The upcoming U.S. spectrum auctions present some interesting times for the wireless industry.
Auctions in the past were more predictable, primarily reserved for veteran executives experienced in running wireless networks.
Today, the story is much different. Wireless has caught the attention of many powerful and nontraditional companies, like Microsoft Corp., Cisco Systems Inc. and America Online Inc. Why? The impending union of the data and enterprise markets with wireless provides enormous potential, said Richard Siber, associate partner with Andersen Consulting in Boston.
“Speculation coming into this is much more extreme than any prior spectrum auction,” said Siber. “It’s all over the map, which makes it more difficult for those helping companies strategize on their auction approach.”
The upcoming U.S. auctions include the sale of spectrum in the 700 MHz band in early September and a re-auction of PCS spectrum in late November. Short forms for the 700 MHz auction are due Aug. 1, after which the Federal Communications Commission will reveal those who registered to bid. However, it’s likely the FCC will delay the 700 MHz auction. Industry players have asked the commission to delay the auction until June 2001, arguing the FCC hasn’t done enough to clear spectrum or give potential bidders enough time to prepare for the auction. Carriers are nervous that TV broadcasters, who occupy this band today and don’t have to leave until 2007, could create some serious interference issues with wireless networks. With this issue looming, carriers find it difficult to place a value on the spectrum.
In the meantime, industry executives and analysts spout a variety of potential bidders and partnerships that include telecom companies, Internet service providers, enterprise companies and content providers. Earthlink Network and Shop at Home Inc. were among companies attending an FCC 700 MHz seminar last week.
ISPs and content providers may become marginalized if they don’t own spectrum is one popular thought. Companies like AOL are paying carriers like Sprint to obtain top placement on phones. AOL, which in the past has not been interested in owning infrastructure, has moved into more concrete areas, like its purchase of Tegic Communications Inc. to facilitate short messaging service over devices like mobile phones. Last week the ISP was rumored to enter a partnership with Japan’s NTT DoCoMo to collaborate on iMode technology.
However, companies like these have no experience, and if auction prices rise, they may not be able to justify bidding to their shareholders.
“AOLs are possibilities, but I’d be very surprised,” said Perry Walter, senior vice president with Robinson-Humphrey Co. in Atlanta. “It’s not a very strategic use of capital. If I’m a shareholder would I really want them to build a wireless network? … Everyone is concerned about being commoditized over time. The key issue you have to weigh is: Do I get into a nonstrategic business or not vs. Can I develop new products and businesses?”
A likely scenario is a Microsoft, Cisco or AOL seeking to help carriers bid for spectrum in exchange for business. Nextel Communications Inc., which analysts say is in desperate need of spectrum for third-generation services, is open to partnering with another company to bid on the auctions. AT&T Wireless Group Chief Executive Officer John Zeglis told analysts during the company’s quarterly conference call that the carrier will not partner with anyone to bid on spectrum.
“I see Nextel and others sharing the risk,” said Dennis Saputo, senior vice president of Moody’s Investors Service in New York. “That will work to limit the impact any large purchases will have on any one issuer.”
Despite sufficient access to a variety of capital, large carriers may worry about the auction prices, which could drain their overall stock earnings.
Almost every major carrier in the industry plans to participate in the upcoming auctions. Nationwide service offerings are the name of the competitive game today, and carriers are racing to fill in their footprints through acquisitions and spectrum auctions. Carriers will also need more spectrum to run more data-intensive third-generation systems.
Verizon Wireless, which has said it will run out of spectrum capacity by 2003, is expected to be an aggressive bidder to fill in holes on the East and West coasts, while BellSouth Corp. and SBC Communications Inc., which plan to merge their wireless properties this fall, have important holes to fill such as New York and several markets in the West. VoiceStream Wireless Corp. also has holes to fill, and Nextel needs spectrum to build out into the next generation. Other regional operators like Qwest Wireless, which operates service in the West, may become aggressive bidders.
AT&T Wireless says it has enough spectrum, though it won’t preclude participating in the auctions.
“We have the largest spectrum portfolio in the industry,” said Zeglis. “It gives us a lot of flexibility to extend second-generation capacity and to launch 3G services. Sure we’ll need more spectrum over the next 10 years, and sure, we’ll register in all the auctions so long as we have a refundable deposit.”
Sprint PCS may not bid at all.
“We haven’t said anything publicly about what we’re going to do. We do have a really good spectrum position,” said Sprint PCS spokesman Tom Murphy. “The majority of our licenses are 30 megahertz.”
What is the value of spectrum?
It’s hard to put a price tag on spectrum these days. The British 3G auctions generated eight times more than what the government had expected. The $35 billion generated set off credit alarms across the world, yet the value of spectrum fell nearly 75 percent in last week’s Dutch 3G auction, which generated around $2.5 billion.
“You had a mass hysteria that took place,” said Herschel Shosteck, head of Herschel Shosteck Associates Ltd. in Wheaton, Md. “The spectrum bubble is breaking now, and none is going to bring in near what the Brits brought in.”
It’s a mixed bag in the United States as well. Some analysts, like John Bensche with Lehman Brothers Inc. predict the auctions will rake in tens of billions of dollars, based on the value proposition of wireless data. Others see the spectrum auctions as a niche play.
Given the carrier’s rich spectrum position, AT&T Wireless’ Zeglis said his company will only buy if the price is right.
“We’re never going to go to these auctions and be mindless and find ourselves in a must-win position,” he said. “We’ll be smart.”
“If you believe that spectrum is as precious as the air we breath and the water we drink, you’ll take an extreme approach that you must win at all costs,” said Andersen’s Siber. “If you believe there will be a glut of spectrum released over the next 10 years, you can treat it as a commodity and look at a virtual network operator standpoint.”
Moody’s predicts most incumbent U.S. operators will participate in the 700 MHz auction but sees little reason for them to bid too aggressively to satisfy their 3G plans since they already own extensive spectrum in the frequency bands slated for global 3G services.
“It’s going to be a function of the participants, their needs and the mix that goes in any type of auction,” said Saputo. “It’s not a guarantee that this is going to be very, very profitable … It will only go up to a certain point and then the participants may come to the conclusion that it’s cheaper in the long term to use someone else’s network.”
Shosteck said more and more carriers, especially in Europe, are looking at the option of getting into the market via a virtual network operator (VNO) approach. Carriers buy airtime and market service but don’t own the network or incur the heavy costs of 3G technology. Network operators in turn are guaranteed revenue every month. Virgin Mobile in
the United Kingdom has become the most successful at this approach.
Spectrum prices are coming down because carrie
rs realize they can lease from network operators as well as band together to jointly bid on spectrum, Shosteck said.
However, Walter believes auction prices in the United States could reach $20 to $30 per pop. Most carriers would like to have more spectrum for 3G services and operators will fight for certain strategic markets like New York, he said. The potential to partition spectrum also is large, Walter said, since the FCC will auction six broad regions in the 700 MHz auction.
“There may be a carrier that buys into the Northwest region and then lets someone else deal with more rural areas,” said Walter. “There’s opportunity for rural and metro-area carriers to work together on some of these licenses.”
