plans in order to keep pace with Verizon. In the LTE market, Verizon has pulled away to cover almost three times as many Americans as AT&T's LTE network currently does.
As an answer to its spectrum woes, AT&T tried to acquire T-Mobile last year. But anti-competitive concerns caused the FCC to block the deal, forcing AT&T to back out and fork over $1 billion of spectrum in addition to $3 billion in cash to T-Mobile. At the same time, Verizon moved quickly to sign a couple of spectrum deals with the cable companies that keep a huge swathe of unused spectrum out of AT&T's reach.
Spectrum auction not a near-term solution
The recent Congressional approval for wireless spectrum auctions should help address its needs, but they are subject to the FCC's judgement of how much TV spectrum AT&T will be allowed to bid for in order to avoid anti-competitive concerns (see Wireless Industry Cheers as Spectrum Auctions Seem Likely). Moreover, the biggest showstopper could be the TV broadcasters' reluctance to part with their spectrum, so AT&T cannot rely solely on the auctions either. Even if the two obstacles are somehow overcome, the auctions may not happen for another year or two.
With spectrum getting scarcer by the day and little by the way of a near-term solution available, AT&T is forced to consider a few of the harder alternatives. With 2G technology on the wane as demand for 3G smartphones continues to rise and 2G usage mostly limited to 2G-only phones, AT&T is looking to transition the remaining 2G users to 3G completely and re-farm the 2G spectrum for 4G purposes. It risks losing the customers completely if they choose to jump to another carrier's network, but continuing to support 2G would not only limit its 4G LTE expansion but also add to its costs of maintaining an aging network. Due to lack of better options, the opportunity costs of maintaining an under-utilized 2G network are just too great for AT&T now.
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