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AT&T's spectrum hunt continues

Tuesday - 8/7/2012, 1:32pm  ET

After the big blow AT&T received last year from its failed acquisition of T- Mobile to satisfy its spectrum thirst, the second largest carrier understood that regulators aren’t really fond of big deals. The wireless operator got an unfavorable decision from the FCC and the US Department of Justice that opposed the deal on account of antitrust issues. This time AT&T is making sure to target smaller acquisitions to meet the airwaves need.

The Target
The telecom provider announced its desire to acquire NextWave Wireless Inc last week for $600 million in cash. The carrier is paying such an amount for the troubled company as it is assuming NextWave’s $550 million debt. As per the agreement, AT&T will pay $25 million for the equity along with a contingent payment of $25 million. The rest of the consideration would be used to clear of the company’s debt. The deal would give the Dallas-based phone company access to NextWave’s valuable WCS and AWS bands.

Other than the above deal, AT&T also announced its plan to buy WCS spectrum from Comcast and Horizon Wi-Com. If the FCC agrees to the above deals, AT&T would start the deployment process in three years but not exhaust the spectrum entirely. The acquired spectrum band is a part of the company’s long-term strategy to enhance its wireless capacity to cope with the enormously rising data demand.

The Need
The industry has been witnessing such a tight spectrum situation from quite some time. With the growing data demand and rising popularity of bandwidth-hogging applications in smartphones such as Apple’s iPhone and Google’s Android, things are getting more difficult given the available spectrum. AT&T needs the airwave for its 3G capacity as well as for the deployment of the advanced 4G LTE network. Increasing its wireless capacity is critical to keep up its revenue flow that comes from data usage by smartphones users.

Also, additional spectrum is extremely essential for the company to keep pace with its bigger rival, Verizon . In fact, Verizon has already taken a lead by making the LTE network available to around 230 million people in 337 markets spread across the US, relative to 80 million people covered under AT&T’s LTE network. The lead carrier had started building the LTE much before AT&T. Currently, Verizon is awaiting regulators' approval on its SpectrumCo deal to acquire AWS spectrum from the group of cable companies.

However, let’s take a look at the current strategy that AT&T is applying in this spectrum crunch environment.

Managing the Shortage
The company is throttling the data speed for the top 5 percent of the data users. In addition, it aims to put off its 2G cellular network by 2017 to free up some airwaves from there for building the next generation network. This would mean the conversion of its 2G subscribers to use higher level or upgraded devices that run on 3G and 4G. Around 12 percent of the company’s postpaid subscribers are on 2G hansets. So there always lies a risk of losing these 2G customers to the rivals.

So we see that carriers are under constant pressure to upgrade their network to meet the increasing data usage more efficiently. Other than adding more spectrum, they are also planning to discontinue some of their legacy networks. Even Sprint is considering to switch off its 2G push-to-talk iDEN network by next June in an effort to divert the freed spectrum to upgrade technology.

The Bottom Line
AT&T claims that it is facing severe spectrum crunch in some of its markets, which could have an impact on the quality of its wireless voice and data services. The airwaves auction program proposed by the FCC is definitely not an immediate solution to the carrier’s present need. This makes FCC’s approval on AT&T’s proposed deals extremely crucial. That’s exactly why the company has come up with smaller acquisition proposals, as it doesn’t want history to repeat itself.

This article was originally published as AT&T’s Spectrum Hunt Continueson Fool.com

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