Wall Street pans AT&T’s plans to spend billions to upgrade and expand its U-verse service.

Wall Street credit ratings agencies are unhappy with AT&T’s plans to increase spending on its broadband network to upgrade U-verse speeds and provide the fiber to the neighborhood service to more customers.

First, Moody’s placed AT&T’s “ratings on review for downgrade,” because AT&T’s plan to spend $22 billion to upgrade service and repurchase its own shares would throw AT&T’s debt level too high. Now Fitch Ratings has gone further, telling clients it has “downgraded” AT&T with a “negative outlook” because the phone company will spend money to provide U-verse to customers not profitable quickly enough to make the spending worthwhile.

Several Wall Street firms question the return on investment providing Internet service in rural areas where capital costs are higher. But many investment analysts are more positive about AT&T’s wireless service, which delivers substantial profits in much shorter time periods. Fitch called AT&T’s investments in LTE 4G service positive and important as Verizon Wireless continues to build and expand its own 4G LTE network.

Will be available to 8.5 million additional customers by the end of 2015

AT&T will spend $6 billion over the next three years to upgrade broadband speeds across its 22 state operating service area and further expand its U-verse broadband platform to reach suburban and exurban customers stuck in the DSL broadband slow lane.

AT&T today announced existing U-verse customers will be able to buy upgraded speeds as high as 75Mbps by the end of 2013, with speeds increasing to around 100Mbps further out. AT&T’s current U-verse platform is currently constrained with maximum speeds of around 24Mbps.

Customers currently bypassed by AT&T U-verse may still have a chance to get the service in their community. AT&T announced plans to expand the fiber to the neighborhood service by more than one-third, with an additional 8.5 million customers able to sign up by the end of 2015.

AT&T also announced an eventual replacement for its existing ADSL platform, which currently offers speeds ranging from 768kbps to around 12-15Mbps in certain areas. The company’s lighter version of U-verse, dubbed U-verse IPDSLAM, will be introduced to 24 million AT&T customers in smaller communities by the end of 2013. Customers will be offered phone and Internet service over the network — but not television — with broadband speeds up to 45Mbps.

About 25% of AT&T’s rural customers will not see any upgrade to their current landline service. Instead, AT&T announced it will seek to gradually decommission rural landline networks and transfer those customers to its 4G LTE wireless service for both broadband and voice service, pending regulator approval.

Short on specifics, AT&T did not say whether rural customers will face the same broadband usage caps that are familiar to other AT&T wireless customers.

AT&T plans to upgrade its broadband speeds using a combination of technologies:

• Pair bonding existing copper wiring to get additional bandwidth;
• 17MHz: Devoting six frequency bands to broadband, up from the current four;
• Vectoring: Using technology to reduce or eliminate speed-robbing crosstalk noise on existing lines;
• Additional Copper Wire Reductions: Bringing fiber further into neighborhoods to reduce the distance of copper wiring between your home and AT&T’s network;
• Using “rate-adaptive” technology to let equipment select the fastest possible speeds with a tolerable error rate.

Verizon’s flooded headquarters on West St., lower Manhattan (The Wall Street Journal)

As cleanup efforts continue across New York, New Jersey, and Connecticut, some of America’s largest telecommunications companies are coming under increased scrutiny for being caught flat-footed after Hurricane Sandy roared across the tri-state region, causing damage Verizon’s chief technology officer now admits is worse than 9/11.

As of this morning, Verizon Wireless’ network is reportedly straining, particularly in Manhattan and Brooklyn, where cell service that worked immediately after the storm is now increasingly failing.

Verizon said 94% of its cell sites were operational after the storm, but some local officials in the area believe 94% of Verizon’s wireless network has now failed them when they need it the most.

Many telecom companies, particularly AT&T, are being criticized for excessive secrecy about the ongoing state of their networks post-Sandy. AT&T, which left its customers in the dark about service restoration as late as last night while asking customers to contribute $10 to the American Red Cross, finally mass e-mailed customers a statement devoid of much detail signed by Steve Hodges, president of AT&T’s northeast region.

