Is AT&T a wireless spectrum hog?

AT&T is pinning its future on getting its hands on more wireless spectrum. But should regulators allow AT&T, which owns more wireless spectrum than any other wireless operator across the nation, to gobble up even more of this scarce resource?

That's the big question that the Federal Communications Commission is grappling with as it scrutinizes the planned merger between AT&T and T-Mobile, which will transfer all of T-Mobile's spectrum to AT&T. The FCC is also in the middle of considering AT&T's plan to buy spectrum in the lower part of the 700MHz band of spectrum from Qualcomm.

Wireless spectrum is like valuable real estate, and what's going on right now in the wireless market is akin to a good old fashioned land grab. The last major wireless auction for the 700MHz band of spectrum, which was considered beachfront property, was only a few years ago. Unfortunately, for wireless operators all the good "property" has already been bought. And until the FCC can free up more spectrum for auction, the only way for operators to get their hands on new spectrum is to buy it.

It's this desire for wireless "property" that is driving AT&T's $39 billion acquisition of the struggling wireless operator T-Mobile USA. It's also why AT&T plans to spend nearly $2 billion to acquire spectrum from Qualcomm, which the chipmaker used to build its failed mobile TV business called MediaFlo.

In its 381-page executive summary filed to the FCC last week (PDF) explaining why this megamerger, which will eliminate one of four nationwide U.S. carriers, is in the public interest, AT&T claims that without additional spectrum from T-Mobile, the carrier will not be able to fulfill short term needs for wireless broadband.

This is in spite of the fact that AT&T is today sitting on more spectrum than any other wireless operator in the top 21 markets in the U.S., and about a third of that spectrum is still being unused.

"It's hard to reach the conclusion that the wireless carrier with the most spectrum and best spectrum isn't able to serve its customers with what it already has," said Larry Krevor, a vice president of government affairs for Sprint. "Every carrier has to use its spectrum resources as efficiently as it can."

AT&T's spectrum holdings
In the top 21 markets in the U.S., AT&T has about 284 MHz more spectrum than its closest competitor, Verizon Wireless, according to data provided by Verizon. To put this in context, the FCC's National Broadband Report calls for an additional 500 MHz of spectrum to be made available for auction in the next decade to fulfill the needs of all wireless broadband providers. The FCC has proposed TV broadcasters to give up about 120 MHz in incentive auctions for wireless broadband within the next five years.

In San Francisco, where it's been well-publicized that AT&T has struggled to keep up with mobile data demand for its smartphones, particularly the iPhone, AT&T has about 30 MHz more 3G spectrum than Verizon Wireless. This 3G spectrum consists of spectrum in both the 850MHz band as well as the PCS band of spectrum.

In other markets, the difference in spectrum holdings is not that great. For example, in Washington, D.C., another major city where AT&T customers have complained about dropped calls and slow data speeds on their 3G wireless devices, AT&T only has about 10 MHz more of 3G spectrum than Verizon Wireless. In New York City, the second largest wireless market, where AT&T customers probably suffer the most from dropped calls and slow connections, AT&T has a deficit of about 10 MHz less than Verizon Wireless.

And this is just the spectrum that AT&T is already using to provide its 2G and 3G wireless services. The company hasn't even touched about 832 MHz of new wireless spectrum in the top 21 markets. This spectrum, which sits in the AWS and 700MHz bands, will be used to build AT&T's 4G LTE network. The company is building the network and has plans to launch it commercially this summer with a target of reaching 70 million to 75 million potential subscribers by the end of this year.

Verizon Wireless, which is also building a 4G LTE network using the AWS and 700 MHz spectrum, has about 918 MHz of this spectrum in the top 21 markets. Verizon launched its 4G wireless service in December, and it expects to serve 200 million people with the service this year. And by the end of 2013 it will be available to more than 285 million potential customers.

The 700MHz spectrum that AT&T and Verizon Wireless are using to build their LTE networks was the last bit of spectrum to become available. It had originally been allocated as analog TV spectrum. It was given back to the government after TV broadcasters were forced to start transmitting signals digitally to make their spectrum use more efficient. It's considered prime real estate in terms of wireless spectrum because the low frequency means that it can send data longer distances and penetrate buildings more easily than spectrum at higher frequencies.

AT&T and Verizon currently own more than 90 percent of the licenses for this spectrum in major cities throughout the U.S. And AT&T is hoping to add to its 700MHz coffers by buying an additional 12 MHz of 700 MHz spectrum that Qualcomm is selling. Qualcomm had used the spectrum to build a nationwide mobile TV network called MediaFlo.

Earlier this week, consumer groups, rural operators, and Sprint Nextel, wrote letters to the FCC asking the agency to reject Qualcomm's request to transfer the licenses to AT&T. They also said that if the FCC doesn't reject the proposal, they would at least like the agency to consider this spectrum license transfer along with the T-Mobile acquisition, since both transactions are fundamentally about increasing AT&T's spectrum holdings.

"Licenses for beachfront spectrum below 1 GHz are disproportionately held by two companies, AT&T and Verizon Wireless," representatives from Free Press, Media Access Project, Public Knowledge, Consumers Union, said in a letter to the FCC (PDF). "The proposed Qualcomm license transfer would only further this competitive disparity."

Spectrum is the 'lifeblood' of the wireless industry
There's no question that more spectrum means that wireless operators can serve more customers with faster, richer Internet services. In a recent speech to strum up support for incentive spectrum auctions that would bring more wireless spectrum to the market, FCC Chairman Julius Genachowski called it the "lifeblood of the wireless ecosystem."

