The Federal Communications Commission’s planned auction of so-called “advanced wireless services” spectrum scheduled for June could spell a windfall for government coffers, though analysts are mixed on the amount of said windfall. The government has said it expects to generate $25 billion during the next three years through the sale of wireless spectrum, with a majority expected to come this summer.
The Yankee Group put out a report last week stating that based on previous auctions and other wireless spectrum transactions, the government is likely to net between $8.5 billion and $13.9 billion in total bids from the AWS auction. Bear Stearns & Co. Inc. telecommunications analyst Phil Cusick noted earlier this year that the auctions would likely bring in between $10 billion and $15 billion.
The Yankee Group noted that while its estimates would result in one of the highest returns on an FCC auction, the results are somewhat lower than many forecasts due to the spectrum make-up. The AWS auction is set to include 45 megahertz of spectrum in the 1.7 GHz band for uplink and 45 megahertz in the 2.1 GHz for downlink.
“Although this would constitute one of the FCC’s highest-grossing auctions, it is still below what an equivalent amount of PCS spectrum would sell for in today’s market,” explained Yankee Group analysts Marina Amoroso.
In determining its estimates, the Yankee Group looked at previous auctions of similar spectrum in the 1.9 GHz bands that began in 1996 up through Auction 58 last year. Those auctions-which included the eventually voided re-auction of NextWave Telecom Inc.’s spectrum during Auction 35- resulted in an average price per megahertz per potential customers covered of $1.41. Secondary market spectrum deals conducted over the past two years yielded a more robust $2.31 average price per megahertz per pop.
The Yankee Group then noted that with the divergent AWS spectrum up for bid compared to previous auctions, along with costs associated with moving existing spectrum holders in those bands, it expects a 25-percent reduction in spectrum bids compared with previous transactions. Thus, the $8.5 billion to $13.9 billion estimate.
The Yankee Group also noted that up to 10 percent of the spectrum up for bid this summer could go unclaimed due to a “lack of market demand, small geographic populations and potential negative returns on investments.”
The Yankee Group added that since the spectrum up for bid is near operations using the 1.9 GHz band, carriers are not likely going to have to deploy new cell sites for broad coverage, but they would have to upgrade existing sites to use the new spectrum.
“Depending on how much demand there is at auction for AWS, costs for this infrastructure could vary according to market demand and economies of scale,” Amoroso explained.
Citing relatively clean balance sheets and positive credit ratings, the Yankee Group predicted that Verizon Wireless and Alltel Corp. would be the strongest bidders in the upcoming auction. Verizon Wireless’ commitment to rolling out spectrum-hungry advanced services, its rapidly growing customer base and desire to maintain a high network quality were noted, as were Alltel’s desire to expand its robust rural footprint into more densely populated markets.
T-Mobile USA Inc. also is expected to be active in the auction as the smallest nationwide operator has experienced tremendous growth during the past several years, but it has been stymied by a relatively poor spectrum position that has prevented it from launching next-generation services. T-Mobile USA’s parent company, Deutsche Telekom AG, has said it has set aside up to $2 billion for potential spectrum acquisitions in the United States.
“We expect T-Mobile to be the most active of the national carriers in the auction, likely followed by Verizon in certain territories,” noted Cusick. “Sprint Nextel and Cingular need little spectrum, though we expect them to register to ensure that final prices aren’t too low.”
Cingular Wireless L.L.C. is not expected to be an aggressive bidder as its acquisition of AT&T Wireless Services Inc. last year left the industry’s largest operator with a healthy spectrum portfolio, though the carrier could be active if only to make sure the spectrum does not sell for too low a price. Sprint Nextel Corp. is seen as being in a similar boat, as Sprint Corp.’s acquisition of Nextel Communications Inc. left the combined operation spectrum rich with holdings in the 800, 900, 1900 and 2500 MHz spectrum bands.
Auction wildcards include U.S. Cellular Corp., MetroPCS Inc. and Leap Wireless International Inc. All three operators were unexpectedly active during Auction 58, picking up spectrum holdings in a number of large and mid-sized markets, often outbidding much larger competitors.
Unconventional bidding competition could come from companies outside the wireless space, including Internet service providers and content-rich media giants interested in owning their own network or distribution channels. Analysts for years have predicted such heavyweights as America OnLine Inc. or even Microsoft Corp. could throw their considerable financial resources into acquiring spectrum to support their own nationwide wireless network, though greater acceptance of mobile virtual network operators by carriers has tempered those moves to date.
