$39 Billion – The Cost of Fixing AT&Ts Network Woes

The AT&T T-Mobile merger worth $39 billion has taken most of the telecom world by surprise. Although it was expected that Deutsche Telekom was looking to dispose off their T-Mobile US asset close on the heels of the T-Mobile UK asset which got merged with Orange – no one really expected AT&T to step in with the amount of money that they have put up - a whopping $39 billion.

On the brand new merger website, http://www.mobilizeeverything.com/ - which sounds quite similar to Everything Everywhere (the newly formed entity from the Orange T-Mobile UK merger) – AT&T has laid out its reasons for the deal. The reason is clear – AT&T has been struggling with an 8000% increase in data traffic since the launch of the Apple IPhone on its network. AT&T is network infrastructure and spectrum constrained to meet the growing demand of mobile data traffic.

AT&T has been trying all the tricks in its bag to get its network up to speed (literally!) – moving to HSPA+, adding additional cell sites/towers/rooftops, building its indoor coverage footprint with DAS and femtocells, recently rolling out Outdoor DAS nodes in Palo Alto, and using Wi-Fi as a preferred offload solution in hotspots like New York and San Francisco.

With the LTE launch expected for later in 2011, and with Verizon’s LTE network up and running in 38 markets already – AT&T was under pressure to boost its network capabilities more importantly its spectrum assets. T-Mobile’s AWS spectrum with its 10 MHz and 20 MHz chunks ripe for spectrum refarming of LTE should give AT&T an advantage over Verizon.

More importantly – AT&T’s femtocell strategy (which is largely voice-based at the moment) complements T-Mobile’s Wi-Fi/UMA strategy – with both femtocells and Wi-Fi being important from a network offload perspective. While Wi-Fi is likely to become the dominant offload strategy - femtocells combined with the ability to reuse multiple spectrum chunks in small cells - give AT&T with an advantage where they have many more tools at hand to compete against Verizon's mobile broadband push.

However, the question that everyone will be asking is whether AT&T was justified in spending $39 billion to fix its network woes or is there an element of over-valuation of T-Mobile’s network assets?