AT&T Looks to Europe for Opportunities

NEW YORK ( TheStreet) -- AT&T ( T) is looking across the Atlantic Ocean at the vast European market despite the challenges all phone companies face in the region.

Despite the European Union, doing business in this region is still complicated and much more regulated for phone companies, with markets that have fragmented pricing and governments where it is a real challenge to create a regional network.

Still, the idea of moving over to Europe makes sense since AT&T has the experience of creating a fourth-generation (4G) U.S. network. It makes sense to apply it to Europe. Faster service would naturally lead to mobile customers increasing data usage. I believe the thinking is sound.

To expand into Europe, one strategy under consideration is buying a European phone company. Vodafone ( VOD), in the news for quite some time since selling its stake in Verizon Wireless, is a strong candidate.

AT&T has battled "big brother" Verizon Communications ( VZ) to keep its dominance in the sales of iPhones, to no avail. Verizon is picking up ground and increasing its iPhone sales, creating a nice dominance in the mobile advertising market. In the spring of 2013 the iPhone boasted 64% of the mobile advertising market share.

In terms of subscribers, Verizon is the largest mobile phone carrier in the United States with a slight edge over AT&T. With the U.S. market becoming more and more saturated, building a 4G network in Europe almost looks like virgin revenue territory.

Still, there are risks. Within the last decade there have been global-minded Internet companies that have attempted to expand their networks internationally by counting on rising Internet usage to pay for it. Do you remember Worldcom? It had a global network that included the United States, Europe and parts of Latin America but ended up filing for bankruptcy.

Entering Europe, AT&T will find it much more difficult to build a network than what it has seen in the United States. Along with the European Union's guidelines, the member countries also have their own rules. Europe as a whole is much more regulated than the United States, which limits the fees and revenue carriers can make from charging for network usage and roaming charges.

Not only is the European economy growing more slowly than in the United States, but unemployment is also much higher. On top of this, "pricing competition" makes it more challenging to squeak out profits.

The jury is still out on how much of a profit AT&T can make as compared to here in the states. Consumers in Europe pay much less for their mobile usage. (A recent Bloomberg article suggested the average European paid $38 per month while the U.S. subscriber pays $69.) Even though the higher amount in the United States includes the 4G coverage, how much are the citizens of the European Union willing to pay for their 4G service?

I highly doubt they will pay what we are paying here in the United States. I do not believe operating costs in Europe are going to be almost half what they are in the United States either. From an investor's viewpoint, it looks to me like AT&T is going to have a major challenge making a profit in Europe compared to here in the states.

I think of AT&T as a stalwart domestic telecom company. As technology has evolved, so has the company. Revenue sources -- such as from landlines -- continue to change, which is why the company is exploring Europe as a market.

Buying Vodaphone could bring AT&T new opportunities and new risks. I believe it will be important for investors to stay abreast of AT&T's interest in developing a 4G network in Europe. The company is a strong investment for "income investors" and Europe could be either a boondoggle or a very strong long-term revenue source.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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