Bloomberg News

AT&T, Sprint Promote LTE Phones With Unfinished Networks

May 10, 2012

An AT&T Inc. cellular antenna in San Francisco. Photographer: David Paul Morris/Bloomberg

An AT&T Inc. cellular antenna in San Francisco. Photographer: David Paul Morris/Bloomberg

AT&T Inc. (T:US) and Sprint Nextel Corp. (S:US) are ramping up marketing for new smartphones with speedy LTE service. The hitch: Most of their customers don’t live anywhere near an LTE network.

The carriers are playing catch-up with Verizon Wireless, which offers the service widely. LTE, short for long-term evolution, is a new wireless standard that provides faster access to the Web. AT&T offers it in 35 markets, reaching about a quarter of the total U.S. population. Sprint doesn’t have any LTE service yet. It plans to roll it out in six cities sometime around the middle of the year.

“If they let consumers know about the situation upfront then it’s not so bad,” said Parul Desai, policy counsel for the Consumers Union in Washington. “I am more concerned about new phone buyers who decide on a two-year contract and don’t get the service for a quarter to half a year.”

The situation recalls the early days of high-definition television, when consumers snapped up sets only to decry the lack of HD shows. The carriers will face more pressure to have wider LTE coverage later this year, when analysts expect Apple Inc. (AAPL:US) to release an LTE version of the iPhone. The iPhone accounted for 64 percent of the smartphones sold at AT&T and Verizon in the first quarter.

AT&T introduced its first LTE phones in November with service in nine cities. It’s now offering seven LTE phones and the LTE Apple iPad, with a goal of complete national coverage by the end of 2013. Verizon has LTE in 230 markets, covering two- thirds of the U.S.

Far Behind

Sprint is the furthest behind in adding coverage, even as it rolls out more LTE models. The company started selling the Samsung (005930) Galaxy Nexus last month, the first of 15 LTE devices planned for this year. For now, buyers of those devices will have to rely on slower 3G connections.

Chief Executive Officer Dan Hesse said Sprint has experience introducing next-generation phones while the network is still being rolled out. The company did something similar with its HTC (2498) EVO phone, which relies on a different 4G standard called WiMax. When the EVO debuted in June 2010, Sprint had WiMax service in only 33 cities. Even so, the EVO set a one-day sales record for any single device at Sprint.

“We have been through this before,” Hesse said in an interview. “We are extremely experienced at it. We know exactly what it means to launch a 4G device early, as you are in the middle of a rollout.”

IPhone Club

Still, the stakes are higher with the iPhone. Sprint, which didn’t offer the device until last year, sees the phone as a linchpin of its comeback plan.

After four years of watching lucrative customers leave to sign up for the iPhone at the other carriers, Sprint committed to paying Apple $15.5 billion over four years to gain rights to the product. That means it’s under pressure to sell a certain number of units. When the next model comes out, Sprint plans to offer it nationally -- even though its LTE network won’t be fully built yet.

Buyers won’t be able to take advantage of the faster speed to download videos and Web pages, essentially turning the new iPhone into a regular 3G device. Hesse defends that approach by saying that existing LTE models at Verizon and AT&T don’t sell as well as the current 3G iPhone. That signals that consumers are more interested in owning an Apple product than one that works on the faster networks.

Verizon Versus AT&T

Even so, buyers of the next iPhone may demand broader coverage. That would give an edge to Verizon -- and to a lesser extent, AT&T.

While Verizon has been the quickest to build out an LTE network, AT&T has offered the iPhone for longer. AT&T has a larger base of Apple customers who may be looking to upgrade, but also more to lose if consumers defect in search of a more extensive network.

The Apple device made up 78 percent of AT&T’s smartphone sales in the first quarter. At Verizon, the product accounted for 51 percent. It relies more on models running Google Inc. (GOOG:US)’s Android, some of which already use LTE.

Brenda Raney, a spokeswoman for Basking Ridge, New Jersey- based Verizon Wireless, declined to comment on LTE competition, other than saying that her company was well ahead in offering devices on the network. Verizon rolled out the HTC Droid Incredible this week, marking the carrier’s 23rd LTE model.

Backup Network

AT&T says customers can always rely on its HSPA+ network when they don’t have LTE access. That technology, short for high-speed packet access, is an older wireless standard that AT&T revamped to make it fast enough to call 4G. Still, it doesn’t have the speed or name recognition of LTE.

“The big advantage for our customers is that if they fall out of LTE service we have 4G covering over 260 million people,” said Mark Siegel, a spokesman for Dallas-based AT&T.

For Sprint, which is trying to recover from about $8 billion in losses (S:US) over the past three years, the LTE handicap will put an extra burden on its finances, said Robert Jaeger, an independent telecommunications analyst in New York.

“They’ll be at a disadvantage versus the big two,” Jaeger said. “They can’t afford to be that far behind since their new subscriber momentum is going to be key to start getting to profitability.”

Sprint has sold a total of 3.3 million iPhones since the product’s debut in October, a pace that Hesse said he’s happy with. “After only two quarters, we are ahead of where we expected to be,” he said.

Unlimited Plans

To draw attention away from its limited LTE coverage, the company should focus its marketing message on service plans that offer unlimited data for a fixed price, said Michael Cote, a wireless strategist at the Cote Collaborative in Chicago. Verizon and AT&T have stopped selling such plans, opting instead to charge customers by the amount of data they use.

To sell all the iPhones that it has promised to buy from Apple, Sprint also could offer older versions to consumers at a lower price, said Kevin Smithen, an analyst at Macquarie Capital USA Inc. in New York. In that scenario, buyers wouldn’t expect to get LTE anyway.

“They could sell the iPhone 4S for $100 with the unlimited plan and meet the Apple volume commitments,” Smithen said.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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