He also said that "mobile broadband is being adopted faster than any computing platform in history, and could surpass all prior platforms in their potential to drive economic growth and opportunity."

Indeed, smartphones have become more popular and consumers are using more data intensive applications, such as video streaming. Computing services are moving toward the "cloud," which is also increasing demand for wireless broadband. And it's true that wireless networks are starting to feel the strain.

But AT&T claims that it is feeling the wireless spectrum even more than its competitors.

In its filing last week to the FCC, AT&T says its network has more smartphones on it than any other wireless provider with a total of 31 million smartphone subscribers. The company highlighted that smartphones consume "24 times as much data as traditional cell phones."

AT&T says that as a result of the growth in smartphones and other connected devices, such as tablets, it has seen its data traffic grow 8,000 percent from 2007 to 2010. And that growth is expected to continue.

By 2015, AT&T estimates that mobile data traffic on its network will reach eight to ten times what it was in 2010. To put it another way, the company says that in just the first five to seven weeks of 2015, AT&T expects to carry all of the mobile traffic volume it carried during 2010.

"[The] spectrum crunch is hitting AT&T harder and sooner than the industry at large," it said in the filing. "And because AT&T plays a key role in supporting the cycle of mobile broadband innovation in the United States, its capacity problems could have ripple effects throughout the broadband ecosystem."

The loaded network is likely what's caused AT&T customers to already experience dropped calls and slow data service in certain markets, such as New York City and San Francisco. AT&T has admitted that it has struggled to keep up with demand in these cities, as well as certain other markets.

And it said that it's burning through spectrum at an accelerated rate trying to keep up with demand in certain markets.

"Whereas in 2004 it took 24 months in major markets to exhaust 10 MHz of spectrum," the company said. "From 2008-2010 growing UMTS demand caused AT&T to burn through 10 MHz in half that time or less in some major markets."

Without additional spectrum, AT&T says that service problems will get worse in certain markets. The company says that it has tried to deal with the capacity crunch by adding more cell sites and using offload technologies such as Wi-Fi and femto cells, which create mini cell sites within people's offices or homes. But it says that these solutions are merely band-aids that don't address the real problem.

The solution, according to AT&T is getting additional spectrum through its merger with T-Mobile USA. T-Mobile doesn't have any of the 700 MHz that AT&T may need to build its new LTE network, but it does have about 580 MHz of 3G spectrum in the top 21 markets, which AT&T could use to help alleviate some of its congestion on the existing 3G network in those markets. And it also has 580 MHz of AWS spectrum in these top markets, which AT&T could eventually use to expand its 4G LTE build out. In fact, AT&T claims that with the T-Mobile spectrum it could reach 97 percent of the population with its 4G network.

AT&T argues that T-Mobile is also capacity constrained when it comes to spectrum and can't afford to acquire new spectrum to sustain future growth. Therefore it makes sense for the two companies to combine "real estate."

"This transaction provides the most effective, efficient, and timely resolution of the capacity constraints facing AT&T and T-Mobile USA," AT&T writes.

Competitors say hold on a second
AT&T's competitors say the carrier is facing the same issues they each face. And they argue that if AT&T is truly struggling to keep up with demand, it may be because the company has not managed its resources well or invested enough in its network.

Look at Verizon Wireless as an example. Verizon, which has 104 million wireless connections on its network as of the end of the first quarter of 2011 compared with 97.5 million total wireless subscribers on AT&T's network, has on average about 10 MHz less spectrum in the top 21 U.S. markets than AT&T. And yet its service is often praised for its reliability.

"We have been building capacity into our network and investing in our network for several years," said Molly Feldman, vice president of business development for Verizon Wireless. "That's why we are in a strong position today."

Some critics question whether AT&T has invested enough in its network. Between 2008 and 2010, AT&T spent $21.1 billion to upgrade its wireless network, according to an FCC filing. During that same period, Verizon spent about $22.1 billion.

Martin Peers points out in a blog for The Wall Street Journal that even though AT&T already knew that it had congestion problems on its network after the introduction of the iPhone in 2007, it still only increased wireless capital expenditures by 1 percent in 2009 compared with an increase in capital spending from Verizon Wireless by about 10 percent.

Meanwhile, Verizon executives say the company has enough spectrum until at least 2015 to keep up with demands on its network. And like AT&T, Verizon now offers the data hungry Apple iPhone and iPad 2 along with several models of Google Android smartphones.

"The bottom line here is that this is about managing the network," Sprint's Krevor said. "I've got to give Verizon credit. They have a little bit less spectrum in some markets than AT&T and more subscribers than AT&T overall. And they don't have these same issues. They've done a better job of managing their network."

Krevor went on to say that AT&T has no one else to blame but itself for the dilemma it faces now.

"If AT&T has a spectrum use issue, it's one of its own making," he said. "They haven't managed their network effectively, so they think the solution is to simply acquire the nearest competitor."

Krevor said that every wireless operator would love to add more spectrum to its network to increase network capacity as it grows. But he said that isn't always possible given the that spectrum is a finite resources. And instead of allowing AT&T to eliminate a competitor, he believes the market will force AT&T and other wireless operators to use their spectrum more efficiently.

"Competition forces you to improve and invest in the network to make the services as good as they can be," he said. "We (Sprint Nextel) didn't do a great job of integrating the Nextel spectrum into our network, and the market punished us. We responded by fixing those issues. Why shouldn't AT&T do the same?"