Although it’s only been three years since widespread adoption of 3G phones arrived in the United States, carriers have already commenced deployment of 4G infrastructure to keep up with exploding bandwidth demand. As more people use smartphones and tablet PCs as their primary means of media consumption and general computing, they are demanding equal or better functionality than a conventional PC with broadband connectivity can provide. Thus, telcos have started ratcheting up investment in 4G networks that offer the ability to quickly load websites, stream HD movies and live TV shows without buffering, video chat, download songs and upload photos to social networking sites in mere seconds, play online games with friends, and quickly download business presentations and conduct work in the cloud, wherever they so choose.

Two mobile standards capable of such functionality currently exist in Worldwide Interoperability for Microwave Access (WiMax) and Long Term Evolution (LTE), and the debate over which will become dominant has been raging for years. WiMax has a clear head start, finishing 2010 with 6.8 million subscribers compared to LTE’s 700,000, thanks to Sprint (S) and Clearwire’s (CLWR) efforts to become early purveyors of the technology in 2008. However, roughly two thirds of carriers worldwide have committed to LTE, which we primarily attribute to the 5-12 Mbps download speeds it can provide, compared to WiMAX’s 3-6 Mbps. As a point of reference, current 3G speeds range from 0.6-1.4 Mbps, and the average fixed broadband connection in the U.S. provided 5.1 Mbps of bandwidth in the fourth quarter of 2010, according to Akamai Technologies’ State of the Internet report. Theoretical download speeds are much higher for both LTE and WiMax (100+ Mbps), but they won’t likely come to fruition until progressive iterations of the technologies develop over the next decade.

Sprint has yet to rule out an LTE build out, but the recent $1 billion cash infusion it provided Clearwire to continue expanding its WiMax network suggests the incumbent technology is here to stay. Sprint WiMax service was available to more than 110 million people in 71 markets at the end of 2010.

According to iSuppli estimates, WiMax will retain its advantage in 2011 with 14.9 million subscribers, while LTE closes the gap with 10.4 million. In 2012, the research firm sees LTE taking the lead with 50 million subscribers and WiMax falling behind with 22 million. An even bigger gap is expected by 2014, as LTE reaches 303 million subscribers compared to WiMax’s 33.4 million. The company expects global LTE infrastructure spending to rise from $1.5 billion in 2010, to $27.9 billion in 2014, which represents a CAGR of 107.5.

Verizon (VZ - Free Verizon Stock Report) and AT&T (T - Free AT&T Stock Report) have both chosen LTE for more reasons than relatively high average bandwidth. LTE provides a compelling development path from existing standards (GSM, CDMA, W-CDMA) by simplifying the radio access network (controls the transmission and reception of radio signals), which leads to better network performance and lower cost per bit.

AT&T and its acquisition target T-Mobile (DTEGY) have both been outfitting base stations with HSPA+ software, a third “4G technology” that provides download speeds of 1-7 mbps (note, the International Telecommunications Union, by definition, does not consider current-generation HSPA+, LTE or WiMax technologies to be true 4G, but the term has been universally accepted by the telecom community). However, AT&T is now installing LTE software and upgrading much of its wireless backhaul by connecting cell sites to its backbone network via high-capacity fiber optic cables. The company is set to switch on its fresh LTE network in mid-2011, and believes the combination of both HSPA+ and LTE coverage will provide increased network reliability and depth.

As of December 31, 2010, Verizon’s LTE network was deployed in 38 major U.S. metropolitan areas (roughly one-third of the country) with 70% initial coverage in each. It’s expanding into Detroit, Memphis, Milwaukee, Louisville, Minneapolis, Sacramento, Honolulu, and other cities in order to reach 140 markets by the end of this year, and its entire current 3G footprint by 2013. The company lists Alcatel-Lucent (ALU) and Ericsson (ERIC) as its primary LTE network vendors. Networking and telecom market research firm Dell’Oro Group revealed that Ericsson, Alcatel-Lucent, and Nokia Siemens Networks accounted for approximately 40%, 30% and 10%, respectively, of total LTE revenues earned in the fourth quarter of 2010. 

Alcatel-Lucent claims AT&T as a major LTE customer; that company and Verizon were each responsible for 11% of its revenues in 2010. While Alcatel’s W-CDMA (3G) equipment sales to Asia Pacific, China, and Korea provided the majority of its Wireless unit’s 34% fourth-quarter revenue advance, LTE products also helped by contributing $133 million in revenues. Alcatel believes miniature cell towers (light radios) used to fill coverage gaps and unique LTE services will differentiate it from competitors. It has contracts with 12 operators worldwide and more than 60 LTE trials or commercial agreements under way.

Ericsson has managed to get an early market share lead in the LTE space thanks to Verizon, AT&T, and MetroPCS (PCS) all making it their primary vendor. The company reports that these customers, along with one other, have a total addressable market of 140 million at present, 60% of whom are served by Ericsson LTE equipment. Only base stations that have come out in the past three years are compatible with 4G/LTE software, so Ericsson is looking to take advantage of the transition by cross selling its current solution, the RBS6000, which reportedly takes up 25% less space and reduces power consumption by up to 65%. But increased LTE R&D and testing expenses (each up 10% in the fourth quarter) should somewhat offset the increased revenue gains over the near term.

North America is the primary revenue market for both Alcatel and Ericsson, providing 30% and 23% of 2010 revenues, respectively. While Alcatel generated slightly lower revenues from Europe than from the U.S., Ericsson is far less exposed to the Continent as it was only responsible for 17% of revenues. North America is expected to account for around half of global spending in 2011, but this rate will likely fall off dramatically in 2012, as European countries catch up and begin rolling out LTE networks ever more quickly.

Fourth-generation wireless infrastructure products still comprise only a small percentage of these companies’ revenues. However, we view the transition to 4G networks as inevitable; thus, LTE and WiMax should provide ample top-and bottom-line earnings growth at these equipment vendors for the foreseeable future.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.