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Analyst: AT&T Needs $5 Billion Investment To Keep Up

AT&T has done well with the iPhone, but the prospect of losing its exclusive contract with Apple and its slow investment in new wireless technologies could hurt its competitiveness in the future, according to a investment research analyst.

AT&T is facing higher capital and operating costs even as it becomes exposed to more competition as Verizon, T-Mobile, and Sprint get contracts to carry the Apple iPhone, Gerard Hallaren, director of research at TownHall Investment Research, a Littleton, Colo.-based investment research firm, told his company's investor customers.

AT&T has revenue of over $50 billion, and is a very profitable company, Hallaren said. However, while AT&T's wireless business is its most profitable, the bulk of the company's investments are going into its wired business, including its U-verse combined television, high-speed Internet, and phone offering.

"(AT&T) management has been investing most heavily in its wire line business. . . . I personally don't believe that all of the wire line capital expenditure that they're doing, particularly on the U-verse, will generate returns to justify its disproportionate position within the company," he said.

Consumer Reports recently reported that AT&T had the lowest customer perception of the four major carriers, in part because it has the most expensive service of the four, Hallaren said. He also noted that AT&T also suffers from a lower data performance according to a PC World report in July. Both of these indicators impact customer perception of AT&T, he said.

More important has been the Verizon advertising campaign showing the difference in 3G coverage between it and AT&T, Hallaren said. The AT&T coverage was based on a map which AT&T published on its Web site, but which it has since pulled, although Verizon and other sources still make it available.

Hallaren said Verizon's map advertisement against AT&T is somewhat unfair in that Verizon's map includes some older technology that does not allow for a direct coverage comparison. Verizon also uses a similar strategy against Sprint using an old map, he said.

AT&T has recently been investing less than its competitors in the wireless market, a situation that the company will have to address, Hallaren said. However, he estimated that if the company invested about $5 billion in its wireless infrastructure it could catch up to Verizon on an "apples to apples" basis.

This could include laying new 3G technology on top of some of its existing older 2G network, and then adopting 4G technology as quickly as possible in the same way Sprint did, he said.

AT&T could also take a page from the Verizon and Sprint playbook and start to take advantage of existing fiber networks that were laid down by other providers and not depend so heavily on its own networks, Hallaren said.

"The one thing that is a big swing factor for AT&T. . . is that AT&T has traditionally preferred to use its own fiber in the back haul, and how they are going to proceed if they're going to be more open," he said.

AT&T will also have to find a new way to handle E911 systems, as its current partner has no plan to upgrade from 2G technology, Hallaren said.

When it comes to losing its exclusive contract for the Apple iPhone, which could happen this year, there will be ramifications for AT&T, Hallaren said.

The iPhone has had a major impact on AT&T's business, but with new competition that impact will fall.

"This is a franchise that AT&T has played Monopoly with, and it's not going to play Monopoly a whole lot longer with the iPhone," he said. "Yes, (AT&T does) have a brilliant smart phone lineup. They've been able to do that because of their GSM network, and GSM is the most widely used of all the cellular standards in the world, so there are more GSM phones than there are for other networking technologies."

However, Hallaren said, AT&T salespeople are used to the easy iPhone sales, and will have trouble with other technologies. "When you walk into a Verizon store, or a T-Mobile store, you generally get better service and more knowledgeable salespeople," he said. "Same with Sprint."

Despite the challenges, Hallaren said, AT&T is not going to go away, but instead has the opportunity to overcome them to become a tougher competitor.

"One of the things we most admire about AT&T is that it seems more innovative than its competitors," he said. "All the carriers had a chance at the iPhone, and only AT&T was willing to take that risk. We also saw it recently become an early mover in its deal with TerreStar (Networks) where it will offer satellite terrestrial phone service."

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