“Restoring our wireless network is our top priority,” Hodges writes. “The vast majority of our cell sites in the Northeast are online and working. We are working issues in areas that were especially hard-hit, where flooding, power loss, transportation and debris all pose challenges. Our crews are working around the clock to restore network service to areas that were impacted by the storm. We will not stop until we repair all of the damage to our network and restore service back to its full capacity.”

The Federal Communications Commission correctly predicted the situation with mobile phones could get worse before it gets better, as backup power wears down and flooding persists. At a press conference held yesterday, FCC chairman Julius Genachowski revealed at least a quarter of all cell sites in areas damaged by Sandy were not operational. Those numbers were less optimistic that those provided by carriers.

The FCC this week activated the Disaster Information Reporting System, a central reporting point for telecommunications companies to update the agency regarding outages and other service disruptions. The FCC also alerted providers that in emergency circumstances, they can assist companies getting fuel for generators and help locate portable cell tower equipment for companies caught unaware.

AT&T’s belated letter to customers affected by Hurricane Sandy

Some may need the help.

New York State Assemblyman Alec Brook-Krasny and Brooklyn Borough President Marty Markowitz both reported Verizon Wireless’ outages are worsening in Brooklyn and midtown Manhattan.

Brooklyn Borough president Marty Markowitz

The Federal Emergency Management Agency (FEMA) today told Sen. Chuck Schumer the federal agency will reimburse New York for 100 percent of the costs incurred restoring power across the storm areas. But that may not expedite how quickly power returns.

Power restoration is expected to bring most cell towers back online. Worsening service is being attributed to battery backup or generator equipment exhausting on-hand fuel supplies, which usually keeps service up and running for up to three days. That means cell towers without power and unreachable by workers will have begun failing late Wednesday into today.

Damage assessments are further behind in New Jersey, the state that took the worst impact from Hurricane Sandy.

Stop the Cap! obtained some new figures from cell phone companies regarding the state of their networks:

• Verizon: Still holding to 94% operational in storm areas;
• AT&T: Declined to comment except to say “the vast majority” of their network is operational;
• T-Mobile: 80% operational in NYC, 90% operational in Washington, D.C.
• Sprint: 75% operational

[flv width=”384″ height=”228″]http://www.phillipdampier.com/video/WSJ Verizon Offices Damaged 11-1-12.mp4[/flv]

Verizon’s critical network takes another hit. “We’ve been here before,” says one Verizon executive, referring to the destruction from the 9/11 terrorist attacks which severely damaged the same facility on West Street now flooded out. (3 minutes)

Our readers report that cell service becomes spotty to non-existent in coastal New Jersey and Connecticut. In Manhattan anywhere south of 29th Street, readers report almost no signals at all.

Verizon’s damaged facilities include those on West and Broad Streets in Manhattan (circled).

Residents are trading tips about “magic spots” where cell service does suddenly pop up, and Gizmodo notes the only place in Alphabet City (the east side in southern Manhattan) to get service is on literally one street corner, where crowds congregate to make and receive calls.

The other salve for telecom withdrawal is the nearest pay phone.

Amusing stories of 20-somethings waiting in long lines only to be confounded by unfamiliar pay phones are appearing in the New York media. One radio station even aired basic instructions for members of the Millennial Generation that have never heard of inserting coins into telephones.

The biggest challenge for the city’s pay phone vendors is clearing them of coin overloads, something unheard of before the storm.

