With 2.5 GHz, Sprint won't have much wiggle room in FCC's new spectrum screen

Spectrum controlled by Sprint (NYSE: S) represents the bulk of the airwaves the FCC is expected to add to its so-called spectrum screen, potentially inhibiting any deal between Sprint and T-Mobile US (NYSE:TMUS).

According to the Wall Street Journal, and consistent with statements last week from an FCC official, 101 MHz of Sprint's 2.5 GHz spectrum is being added to the screen out of the net 128.5 MHz in total being added. Sprint had argued its 2.5 GHz spectrum--Sprint owns around 120 MHz of 2.5 GHz spectrum in 90 percent of the top 100 U.S. markets--should not be counted in the screen. Sprint is using the spectrum to deploy TD-LTE service and increase speed and capacity on its network.

Dish Network's (NASDAQ: DISH) spectrum--40 MHz of AWS-4 spectrum and the 10 MHz block of 1900 PCS H Block spectrum it recently won at auction--will also be counted. Sprint and Dish's spectrum will be added to the screen because the FCC determined that the airwaves are suitable and available for mobile broadband use, the FCC official said.

The FCC will vote on the new spectrum screen at its May 15 meeting. However, the rules could change before then.

The FCC currently uses the screen as a factor when reviewing spectrum transactions to determine whether they are in the public interest. If a carrier acquires too much spectrum and violates the screen, the deal is more closely scrutinized. Currently, the screen is different for each proposed transaction. The FCC has been reviewing changes it should make to the screen since 2012.

The screen can trigger a more detailed competitive analysis by the FCC, and currently the trigger occurs when a wireless provider holds one-third or more of the available spectrum in a given market. As the Journal noted, the new screen would cause Sprint to hit or exceed the one-third threshold in most major markets.

The proposed changes will keep using the one-third spectrum holding factor. The proposed rules would also continue to use a case-by-case review for transactions involving spectrum below 1 GHz. 

The new spectrum screen rules will only affect transactions after the upcoming spectrum auctions, for AWS-3 spectrum later this year and the 600 MHz auction, planned for mid-2015.

A Dish spokesman declined to comment and a Sprint spokesman did not immediately respond to a request for comment.

However, in a recent FCC filing that noted a meeting Sprint had last week with FCC officials, Sprint said it was important for the FCC to differentiate between different bands of spectrum included in the screen. The company said the changes would make the screen less meaningful in determining which transactions warranted extra scrutiny.

"Sprint noted that proposals to include the vast majority of the 2.5 GHz band, without significant reductions to reflect the encumbrances to broadband deployment (over and above the educational reserve and white spaces), would produce counter-intuitive results under the screen," the company wrote. "This outcome would render the proposed revised screen ineffectual in diagnosing the potential for undue market power and thus would not assist the Commission in identifying transactions warranting in-depth competitive review. Moreover, as proposed the revised screen would contravene the public interest by facilitating the ability of the most dominant firms to bolster their already-dominant spectrum holdings."

SoftBank CEO Masayoshi Son explicitly called for a deal between SoftBank-owned Sprint and T-Mobile in March, and said combining the No. 3 and 4 wireless carriers would ignite a "massive price war" and more competition in the U.S. market. However, since then speculation about a deal has gone cold amid perceived opposition from regulators.

The changes to the spectrum screen would make it more difficult for Sprint to pursue a deal with T-Mobile. "Sprint could still bid on AWS-3 spectrum even though it would take them over the spectrum screen but it has indicated little interest in bidding on AWS-3 spectrum," BTIG analyst Walter Piecyk wrote in a blog post. "More importantly, an acquisition of T-Mobile would clearly take them well over the screen, whether they bought AWS-3 or not. Some might argue that Sprint could divest some 2.5/2.6 GHz spectrum but this spectrum is central point to Softbank CEO's Masa Son's differentiated strategy."

Piecyk also noted that the changes to the screen could potentially allow the other Tier 1 carriers to buy Dish and AWS-3 spectrum without hitting the new proposed screen threshold.

For more:
- see this WSJ article (sub. req.)
- see this BTIG blog post

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