Analysts: Verizon might be playing coy with 600 MHz auction participation to get more favorable rules

Verizon Wireless (NYSE: VZ) indicated that it thinks it has enough spectrum for the foreseeable future and is taking a "wait and see" approach to the FCC's 600 MHz incentive auction of broadcast TV spectrum. However, some analysts think that Verizon is playing coy as a way to get auction rules that it finds more favorable or to delay the auction.

Speaking to investors on Tuesday, Tony Melone, Verizon Communications' executive vice president of network, said that "as more spectrum comes to auction, including the incentive auction targeted for 2016, we will carefully look at the rules and evaluate if and/or how our participation would enhance achievement of our network strategy."

Verizon Communications CFO Fran Shammo said that Verizon's strategy will balance both a need for more spectrum and a willingness to use network technology to make its exiting holdings more efficient. He said that right now, following the record-setting AWS-3 spectrum auction in which Verizon spent $10.4 billion, Verizon understands how much certain spectrum bands are worth in the market.

"So as a result of that we are planning capacity solutions and technology to give us what we need going forward," Shammo said, according to a Seeking Alpha transcript of his remarks. "If those dynamics change, we would certainly consider spectrum alternatives, but at this point in time, I would say there is no definitive day when we need additional spectrum. We'll just balance the two parts of the equation."

In May, the FCC approved tentative 600 MHz auction rules designed to prevent Verizon and AT&T (NYSE: T) from acquiring all the available spectrum up for grabs. The rules reserve up to 30 MHz of spectrum for smaller carriers like T-Mobile US (NYSE:TMUS) and others that hold less than 45 MHz of low-band spectrum.

Crucially, however, in situations where broadcasters have given up only 60 MHz of spectrum, only 20 MHz can be reserved, and where broadcasters have given up 50 MHz of spectrum, only 10 MHz can be reserved. Those rules are not yet final and T-Mobile and other smaller carriers have been pushing the FCC to set aside more reserved spectrum.

According to an analysis last year by Mosaik Solutions, under the FCC's current proposed rules for the 600 MHz auction, Verizon could face bidding restrictions in the auction in virtually every state in the country. The only major places where Verizon wouldn't face restrictions would be in Southern Texas, parts of the Great Lakes and in parts of the Northwest. AT&T, meanwhile, could be restricted from bidding in parts of California, southern Texas and large sections of the Northeast. Under the current proposed rules, AT&T would be free to bid on 600 MHz licenses without restrictions across wide swaths of the Western United States.

Yet while AT&T has said it plans to purchase between 20 MHz and 40 MHz of spectrum in the incentive auction, Verizon has never made any such commitment. "With the addition of the licenses won at this (AWS-3) auction, we have spectrum holdings that allow us to cost effectively meet the anticipated growth needs of the business in the near-term," Melone said.

Some analysts think Verizon is angling to get more favorable rules by holding off from committing to participate in the incentive auction.

"You can't take AT&T and Verizon out of the auction," Armand Musey, a managing director at Goldin Associates, told CNET. "They make up more than 70 percent of the market. And they have much deeper pockets than anyone else that would participate in this auction."

As CNET notes, if the incentive auction were delayed again (and it's already been delayed twice) Verizon might push to have the auction held after the next presidential election, which could change the composition of the FCC if a Republican wins. Such a change would likely help Verizon implement auction rules it finds more attractive. Additionally, it would give Verizon some financial breathing room following the AWS-3 auction.

Wells Fargo analyst Jennifer Fritssche wrote in a research note that Verizon "seemed to be somewhat in a 'wait and see' mode for the 600 MHz spectrum auctions. Our sense is the company feels it is difficult to outline any strategy until the rules of this auction are put in place. We would not expect VZ to offer a verbal capital commitment to this auction (as AT&T did)."

Smaller carriers have been clamoring for the incentive auction to take place as soon as possible, arguing that they need low-band spectrum to compete long term. "Delaying the auction would be bad for all competitive carriers," Eric Graham, senior vice president at C Spire Wireless, told CNET.

Yet Graham noted that smaller carriers also need robust participation from Verizon and AT&T to make the incentive auction successful--and ensure a large device ecosystem. "The more participants in the auction, the more valuable the spectrum becomes for the consumer," Graham told CNET. "If every wireless operator is using the same bands of spectrum, it means that there will be more device interoperability. And that's key to consumer choice." 

For more:
- see this CNET article
- see this Seeking Alpha transcript

Related Articles:
Verizon: With AWS-3, we have at least 40 MHz of AWS spectrum in 92 of top 100 markets
FCC's estimated opening bids for 600 MHz auction 'grossly' undervalues licenses, broadcaster group says
T-Mobile keeps pushing FCC to set aside more 'reserved' spectrum in 600 MHz auction
FCC tentatively sets price of $1.25 per MHz-POP on 600 MHz spectrum for 'reserved' bidding to start in incentive auction
Mosaik: Verizon could face bidding restrictions across much of country in 600 MHz auction
AT&T to buy up to 40 MHz of spectrum in incentive auction, but Verizon remains aloof

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