The often maligned pay phone has exposed the limits of the “more advanced” and expensive networks that were supposed to replace them. Despite claims of superiority for wireless service, northeast residents have once again discovered it has its limits:

• They don’t work during major weather events that knock out power and limit access to maintain backup generators;
• Cell networks are less capable of handling large call volumes, a problem made worse when cell phone refugees in other areas seek out remaining cell signals, further congesting the network;
• Wireless is just as susceptible to wireline or fiber failures on the ground. Cell towers typically connect to providers through wired backhaul circuits, which knock out cell service if they fail;
• Cell phone users need power to recharge their power-hungry smartphones. Batteries drain even faster searching for a weak or non-existent cell signal;

Hardest hit remains Verizon, which allowed reporters access inside damaged facilities to help New Yorkers better understand the scope of the problem.

[flv width=”384″ height=”228″]http://www.phillipdampier.com/video/WSJ Wireless Network Outages 11-1-12.mp4[/flv]

The Wall Street Journal takes a look at the state of the wireless communications networks across the northeastern U.S. and when service will be back.  (4 minutes)

Eleven years after the 9/11 terrorist attacks that took out Verizon’s West Street office when buildings collapsed at the nearby World Trade Center, Verizon is likely going to have to re-learn some lessons about catastrophe management as flood waters recede.

Verizon has deployed this 53-foot Emergency Mobile Communications Center for use by the Nassau County Office of Emergency Management that provides Internet and phone service.

The Wall Street Journal was able to obtain access inside the damaged facilities, and the reporter covering the event was left somewhat stunned by the scope of the damage.

In the middle of organized, yet chaotic recovery efforts was Verizon’s chief technology officer Tony Melone who had seen enough to declare the damage worse than 9/11.

The pictures of several feet of muddy water from the nearby Hudson River covering the lobby of the company’s headquarters on West Street said it all. The mostly salt water was an unwelcome guest in Verizon’s building, especially considering the five level basement below the lobby contains critical cables and telecommunications equipment. Almost four of those basement floors were completely flooded. After the water was pumped out, dampness and leaves from nearby trees remain littered on the floor.

One lesson learned after 9/11 was not to place critical phone switches below ground level. After reconstruction, the switches were moved to a higher floor and consequently were left undamaged. But while Verizon moved its backup generators upstairs, it left the pumps and fuel tanks that power them in the basement — leaving them inoperable.

This morning, passersby on West Street have to step around Verizon’s network of generators now running outside of the building, right next to large temporary fuel tanks to power them.

Verizon central offices in other parts of Manhattan, particularly further southeast on Broad Street, were never upgraded and are in worse shape, with electrical equipment damaged perhaps beyond repair. The force of the water was strong enough to bend the 86 year-old steel and bronze doors. Workers there are still trying to get water out of the building, shoving a pipe down an elevator shaft to facilitate pumping.

Verizon has some redundancy built into its network to protect its most valuable customers. That kept the landline phones working at the New York Stock Exchange, even though other landline and wireless customers will have  to wait longer for service to resume.

AT&T’s generator staging area near Meriden, Connecticut. (Credit: Brian Pernicone)

Some critics of the increasingly concentrated telecommunications landscape think Verizon and other companies have still not learned enough to prevent the kinds of service disruptions that will leave some customers without service for weeks.

It is hard to miss the bustle outside of Verizon’s offices damaged by the storm, watching flood water drain down the street. But things are murkier at cell phone providers who have been less than forthcoming about specific outage information and service restoration assessments.

Some have advocated the federal government step in and require cell phone service, now deemed essential by an increasing number of Americans, be protected with robust backup solutions to keep service up and running after catastrophic weather events.

After Hurricane Katrina, the FCC in 2007 tried to issue new rules that required a minimum of eight hours of backup power for all cell sites. The industry balked, predicting it would lead to “staggering and irreparable harm” for the cell companies. One wireless trade association warned their members might take several cell sites down if they were forced to provide backup power.

The CTIA Wireless Association and Sprint-Nextel sued the agency in federal court and the Bush Administration’s Office of Management and Budget eventually killed the proposed regulations.

