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As 5G goes nationwide, US carriers' capex, spectrum plans come into focus

With U.S. wireless operators starting to offer next-generation 5G service nationwide, carriers are fine-tuning their 5G ambitions and scaling back on their capital spending plans.

Three of the top four U.S. wireless operators have either launched or promised to launch nationwide 5G service, a mobile technology that delivers faster speeds and supports more connected devices. T-Mobile US Inc. began offering what it described as nationwide 5G service in December 2019, covering more than 200 million people. AT&T Inc. said March 3 that it will deliver 5G nationwide in the second quarter, and Verizon Communications Inc. plans to do the same this year. Sprint Corp., which hopes to close its merger with T-Mobile as early as April, has thus far focused on city-by-city rollouts.

Combined, the four operators recorded total capital expenditures of $55.63 billion during calendar year 2019, in line with the $55.71 billion they spent in 2018, according to S&P Global Market Intelligence data. These expenditures include any cash spent to maintain, improve or construct operators' networks, including interest. But looking into 2020, AT&T and T-Mobile US both expect capital spending to decline year over year as the companies shift their focus away from deploying broad-based 5G coverage.

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AT&T

AT&T recorded capex of $19.64 billion in 2019, which on the surface looks like it was down year over year from 2018 when the company posted capex of $21.25 billion. But the reported figure includes billions of dollars of reimbursements for the deployment of FirstNet, a dedicated network core for first responders, as well as other vendor payments.

Excluding those reimbursements, total gross capital investment was $23.7 billion in 2019, according to the company, up from 2018, when the company recorded what AT&T CFO John Stephens described as "near-record" gross capital spending of almost $23 billion.

By comparison, the company is projecting gross capital investment in the $20 billion range for 2020, marking a double-digit percentage decline.

"Last year was a year of us getting ... macro coverage in place," AT&T COO and President John Stankey said on a recent earnings call. This year, by contrast, AT&T will focus on improving the network by extending the number of square miles covered and improving coverage inside buildings.

T-Mobile

T-Mobile also expects to see a decline in capital spending this year, albeit a smaller one. The company forecast spending $5.9 billion to $6.2 billion in 2020 on a stand-alone basis, versus capex of $6.39 billion in 2019.

During the company's February earnings call, UBS Investment Bank analyst John Hodulik noted this was somewhat unexpected given that he had anticipated T-Mobile needing to "ramp up the expenditures on small cells and additional capacity." Small cells are the cellular base stations and antennas used to make networks denser in 5G build-outs.

T-Mobile CFO Braxton Carter acknowledged the "slight dip" year over year, but said the company's 2019 spending went toward using T-Mobile's low-band 600 MHz spectrum to roll out 5G nationwide.

"If it's similar to the last several years, we'll be at the very high end of that guidance ... But we do believe we can accomplish everything we need to do with that guidance," the CFO said.

Low-band vs high-band

For nationwide coverage, both AT&T and T-Mobile are relying on their low-band spectrum, which can travel long distances and penetrate walls but generally has limited bandwidth. Verizon, by contrast, has centered its 5G efforts on high-frequency or millimeter wave spectrum, which can carry massive amounts of data at high speeds. But the shorter wavelengths that give millimeter wave spectrum its name mean it has trouble traveling long distances and penetrating certain surfaces.

Bob O'Donnell, president and chief analyst of the technology consulting and market research firm TECHnalysis Research LLC, said in an interview that the difference in speeds between advanced LTE 4G technology and low-band 5G technology is "nominal at best."

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In February, mobile analytics company Opensignal recorded average 5G download speeds of 59.3 Mbps and 47.5 Mbps, respectively, on AT&T and T-Mobile’s low-band 5G networks. This is not too much higher than the average 4G LTE download speed cited by O'Connell of 35 Mbps.

"The net-net is the low-band [5G] stuff in the U.S. is not much faster and that's part of the problem," he said.

AT&T's Stankey acknowledged on March 3 in response to an analyst question that the difference between 4G and low-band 5G in terms of "what the customer experiences effectively at the handset is not huge." In addition to nationwide low-band coverage, AT&T has also rolled out millimeter wave 5G service — or what it bills as 5G+ — in parts of 35 cities.

T-Mobile has rolled out millimeter wave service in parts of seven cities.

Verizon

Verizon, which has rolled out millimeter wave 5G service to more than 30 cities, clocked average download speeds of 722.9 Mbps on its high-band 5G network, according to Opensignal.

"The type of 5G service and the spectrum used for 5G has a major impact on the speeds a user will see," Opensignal said.

In 2020, Verizon plans to deliver 5G on millimeter wave in more than 60 cities, up from 31 at the end of 2019. It will also deploy more than 5x more small cells in 2020 compared to 2019.

For nationwide coverage, however, the company plans to use its low-band spectrum and to rely on dynamic spectrum sharing, which allows for the transmission of 4G LTE and 5G service in the same spectrum band at the same time.

"We're going to launch that when we think it's commercially right," Verizon CEO Hans Vestberg said on Feb. 13, noting the company would like to see more 5G handsets in the marketplace first.

All told, Verizon expects capex of $17 billion to $18 billion in 2020, in line with the $17.94 billion the company spent in 2019.

Sprint

Following launches that began rolling out in May 2019, Sprint 5G service is now available in parts of nine major cities.

Unlike the other wireless operators that have focused on low-band spectrum below 1 GHz or high-band millimeter wave spectrum, Sprint uses its 2.5 GHz mid-band spectrum. Mid-band spectrum balances speed and range, providing broader coverage than high-band spectrum and faster speeds than low-band spectrum. Opensignal recorded average 5G download speeds of 183.0 Mbps on Sprint's 2.5 GHz 5G network.

Sprint, which reports on a fiscal calendar, spent $11.66 billion in capital expenditures during the 12 months ended Dec. 31, 2019, down slightly from $12.26 billion in 2018.

T-Mobile has committed to using Sprint's 2.5 GHz spectrum to deploy a 5G network that covers 97% of the U.S. population within three years of closing its deal with Sprint.