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The Problem

Today, the United States wireless telecommunications services infrastructure is coming under increasing pressure due to one major demand trend. That is, consumers and corporate customers are more commonly using their wireless devices (e.g., phones, laptops) to transmit data, as opposed to voice communication. Increasingly, subscribers are shedding traditional wireline connections in favor of advanced wireless offerings. Popular data services include surfing the Web, social networking, navigation, gaming, and downloading music, movies, books, and documents.

Our nation’s wireless network was initially constructed to deliver good-quality voice service. Data exchanges use a substantially greater amount of capacity, or spectrum, than do voice transmissions, thus, posing a challenge to cell-tower/wireless broadband systems. Too, for a number of years, cable companies, such as Cablevision (CVC), Comcast (CMCSK) and Time Warner Cable (TWC), have been dealing with service delivery bottlenecks on their fixed-line broadband systems, caused by growing subscriber rolls and data use.

Recently, AT&T (T), which provides wireless service over Apple’s (AAPL) popular iPhone, was at the center of this issue. Last December, during the Christmas holiday weekend, consumers in New York City were unable to purchase the smart phone on the telco’s Web site, and industry watchers speculated that management purposely caused the snafu to give temporary relief to an over-taxed data infrastructure. AT&T denies this charge. Nevertheless, as smart phones proliferate across the industry, the overall domestic network might well suffer frequent service disruptions and slowdowns, unless the telcos, notably AT&T, Sprint Nextel (S) and Verizon Wireless, a Verizon Comm. (VZ)/Vodafone (VOD) partnership, act quickly.

According to ABI Research, U.S. mobile traffic will rise from just a few billion megabytes in 2007 to some 4,500 billion megabytes by 2014 and, over the same time frame, wireless broadband subscriptions will increase from five million to about 150 million. Television and radio broadcasts, public and government communications, wireless fidelity and other airwave systems all have to operate under natural and federal capacity and interference limitations.

Solutions

Several initiatives are under way to resolve this industry dilemma. Among them are telco efforts to win regulatory consent of tiered pricing, expand government auctions of spectrum, improve existing network efficiency, add more cell sites, and construct a new domestic fourth-generation (4G) infrastructure.
Currently, a minority of subscribers accounts for the largest portion of data usage on both wireless and fixed broadband networks. Service carriers want to charge customers based on their capacity burn, which would likely lead to greater user conservation, not to mention higher company revenue and net profits. Government authorities and consumer advocates are resisting such plans, but the telcos have considerable financial clout and lobbying power. At any rate, the telecoms will probably be able to charge a premium for enhanced wireless fidelity 4G service or possibly set usage limits, charging for overages.

The U.S. Congress and the Federal Communications Commission are considering an audit of available domestic wireless spectrum, which would facilitate more efficient use of the airwaves and help to identify underutilized capacity that could be auctioned off to the highest bidders. Too, these authorities, along with the White House, have worked to increase funding for expanded (into rural areas) fixed and wireless broadband market coverage. (Note: A substantial portion of wireless traffic travels over fixed broadband systems.) Once executed, federal measures should go a long way toward relieving congestion.

With regard to enhancing network quality and efficiency, the telcos are adding and/or leasing cell towers, upgrading systems software, laying Ethernet backhaul lines, and utilizing Distributed Antenna System services. These undertakings are often time-consuming and capital-intensive. Outsourcing functions to companies, such as Alcatel-Lucent (ALU), American Tower (AMT), Bytemobile Inc., Cisco Systems (CSCO) and Ericsson (ERIC), can help to contain costs and spending outlays. Also, the shifting of resources (e.g., staff) from internal wireline operations to wireless segments keeps costs in control.

Given the ample boost that the iPhone has given to its net subscriber additions (2.7 million in the latest December quarter), AT&T has upped its total 2010 network budget ($18 billion-$19 billion) by $2 billion to maintain wireless service quality and prepare for the introduction of Apple’s iPad mobile device. Management is hopeful that many iPad owners will opt for new 4G wireless fidelity service, which would take some traffic off existing networks. A rising share of the high-end wireless market is enabling the telecom giant to post strong share-net advances. Sprint Nextel has invested over $8 billion in assets and cash in Clearwire (CLWR), a company that is establishing a national WiMax (wireless fidelity) network. Clearwire plans to soon introduce a WiMax smart phone to its handset lineup. Verizon Wireless is spending some $6 billion a year to improve its network, and is developing an alternative to WiMax, called Long-Term Evolution (LTE). AT&T intends to build its own LTE system as well.

All in all, we believe that the major telcos have the management and technical expertise and financial wherewithal to maintain an adequate level of service as wireless broadband services proliferate around the nation over the next several years.