Dissecting wireless carriers' capex

Mike DanoHow much do U.S. wireless carriers really invest in their networks? Until recently, it was a question that largely dominated the marketing message of most Tier 1 operators: Verizon Wireless (NYSE:VZ) argued that "it's the network," while AT&T Mobility (NYSE:T) assured consumers it offered "more bars in more places." Sprint Nextel (NYSE:S) and T-Mobile USA, along with most of the Tier 2 and 3 players, also have offered some version of this assertion.

Which carrier is really spending the most money on its network? Of course, the nation's largest operators--the ones with the most subscribers and the biggest networks--account for the lion's share of the nation's network capital expenditures. According to a recent Government Accountability Office report on the wireless industry, AT&T and Verizon both spent more than $2 billion on their respective networks in the fourth quarter of 2009, representing about two-thirds of total industry expenditures. U.S. Cellular and Leap Wireless (NASDAQ:LEAP), meanwhile, each spent under $200 million in the same time frame.

Clearly, though, this isn't a fair comparison. Luckily, the GAO in its report offered an apples-to-apples comparison of network investments by the nation's top wireless carriers. The agency charted operators' capital expenditures as a percentage of their service revenue during the past three years, and the results are worth taking a look at.

According to the GAO's numbers, Leap and MetroPCS (NYSE:PCS) actually invested the most money, as a percentage of their service revenue, into their respective networks. And, despite their heated advertising battles, it appears Verizon and AT&T actually were pretty equal when it came to investments as a percentage of service revenues. And on the low end is Sprint.

Now, while it's fun to rank the nation's wireless carriers by this metric, there are plenty of caveats to go around.

First, the GAO points out that, because of their scale, "large national carriers can purchase necessary network equipment, such as chipsets, before their smaller competitors. Small and regional carriers generally do not have the number of subscribers necessary to obtain, at any price, the necessary equipment. As a result, this equipment is often only designed to utilize the large national carriers' spectrum holdings." Meaning, the dollars spent by AT&T and Verizon may actually be buying more than the dollars spent by Leap and Metro.

Monica Paolini of Senza Fili Consulting adds additional considerations: "To look at this information on a quarterly basis makes little sense because there are bound to be fluctuations that are not particularly insightful, which have to do with the timing for upgrades and network expansion," she wrote in response to my questions on the topic. She said an operator in the middle of a major network upgrade would have a higher capex as a percentage of service revenues.

Indeed, during the GAO's timeframe both Leap and MetroPCS were building new markets with spectrum they scored from FCC auctions. Other carriers, such as Sprint, haven't participated in any recent FCC auctions. As Paolini points out, "you could make the argument that Sprint is spending less on infrastructure as Clearwire (NASDAQ:CLWR) is building out the network for them--so from a financial point of view this would result in higher opex, due to fees paid to Clearwire to access the network, but overall lower capex."

The same could be true for T-Mobile. "Look at the third 'highest' line--T-Mobile," wrote Current Analysis' William Ho in response to my questions. "They acquired AWS and they're building out in ‘07 and ‘08. It's clear."

Finally, Current Analysis' Peter Jarich pointed out that the chart is further skewed by the business models employed by the various carriers. "What's Verizon Wireless' average revenue per user? Around $50? What's Metro's? Around $40? If they're pulling in less cash per user but still building out, that may have an impact."

So what does this mean? The GAO's chart was part of a larger assessment of the amount of competition in the U.S. wireless market. The agency acknowledged the industry is competitive, but that industry consolidation has made it more difficult for small and regional carriers to remain in the game.

"Developing and expanding networks require significant capital investment," GAO noted. "Without pressure to keep their networks and, therefore, their services competitive, carriers may not be willing to undertake this investment." But, the agency said, carriers across the board managed to continue to invest significant capital into their networks, despite the recent economic downturn.

The bottom line, I suppose, is that U.S. carriers are investing billions of dollars into their networks, though which network is receiving the most attention depends on how you calculate the numbers. --Mike

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