Analysis: AT&T's WCS spectrum shopping spree won't catch it up to Verizon

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AT&T's (NYSE:T) pending purchases of WCS 2.3 GHz spectrum will be beneficial to its medium- and long-term network capacity needs, but they will not help AT&T keep pace with Verizon Wireless (NYSE:VZ) as the two roll out their respective LTE networks, according to analysts.

AT&T announced yesterday it will acquire NextWave Wireless, a spectrum holding company, in a deal valued at $600 million. According to FCC filings, AT&T also purchased WCS spectrum from Comcast and Horizon Wi-Com, which were two of the last remaining WCS spectrum holders outside of AT&T and NextWave. If the NextWave deal is approved by the FCC along with a joint WCS proposal from AT&T and Sirius XM, analysts estimate that AT&T will have around 20 MHz of usable WCS spectrum for LTE service in many areas of the country, especially in the Midwest and West, but an average of 12 MHz nationwide.

That added spectrum depth should ease some of AT&T's capacity constraints, but the deals come with caveats. There are currently no commercial handsets or base stations that use 2.3 GHz WCS spectrum, meaning an ecosystem needs to be developed before AT&T can make use of the spectrum. AT&T said if the NextWave deal is approved, which it expects to happen by year-end, it can start initial deployment of the airwaves in three years. That still leaves AT&T behind Verizon, which is closing in on securing nationwide AWS spectrum from a group of cable companies for $3.9 billion.

"This improves their [AT&T's] shortfall relative to Verizon, but it does not close the gap entirely," wrote Credit Suisse analyst Jonathan Chaplin in a research note. "AT&T will have the following available for LTE: 20 MHz of 700 MHz nationwide; 20 MHz of WCS nationwide; a few AWS licenses (5 MHz on average). With SpectrumCo, Verizon will have: 20 MHz of 700 MHz nationwide; 20 MHz of AWS nationwide; another 10 MHz of AWS in 60 percent of the country (13 MHz on average). In addition, Verizon's spectrum is useable immediately, while AT&T's WCS will take three to five years to deploy."

AWS spectrum is much more widely supported in both handsets and network gear.

"It's the type of incremental transaction that we would expect AT&T to embark upon after failing to close the T-Mobile transaction," RBC Capital markets analyst Jonathan Atkin told FierceWireless. "There's no near-term practical impact [on AT&T] in the way that the Verizon/SpectrumCo transaction might have on Verizon's business. [The WCS spectrum] is a prudent, incremental asset to have."

Even though AT&T's WCS purchases are relatively minor, they may generate ripples. Sprint Nextel (NYSE:S) remains a key holder of a small number of WCS licenses, and may sell them to AT&T. "The main holder of the remaining A & B WCS licenses is Sprint Nextel, with an average of 1 MHz of coverage in the top 100 markets (2 MHz nationwide)," UBS analyst John Hodulik wrote  in a research note, arguing that Sprint might fetch around $130 million if it were to sell its WCS spectrum.

Further, AT&T's WCS purchases might have an effect on the value of other high-band spectrum, especially the 2.5 GHz spectrum Clearwire (NASDAQ:CLWR) holds. "We think Clearwire's spectrum should be worth more than the WCS because: 1) it is immediately useable, with no interference issues; 2) there is substantially more of it; 3) it is globally harmonized," Chaplin wrote. "Offsetting this, the WCS spectrum will be paired if the AT&T proposal succeeds, and AT&T appears to have a preference for paired over unpaired spectrum."

John Bergmayer, senior staff attorney at public interest group Public Knowledge, decried the WCS purchases. "The 'spectrum gap' between AT&T and Verizon and the rest of the industry is already unacceptably large," he said. "These proposed transactions would worsen it. They are a symptom of our broken spectrum policy, which rewards concentration rather than competition."

For more:
- see this AP article
- see this FT article
- see this WSJ article (sub. req.)

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