Although AT&T (T) and Verizon (VZ) dominate the market for US mobile phone service, AT&T’s network is perceived to be inferior to that of Verizon due to less mobile phone coverage across the US and poorer call quality compared to Verizon.
AT&T Trails in Mobile Phone Capital Expenditures
A primary reason why AT&T lags behind Verizon is that it spends less money on the wireless equipment needed to compete with Verizon on coverage and quality. We estimate that AT&T’s annual mobile phone capital expenditure was about $60 per subscriber in 2009, less than the $78 per subscriber spent by Verizon. AT&T would need to spend an additional $1.5 billion annually to match Verizon’s investment per subscriber.
We expect Verizon’s mobile phone capital expenditures to reach nearly 18% of its mobile phone gross profits in 2010 and increase to over 20% over the Trefis forecast period. In comparison, the same figure for AT&T is expected be about 15% in 2010 and to increase to 17% by the end of the Trefis forecast period.
Focusing Capital Expenditure Where It Matters
We estimate AT&T’s total annual capital expenditure to be $18 billion in 2009, which is more than the $17 billion spent by Verizon; however, AT&T spends about 74% of the $18 billion on three business divisions:
Interestingly, we estimate that these three businesses together account for only 40% of AT&T’s value. We estimate that AT&T spent only 26% of its total capital expenditures on its mobile phone business which accounts for a little more than half of AT&T’s value.
AT&T sees a strong growth opportunity in the TV and internet markets which are dominated by cable companies like Comcast (CMCSA) and Time Warner (TWC). By strengthening its internet, TV and phone offerings, AT&T will be better positioned to offer service bundles that compete with those offered by the cable companies.
Our analysis of the value of AT&T’s internet and TV business factors in growth of TV subscribers, from 2 million in 2009 to 7 million by the end of our forecast period, as well as growth in non-DSL (e.g. u-Verse) internet subscribers from less than 2 million in 2009 to nearly 6 million by the end of our forecast period.
Compared to the $5 billion we estimate that AT&T spent on mobile phone capital expenditures in 2009, Verizon spent about $7 billion, or 42% of its total capital expenditures, on mobile phone capital expenditures. We believe that AT&T will need to increase its mobile phone capital expenditures to match Verizon’s extensive coverage and retain market share.
You can modify our forecasts for AT&T’s CapEx as a % of Gross Profits and AT&T’s Mobile Phone Market Share to see how increases in both capital expenditures and market share would impact AT&T’s stock.
Disclosure: No positions
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