identification

Analysts: Sprint, T-Mobile ditched H Block to focus on other spectrum, avoid Dish complications

Tools

In the span of 48 hours this week executives from both Sprint (NYSE:S) and T-Mobile US (NYSE:TMUS) declared that their companies will not participate in the Jan. 22 auction of the 1900 MHz PCS H Block, leaving Dish Network (NASDAQ: DISH) the most likely winner of the spectrum. Analysts said the two carriers are avoiding the H Block auction because they want to focus on their existing spectrum holdings and wait for other upcoming auctions, as well as a  avoid complications with Dish and its chairman, Charlie Ergen.

Dish Network has agreed to bid the reserve price of $1.56 billion in the H Block auction as part of a complex deal with the FCC in which it may be given leeway to convert part of its 2 GHz AWS-4 spectrum from uplink to downlink operations. U.S. Cellular (NYSE:USM) CEO Kenneth Meyers said Wednesday that U.S. Cellular will likely sign up to participate in the auction but is still evaluating its options. With few other obvious bidders on the horizon, it appears Dish will have little competition.

TMF Associates analyst Tim Farrar told FierceWireless that Dish winning the H Block spectrum for the reserve price of $1.56 billion,  this outcome will still be a victory for the FCC. "Yes, it could be higher, but it's enough for the FCC," he said.

Farrar added that getting at least $1.56 billion for the H Block is more than Sprint was expected to pay for it last year and will give the FCC flexibility ahead of the incentive auctions of 600 MHz broadcast spectrum. Sprint and T-Mobile want the FCC to limit how much spectrum Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) can win in the auction.

"That is the FCC's key objective in the upcoming spectrum auctions, so it can limit AT&T and Verizon's participation in the 2015 broadcast TV incentive auction and ensure that Sprint and T-Mobile gain sufficient low-frequency spectrum to preserve a four player market after the next presidential election," Farrar wrote in a separate blog post. "Once no net revenues need to be raised from the incentive auction, then it won't matter if AT&T and Verizon refuse to participate, as that would simply keep the price low for Sprint and T-Mobile (or ensure that not as much broadcast spectrum is cleared)."

"The FCC has moved quickly to implement Congress' direction to auction the PCS H block, and has scheduled the auction for Jan. 22, 2014," an FCC spokesperson told FierceWireless. "The Commission is looking forward to a successful auction, which will spur additional mobile broadband network development for American consumers and businesses, and provide a down payment on the Nationwide Interoperable Public Safety Network."

In September, Democratic FCC Commissioner Jessica Rosenworcel said she disagreed with the commission's decision to split the H Block from other upcoming auctions, most notably the AWS-3 auctions. She said in a statement that "holding a single auction of all 65 MHz at once is bound to yield more interest, more bidders, and more revenue than dividing this spectrum up and holding an auction of the 10 MHz H block alone. As Wall Street analysts have noted, splitting this spectrum up for auction will likely limit interest in the H Block to only one, or possibly two bidders. If that is true, we will have a retail sale--not an auction. Moreover, it will mean reduced revenue from this spectrum--and less support for our nation's first responders."

Sprint indicated that its focus is on both the incentive auctions and on building out its existing spectrum holdings, including its 2.5 GHz for TD-LTE. T-Mobile has long coveted low-band spectrum below 1 GHz but is also likely to be interested in the upcoming AWS-3 spectrum auction, scheduled for no later than February 2015.

"T-Mobile is also interested in acquiring spectrum in the later broadcast incentive auction and the AWS-3 auction, which could potentially pair the government-encumbered 1755-1780 MHz with 2155-2180 MHz, among other bands," noted Stifel Nicolaus analysts Christopher King and David Kaut in a research note.

All of this is likely to leave Dish with a lot of spectrum. The H Block is a 10 MHz block of paired airwaves that runs from 1915-1920 MHz (for the uplink) and from 1995-2000 MHz (for the downlink). Dish controls spectrum adjacent to a portion of the H Block, called AWS-4; Dish's 40 MHz of AWS-4 spectrum specifically runs from 2000-2020 MHz (for the uplink) and 2180-2200 MHz (for the downlink). Dish is also the leading bidder to win LightSquared's airwaves in an auction in bankruptcy proceedings on Nov. 25.

"In the meantime, Ergen has some busy weeks ahead of him with the LightSquared bankruptcy spectrum auction pulling to a close, a waiver approval and the H Block auction," noted BTIG analyst Walter Piecyk. "But the benefit likely will be large as he could emerge as the owner of 90 MHz of spectrum by the end of Q1."

However, it's unclear what he will do with all of those airwaves. "It's a bad thing if you have no way to monetize it," Farrar told FierceWireless. "It's a good thing if you can leverage it into some kind of deal."

That could make Sprint's decision to abstain from the H Block auction seem wise, Farrar said. Dish has asked the FCC for 30 months to decide whether to convert its 2000-2020 MHz spectrum to downlink, if it is given permission to do so. Farrar noted that owning the adjacent H Block spectrum would give leverage to Ergen, as Dish decides what to do.

Dish's ultimate play may be to transform all of its spectrum adjacent to the PCS band into supplemental downlink spectrum for other PCS spectrum holders, Farrar said. As more carriers convert PCS spectrum to LTE—as Sprint had done and as AT&T is starting to do—that could be a potentially lucrative offering for Dish. However, Dish would still likely need a wireless partner, and Sprint has said it remains open to using its multi-mode Network Vision network architecture to host others' spectrum.   

For more:
- see this TMF Associates blog post
- see this BTIG blog post (reg. req.)

Related Articles:
Sprint abandons pursuit of H Block spectrum
T-Mobile rules out H Block auction, willing to buy spectrum from 'a private party'
Dish's Ergen leaves door open to deal with T-Mobile, other wireless options
FCC delays H Block auction following government shutdown