NEW YORK-The Federal Communications Commission 700 MHz auctions in May will be “a significant industry-transforming event and near-term catalyst … in the race toward wireless data,” John Bensche, senior analyst for Lehman Brothers Inc., said.
Bidding teams could well include Internet service and content providers, who “may run the risk of being marginalized over time if [they] do not have ownership in the spectrum,” he said last week.
“The content providers, in exchange for financing the spectrum purchase, could get favorable terms for reaching their customers both on the wireless devices and on the wired/broadband networks provided by the incumbent [carriers].”
The possible entry of Internet-related companies into the bidding mix is based on the premise that wireless data will remain a service used primarily by businesses for the next five-to-seven years, according to Lehman’s projections. These customers are willing and able to pay for their employees’ multipurpose phones, which allow voice communications and access to company intranets and databases.
“Content providers eager to transmit … over wireless networks … will carry a heavy burden of proof if they want … that traffic carried for free and (to) chew up valuable network capacity … ” Bensche said.
“If the content is more consumer focused, (like that of) AOL and Yahoo!, business customers are unlikely to subsidize it, and the content provider may have to pay meaningful sums to get [its] content distributed.”
The upcoming auction covers a band of radio waves that have the advantage of traveling even farther than do those in cellular communications, Bensche said. Consequently, this available spectrum will work well for mobile wireless generally and also for rural applications where personal communications services “perhaps did not make sense.”
Bidding for the former UHF television channel licenses is open to anyone, and bidding credits are available to small and very small businesses. However, big players with deep pockets likely will wind up as auction winners for this “prime real estate,” he said.
In remarks late last month, Michael T. Flynn, group president of communications for Alltel Corp., concurred with Bensche’s assessment.
“I believe the auctions have been set up so that, because of the nature of the geographic footprints and the huge price of the down payment, small companies will be precluded,” Flynn said.
A dozen licenses in six regional Economic Area Groupings, each covering about 40 million people, are up for grabs. Because the blocks available are in contiguous bands, they are desirable for spread-spectrum applications like those employed in many third- generation wireless technologies, Bensche said. As an example, he noted that wideband CDMA requires 5 megahertz per carrier of adjacent spectrum.
“It’s a nice part of the neighborhood that might be good for fixed wireless or data applications,” Jonathan Chambers, vice president of regulatory affairs for Sprint PCS, said late last month.
“We have 30 MHz licenses in most of the United States, but in some urban areas where we have 10 MHz, we will need more down the road. We are looking at the 700 MHz, as is every other company, but we haven’t made a decision whether to participate.”
Of the seven major carriers Lehman believes are most likely to bid, Bensche said Sprint PCS is least in need of additional spectrum.
On the other hand, he opined, “laying the groundwork to attack wireless [Internet Protocol] full bore sounds like something WorldCom might think is a worthwhile endeavor, and getting the spectrum to do it is key …
“Were Sprint PCS/WorldCom to get a nationwide (license), it would be a stunning victory.”
Despite sufficient access to various forms of internal and external capital, large carriers may be concerned that the auction prices will be a dilutive drain for awhile on their overall corporate stock earnings, Bensche said. Issuance of tracking stocks for the wireless units would help to relieve that pressure, but only AT&T Corp. is likely to sell this type of security before the auctions begin.
“AT&T does … have some flexibility around whether [it needs] additional spectrum nationwide or if regional blocks will be sufficient to enhance its portfolio,” he said.
Sprint has plans for a tracking stock later this year. At least for the time being, Bell Atlantic Corp. may be constrained from creating a separate entity to raise capital for new licenses. That is because doing so could adversely affect the accounting treatment of its GTE Corp. acquisition as a pooling of interests.
The Financial Accounting Standards Board has proposed elimination of this common form of accounting treatment for mergers because FASB believes it provides a “misleading corporate earnings boost” unrelated to any underlying economic fundamentals.
“Today, [Bell Atlantic/Vodafone AirTouch, GTE] has a predominantly cellular footprint with 25 MHz of spectrum,” Bensche said.
“Consequently, we believe [it] will be an aggressive bidder for spectrum, particularly on the highly desirable East and West Coasts.”
BellSouth Corp., which has a national roaming agreement with AT&T, also owns enough cellular spectrum to support voice communications for the next several years.
“At [its] recent analysts meeting, [BellSouth] emphasized [its] focus on a nationwide voice footprint and [its] aggressive push in into wireless data … Consequently, we would conclude [it] will also participate in the auction …” Bensche said.
Qwest/US, largely “silent” on whether it wants to be a national carrier, has nevertheless been out front in its focus on data communications. Although it lacks as much capital as the biggest of the big carriers, Qwest also has partnered in different ways “with leaders in adjacent industries,” like Microsoft Corp. and KPMG LLC, Bensche said.
“As a result, we believe Qwest will be the most likely large cap telecom player to come to the table with an industry outsider,” he said.
VoiceStream-Omnipoint-Aerial is “a new entrant whose channels are not jammed with voice traffic … [and it has] relatively deep spectrum,” Bensche said.
“We rate VoiceStream as a more likely player in the C-block re-auction through its Cook Inlet joint venture … than a go-for-broke bidder in 700 MHz.”
By contrast, Nextel Communications Inc., has “roughly half as much spectrum as all of [its] national competitors … and [therefore] the highest need for spectrum of any company in the industry,” he said.
“Given its recent $8.3 billion hostile bid for NextWave, Nextel has set the tone for the coming auction. Opening ante is at least this amount.”
However, Bensche added that Nextel also is part of a consortium bidding for the upcoming third generation wireless licenses in the United Kingdom.
“It will need to keep powder dry in case this come through,” he said.
