Google Phone May Add to Network Strain

The Nexus One could spur more network capacity crunches for wireless carriers as smartphone use rises for Web surfing and video

By Amy Thomson and Todd Shields

(Bloomberg) — Google Inc.'s (GOOG) Nexus One phone, a bid to lure customers from Apple Inc. (AAPL), may spur further network capacity crunches for carriers as more people use handsets for Web surfing and video.

The number of smartphones like the iPhone, sold by AT&T Inc. (T) in the U.S., may more than double globally by 2013, according to researcher IDC. Verizon Wireless, the largest U.S. mobile carrier, and T-Mobile USA Inc. both said this week they will offer the Nexus One, which lets users run multiple programs at once and upload high-resolution videos to the Web.

AT&T, which says it has more than twice as many smartphone customers as Verizon, has already faced complaints over dropped calls as iPhone traffic flooded parts of its network. That may spread to other carriers as they add more smartphones, said Craig Moffett, an analyst at Sanford C. Bernstein & Co.

"It's obviously already a problem for AT&T," said Moffett, who's based in New York. "The sand is running out of the hourglass pretty quickly just given the lead time that it takes to make spectrum available."

Dallas-based AT&T and other carriers may have as little as three years to find new airwaves to meet demand as more customers surf on their phones, analysts say. AT&T, which introduced Apple's iPhone in 2007, has seen data traffic increase 5,000 percent in the past three years.

Not Enough?

Although U.S. carriers are adding new towers and building out infrastructure to handle the capacity, that won't be enough as smartphone numbers surge, according to Moffett.

The growth may lead carriers to institute more strict usage caps and usage-based pricing, he said. AT&T wireless chief Ralph de la Vega has said AT&T has no immediate plans to institute a so-called tiered pricing model.

AT&T's network doesn't differ that much from Verizon's, other than the data load it has to carry, UBS Securities LLC analyst John Hodulik said. Carriers will have to increase investments in their networks if they want to keep up with the growing popularity of devices like Mountain View, California-based Google's Nexus One, he said. Google spokeswoman Katie Watson declined to comment.

"AT&T continues to invest aggressively in our networks and works relentlessly to make the user experience even better," spokesman Fletcher Cook said in an e-mail. "But spectrum availability is a core industry challenge that will need to be addressed." AT&T trails only Verizon Wireless in mobile subscribers.

AT&T dropped 41 cents to $27.61 in New York Stock Exchange composite trading yesterday. New York-based Verizon Communications Inc. (VZ), which co-owns Verizon Wireless with Vodafone Group Plc, fell 95 cents to $31.92. AT&T slid 1.6 percent last year, compared with a 2.3 percent decline at Verizon. Google dropped $15.73 to $608.26 on the Nasdaq Stock Market.

Poor Performance

AT&T ranked last in a Consumer Reports survey of the top four U.S. wireless companies last month as subscribers complained about poor voice quality. The carrier has added infrastructure and updated equipment to handle more traffic, logging about $17 billion in capital spending last year, similar to Verizon's amount.

As they add feature-laden devices, Verizon and other carriers will grow more vulnerable to the same traffic surges that plagued AT&T, UBS's Hodulik said. AT&T and Basking Ridge, New Jersey-based Verizon Wireless will have to increase network spending about 10 percent this year to keep up with the traffic, he said. Sprint Nextel Corp., the third-biggest carrier, might have to boost expenditures as much as 20 percent, he estimated.

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