AT&T to Invest in Cloud Business - Analyst Blog

The second-largest U.S. mobile service provider AT&T Inc. (T) plans to invest $1 billion in network-based cloud, mobility and network sourcing solutions in 2011.

Telecommunication carriers are rapidly entering the cloud computing business due to increased competition in the space and changing consumer habits. This will help operators to differentiate their products and services and pave the way for strategic alliances between telecom and IT companies.

AT&T will deploy the cloud computing services to businesses across the board, from small to big multinational companies. The company will cover government agencies and institutions as well as industries such as manufacturing, retail, health care, automotive and hospitality.

The billion-dollar investment is a chunk of the company's estimated $19 billion capital budget for 2011. AT&T showed keenness to invest in the cloud computing business after its largest rival Verizon Communications Inc. (VZ) acquired information technology service company Terremark Worldwide Inc. (TMRK) last month.

In February, AT&T lost its exclusive hold on Apple Inc.'s (AAPL) iPhone to Verizon. This resulted in only 3.6 million iPhones activations by AT&T in the recently concluded quarter. In order to make up for the subscribers lost to Verizon, AT&T announced its intention to acquire Deutsche Telekom unit, T-Mobile USA, for $39 billion in March. The entry into cloud computing is indicative of the company's efforts to remain competitive.

AT&T is also pursuing a number of strategies to tap opportunities in the wireless data market and currently operates the nation's fastest mobile broadband network. The company is aggressively deploying the high frequency 850 MHz band across its markets to boost its 3G network performance. AT&T currently delivers 4G services using High-Speed Packet Access Plus technology and plans to roll out Long-Term Evolution technology in mid 2011.

Although the AT&T/T-Mobile merger would lead to extensive growth in subscribers, revenues as well as profits, it is a time-taking process and might alter the structure of the overall telecommunication industry. We believe the inclusion of T-Mobile operations will position AT&T as the market leader in the U.S. wireless industry and further bolster its mobile broadband services, which are currently booming.

Additionally, the company is expanding its wireless and wireline businesses, which would in turn fuel profitability going forward. However, the completion of the T-Mobile and AT&T deal contains a number of risks.

Based on competitive pressure as well as a steep decline in its traditional fixed-line phone business, we are recommending a Neutral rating with the Zacks #3 (Hold) Rank on the stock.