T-Mobile and AT&T have cut an emergency deal to share their cellphone networks in areas affected by Superstorm Sandy. They’re trying to make it a little easier for customers to get a signal as carriers restore their networks. Some say companies should be forced to make their networks more resilient. National Public Radio’s Morning Edition has the story. (November 1, 2012) (3 minutes)
You must remain on this page to hear the clip, or you can download the clip and listen later.

With a declining number of Americans willing to pay AT&T’s prices for smartphones and wireless service plans, AT&T’s future revenue growth will increasingly depend on getting the company’s current customers to pay more for data and adopt new types of wireless communications services.

After a quarterly earnings report found AT&T subscriber growth falling far behind its larger rival Verizon Wireless, AT&T appears ready to concede there is a finite number of new customers to be won from endless battles for market share.

AT&T was expected to add 358,000 new customers in the previous quarter, but only managed to attract 151,000. Demand for the latest Apple iPhone has yet to meet available supply, with most iPhones obtained by AT&T allocated to existing customers. AT&T exclusively launched the iPhone in the United States in 2007 and retains the largest share of iPhone owners, even after the phone became available from other carriers. Verizon Wireless had fewer problems adding new customers because it is not nearly as dependent on Apple.

de la Vega

Despite lackluster subscriber growth, AT&T reported stellar revenue during the quarter, partly from rate increases and the launch of usage-limited, family share plans. AT&T also continued to benefit from  tax savings, share buybacks, and refinancing debt at lower interest rates. With fewer customers adding subsidized phones, AT&T also paid fewer subsidies.

AT&T’s profit rose to $3.64 billion, or 63 cents per share, up from $3.62 billion, or 61 cents per share — $.03 ahead of Wall Street expectations.

AT&T can thank its wireless data services for a significant chunk of their earnings, with more to come.

The company reported more than 2/3rd’s of their customers (28+ million) are now on usage-based pricing plans. That is 10 million more than a year ago. The company’s new mobile share plans have attracted almost two million subscribers during the first five weeks they were on offer. More than one-third of those customers are choosing the company’s 10GB data allowance, which costs the customer $150 a month with unlimited talk and texting ($30 a month for each additional smartphone on the account.) Around 15% of new mobile share customers are choosing to abandon their grandfathered unlimited data plans.

AT&T’s forthcoming strategic redirection, to be announced Nov. 7, is likely to center around increasing revenue from the company’s wireless data network.

The average AT&T customer’s wireless broadband data bill is on the increase.

Ralph de la Vega, president and CEO of AT&T Mobility and Consumer Markets, told investors it is taking “this massive data growth and building products and services on top of that.”

“One of the best examples I can give you is our launch of Digitize that will happen next year,” de la Vega said. “It leverages this huge smartphone database and adds services on top of it and not just data access, but services that differentiate us from the competition. So you’re talking about connecting the home with service automation and security monitoring. We’re talking about connecting your car with all kinds of entertainment services.”

That means AT&T sees its future revenue coming mostly from existing customers paying more.

“Those services are not dependent on adding more customers per se, but connecting more houses, connecting more cars and connecting more things that drive significant revenue streams with good margins for us,” de la Vega said. “In terms of what we see happening with others in the industry, I don’t think anything we have seen changes our plan. We’re going to execute [and] let others react to our plan, instead of us reacting to them.”

AT&T seemed unconcerned by competition in the current marketplace, especially from those offering cheaper plans. de la Vega predicted other carriers will come around to AT&T and Verizon’s way of thinking about mobile plan pricing.

“I think these mobile share plans are very compelling to customers,” de la Vega told investors. “And I think those that don’t put them in, in the industry will probably have to rethink down the road because I think the reception has been exceptional.”

John Stephens, AT&T’s chief financial officer, called AT&T’s data growth important, as long as those customers are on tiered data plans. With three-quarters of their customers buying “higher-priced plans,” AT&T can grow revenue by encouraging data usage that forces customers into ever-higher allowance plans that deliver revenue boosts indefinitely.

