AT&T sans T-Mobile USA: Making lemons from lemonade

With its proposed acquisition of T-Mobile USA smoldering in ruins, AT&T will now actually lose advanced wireless services (AWS) licenses in 128 markets as part of the breakup fee, as The Verge reports. Meanwhile, as my colleague Kevin Fitchard documents here, Verizon Wireless continues to accrue spectrum like a kid gathering candy under a smashed piñata. As we enter the 4G era, AT&T will have to find spectrum wherever it can to keep pace. But more importantly, it will have to invest heavily to optimize the spectrum it has most effectively. Otherwise, Verizon could quickly soar past the second-largest U.S. network operator.

Few attractive options

AT&T could look to acquire Dish Network, as Stifel Nicolaus analyst Christopher King discusses in this Bloomberg piece. That deal makes some sense on several levels: Dish Network has made no bones about its desire to get into mobile (it said last week it planned to pursue a partnership with T-Mobile should the acquisition fall through), it would be affordable (with a market capitalization of $12.13 billion), and federal regulators would likely approve the deal because it would foster competition between the two biggest carriers. But the satellite TV operator may fight any takeover, preferring to remain an independent player as it finds a partner in mobile (likely T-Mobile). And an acquisition would include a satellite TV business I don’t think AT&T actually wants. Dish Network may partner with AT&T rather than T-Mobile if it gets a better deal from the larger carrier, but I think an acquisition here is unlikely.

Walter Piecyk of BTIG Research seems to believe Clearwire might be highest on AT&T’s wish list, as Barron’s notes here, and LightSquared is another potential target for acquisition. But I think both of those are extreme long shots: Both companies have deep relationships with other service providers (LightSquared plans to launch sometime next year with more than 30 partners; Sprint is Clearwire’s majority owner in addition to being its biggest customer), which would make any deal very complicated for AT&T. And because both are wholesale network operators looking to sell services to multiple carriers — which presumably would increase competition — federal regulators may not look kindly on any attempted acquisition.

While smaller operators like MetroPCS or Leap Wireless have some spectrum, their CDMA networks are incompatible with AT&T’s GSM network. And although the Federal Communications Commission is slowly moving forward with plans to auction off broadcast spectrum for mobile broadband use, political bickering has left those plans in limbo and many broadcasters remain opposed to the effort. So an auction isn’t likely to occur next year — or even in 2013. Meanwhile, it appears no other company has enough spectrum to justify an acquisition by AT&T.

Lemons from lemonade

The thing is, AT&T probably doesn’t need that much more spectrum to stay competitive with Verizon Wireless. The analyst firm Nomura estimates that Verizon will have about 120 MHz of spectrum compared with AT&T’s 103 MHz once the Qualcomm and SpectrumCo deals are completed, so the spectrum gap between the two largest operators is relatively small. Sprint and T-Mobile, by way of comparison, each claim about 50 MHz.

Rather than match Verizon MHz for MHz, then, AT&T’s best strategy is to optimize its network the best that it can. As Sprint suggested earlier this year, AT&T should invest heavily to build more macrocells and microcells to bolster its network and handle more traffic on its existing spectrum — especially in the urban markets, which will increasingly become hotbeds of mobile data consumption.

While it won’t be cheap, AT&T also must step up its buildout of LTE, as Kaufman Bros. noted in this post from the Wall Street Journal. As we all know by now, LTE is more spectrally efficient than earlier technologies. Just as AT&T has been a leader among network operators in leveraging Wi-Fi, it should continue to turn to offloading technologies when it can to consistently deliver data to users without clogging its network. If it invests heavily and wisely in both its cellular networks and offloading technologies, it should be able to keep pace with its bigger rival.

These aren’t long-term solutions, of course, and AT&T should continue to try to compile spectrum however it can until the FCC can finally pry some of the airwaves away from TV broadcasters. But AT&T is all too familiar with how network shortcomings can be very costly for a mobile carrier. For now, at least, bulking up its 3G network and building out LTE may be the best moves it can make.

Question of the week

What should AT&T’s top priority be now that the acquisition of T-Mobile is dead?