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Apple Economy's 'Fiscal Cliff' Saved by AT&T's Checkbook


In the wake of Barack Obama's re-election as president of the United States, lawmakers like Republican House majority leader John Boehner and Senate Democratic leader Harry Reid took to airwaves to show Americans that Congress will work to bride a partisan budget divide and avert a so-called 'fiscal cliff' scheduled for early 2013.

Less heralded on Wednesday was telecom giant AT&T's (NYSE:T) announcement of a blockbuster capital spending plan, which will stimulate an array of tech, telecom and infrastructure sectors and forestall the prospect that falling corporate spending will slow a booming wireless economy driven by Apple (NASDAQ:AAPL) iPhone's and Google (NASDAQ:GOOG)-Android powered devices.

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At a telecom analyst conference in New York City, AT&T said it will boost corporate spending to $22 billion a year through 2015 to improve its wireless service and upgrade wireline and fiber networks. The move comes at a time when carriers like AT&T, Verizon (NYSE:VZ), Sprint (NYSE:S) and a recently merged MetroPCS (NYSE:PCS) and T-Mobile are in an expensive fight to upgrade wireless networks to meet surging data demand from smartphones and tablets.

While AT&T's higher than expected spending plan was seen by John Hodulik of UBS as depressing its forecasted earnings, the company also upped its quarterly dividend to 45 cents a share, in a set of announcements that failed to impress investors.

Still, the spending is seen as returning wireless sector spending to growth from forecasts of a decline starting in 2013, and analysts and investors expect that it can drive the earnings of companies like Juniper Networks (NYSE:JNPR), Ciena (NASDAQ:CIEN) and Qualcomm (NASDAQ:QCOM), which provide infrastructure and parts to the smartphone economy pioneered by Apple.

An increasing dedication to wireless service improvements are also expected to directly benefit handset makers like Apple, who are relying on carriers to provide data service that will further tether consumers to their smartphone and tablet devices.

Kulbinder Garcha of Credit Suisse expects that AT&T spending plan will account for 35% of overall wireless capital expenditure in coming years, helping to turn an expected 3% spending decline to 6% annual growth. Garcha expects that a turn from a 2013 spending cliff to continued growth will be a boost to Apple and its key suppliers like Qualcomm as more consumers move to smartphone and tablet devices.

Currently, 64% of AT&T's postpaid wireless customers are using smartphones, calculates Garcha, who notes that Wednesday's announcement signals AT&T "continues to expect strong smartphone penetration and adoption of data plans to be a driver of wireless growth." He forecasts AT&T will reach 90% smartphone penetration within its postpaid subscribers by 2015, given that smartphones account for 80% of new handset sales.

Dallas-based AT&T will spend $8 billion a year to continue expanding 4G wireless network it says will reach 300 million people by 2014, and an additional $6 billion on wireline equipment that serves business customers.

Tal Liani, an analyst with Bank of America Merrill Lynch says Ciena, Juniper Networks and Qualcomm are likely to be the biggest beneficiaries of the billions in annual wireless and wireline network spending AT&T now forecasts.

"We believe Juniper and Ciena could be prime beneficiaries from AT&T's spending boost, given the required investment in core network, aggregation and management equipment," writes Liani of AT&T's announcement.

"Such spending could have a significant impact on their financials and both stocks have been under pressure recently due to weak carrier capex. Qualcomm is an indirect beneficiary, with AT&T's announcement likely to drive Verizon and T-Mobile to push harder with their LTE roll outs," the analyst adds.

AT&T isn't alone in making big spending bets on the smartphone and its spending plans may force competitors to quicken costly network upgrades.

On Wednesday, Sprint, which has seen its finances revitalized by an October merger with Softbank of Japan said it will U.S. Cellular's Midwest assets, in a deal that is evidence of the company's improved industry standing.

Already, Sprint is now seen as having the finances to complete wireless network improvement projects and take on subsidized Apple iPhones to its unlimited data plans - in expensive smartphone market bets that once had analysts handicapping the company's bankruptcy.

Quietly, as the telecom industry has consolidated in a string of deals that makes Sprint and MetroPCS-TMobile better competitors to AT&T and Verizon in servicing smarthpones, tower operators like American Tower (NYSE:AMT), SBA Communications (NASDAQ:SBAC) and Crown Castle (NYSE:CCI) have been buying up assets to serve growing wireless networks.

AT&T's spending plans may have a windfall on tower operators, says Piper Jaffray analyst Christopher Larsen. "Today's announcement translates to more cell sites... The installations will leverage fiber connections to the towers, which is good for fiber- based players," writes Larsen in a note to clients that highlights American Tower, SBA Communications and Crown Castle as beneficiaries.

All told, AT&T's spending signals that money is still gushing into the wireless market as a swath of industries brace for continued consumer demand for smartphones, tablets and other mobile devices. While AT&T's plans may tip forecasts of infrastructure spending positive -- averting a cliff that may hit other sectors - there's good reason to expect other large wireless carriers to plow billions more into wireless and fiber networks, in coming years.

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