“I think some of the things driving our pricing and the price moves we made almost a year ago where we increased our data pricing are driving our revenue growth,” de la Vega admitted. “But we’re also seeing people sign up for more data. And the fact is, as you sell more smartphones or more tablets, people need more data. Usage-based data pricing means as usage goes up, we can see some of that lift also coming from additional average revenue per customer. So not only do we feel good where we are, but I feel really good about where we’re going, because you have to have that base of usage base in order to be able to monetize the data growth that we foresee in the future.”

AT&T continues to depend primarily on its wireless division for most of its revenue, but as growth slows, the demand for ever-increasing average revenue from each customer will have to come from increasing prices or finding new services to sell that customers want.

Applications that wireless carriers seek to monetize

Some other highlights:

• AT&T was questioned by Wall Street about its decision to voluntarily contribute a $9.5 billion preferred equity interest in AT&T Mobility into the Pension Plan Trust. Some analysts consider that amount unnecessary and above the amount required by law, despite the company’s assertion this would help protect the long-term health of AT&T’s pension fund. But some retirees note AT&T’s generosity benefits itself — the company’s contribution to the pension plan is invested entirely in AT&T’s wireless business;
• AT&T now has 7.4 million U-verse subscribers, driving wireline revenue growth to levels not seen in more than four years. But AT&T still only averages less than a 15% market share in the cities where U-verse is available, suggesting cable operators are maintaining their market dominance;
• AT&T’s new upgrade policy, which curtails early upgrades and imposes new upgrade fees, is having a dramatic impact on discouraging customers from upgrading their phones. That has kept AT&T’s upgrade rate at a steady 7%, even with the introduction of the wildly popular new iPhone. AT&T has effectively cut their subsidy costs and took a 28% increase in equipment revenue from new upgrade fees to the bank;
• Capital expenditures are on target at $13.8 billion, with more than half of that invested in the wireless business. Landlines and U-verse upgrades took a back seat.
• AT&T receives enough iPhones to activate 5,000-10,000 new iPhone customers a day and still that is insufficient to meet demand;

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/ATT Quarterly Earnings 10-24-12.flv[/flv]

AT&T’s Ralph de la Vega explores the company’s latest quarterly earnings, focused on its profitable wireless business.  (3 minutes)

AT&T has secured support from the Federal Communications Commission for authority to deploy 4G LTE service within a 20MHz portion of the 2.3GHz WCS band after cutting a deal with a next door neighbor especially sensitive about potential interference.

WCS spectrum holders have fought for years to develop commercially viable wireless service, but faced regular opposition from the satellite radio industry concerned that interference problems would result from using the band for mobile data. Right in the middle of the WCS band is Sirius XM, which depends on sensitive receivers to pick up the company’s satellite signal.

But now AT&T and Sirius XM have worked out a compromise both companies believe will protect mobile data and satellite radio. AT&T has conceded 10MHz of its total WCS spectrum for two 5MHz guard bands, devoid of signals, around Sirius XM’s frequencies. Sirius XM signal engineers believe this, combined with power limits, will protect radio receivers from overloading whenever near AT&T’s ground-based LTE cell towers.

In August, AT&T announced its intention to acquire WCS spectrum from NextWave Wireless, a spectrum-squatting holding company, for $600 million. The phone company is also attempting to acquire the remainder of WCS spectrum from the last two significant holders — Comcast and Horizon Wi-Com, which both have between 10-25MHz of spectrum in 149 and 132 communities respectively.

When the acquisitions are complete, AT&T will have WCS spectrum covering virtually the entire nation.

Frequencies in the 2.3GHz band are best received outdoors. Signals crossing windows and walls lose potency. (Courtesy: Greenpacket)

AT&T says it needs the spectrum to further deploy 4G LTE data service across the country. But the company admits it will take up to five years before it can switch on the new frequencies — no current smartphones support the 2.3GHz WCS band.

AT&T has also included provisions to ensure fixed wireless base stations will be able to utilize AT&T’s WCS spectrum, within reasonable limits to protect Sirius XM radios from harmful interference. That has important implications for AT&T’s long-term view that rural landline and broadband service is best delivered over a wireless network.

A major limitation of spectrum in the 2GHz band is the quality of indoor coverage it can deliver. As many Clearwire customers can attest, these frequencies suffer from high transmission loss, poor ability for diffraction, and most importantly, poor building penetration — especially in urban and suburban areas. Tall nearby buildings, homes, and even trees all impede WCS reception. According to Andrea Goldsmith in her book Wireless Communications, there is also a 6dB penetration loss when 2.5GHz signals cross un-insulated glass windows and a 13dB loss for concrete walls, with wood falling somewhere in-between.

But rural areas do better, in part thanks to the higher likelihood of unimpeded line-of-sight access between a cell tower and receiver. AT&T’s fixed wireless solution would place a small antenna on the roof or side of a home, positioned for maximum reception from the nearest cell tower. The signal is then brought indoors through cabling (or in some cases Wi-Fi) and available to customers, comparable to a home broadband connection.

AT&T’s strong spectrum position in WCS gives the company an opportunity to construct a robust, near-nationwide wireless network suitable for rural wireless communications. In more urban areas, WCS could operate seamlessly with AT&T’s lower frequency holdings and offer an extension of its current LTE service.

AT&T’s acquisition of WCS has several important implications for the wireless marketplace:

2GHz signals travel the least distance in urban and suburban areas, often blocked or degraded by buildings or trees. But better results in rural areas suggest AT&T’s WCS spectrum could partly be deployed as a fixed wireless broadband solution, if enough towers are available to support it. (Courtesy: Greenpacket)

1. It proves AT&T never needed to acquire T-Mobile USA. Through spectrum acquisitions like WCS, AT&T can still find relatively inexpensive spectrum suitable for mobile broadband use, without spending tens of billions to acquire a competitor just to poach its spectrum and eliminate a competitor.

2. The Competitive Carriers Association worries AT&T’s acquisition of secondary spectrum holders is allowing the company to gather a massive amount of spectrum.

CCA President & CEO Steven K. Berry said, “Allowing the largest carriers to obtain unlimited amounts of  spectrum on the secondary market raises serious competitive concerns.  The only way for the FCC to truly see the devastating consequences of further spectrum aggregation is by consolidating the proposed applications.  On their own, AT&T’s proposed license acquisitions may not seem significant, but when added together, it totals to a significant amount of spectrum.”

Berry continued, “Should the FCC decide to approve the transactions, it must impose conditions to ensure interoperability across the Lower 700 MHz band and to ensure data roaming – both are absolutely essential ingredients to a healthy, competitive marketplace.  Competitive carriers need access to usable spectrum, and I urge the Commission to carefully review the negative impact these transactions will have on the wireless marketplace.”

3. Clearwire’s 2.5GHz spectrum could become more valuable if AT&T can demonstrate its 2.3GHz service can deliver robust service, if provisioned adequately for customers. Clearwire’s capital investments and overall performance of its limited coverage WiMAX network have been deemed inadequate by its biggest partner Sprint, now constructing its own 4G LTE network to replace Clearwire’s WiMAX network.

4. Credit Suisse analyst Jonathan Chaplin notes Verizon will still have a better standing in spectrum even with AT&T WCS: “AT&T will have the following available for LTE: 20 MHz of 700 MHz nationwide; 20 MHz of WCS nationwide; a few AWS licenses (5 MHz on average). With Verizon’s deal with large cable companies, Verizon will have: 20 MHz of 700 MHz nationwide; 20 MHz of AWS nationwide; another 10 MHz of AWS in 60 percent of the country (13 MHz on average). In addition, Verizon’s spectrum is usable immediately, while AT&T’s WCS will take three to five years to deploy.”