The FCC's decision to create a spectrum reserve in next year's incentive auction of 600 MHz broadcast TV spectrum was hailed as a victory for smaller carriers, and for T-Mobile US (NYSE:TMUS) and Sprint (NYSE: S) in particular. With Sprint choosing to sit out the auction, it has been widely assumed that T-Mobile and other competitive carriers will be able to bid for the "set aside" airwaves -- up to 30 MHz in a given market -- without having to worry about AT&T (NYSE: T) and Verizon Wireless (NYSE: VZ). However, that likely won't be the case, and in many rural markets AT&T and Verizon will be able to fully bid on reserve spectrum and put pressure on smaller carriers during the auction, and potentially after it as well.
Non-nationwide carriers will automatically get to bid on the reserve spectrum. And AT&T and Verizon will be excluded from bidding in many markets where they hold more than 45 MHz of low-band spectrum below 1 GHz on a population-weighted basis. However, there are a lot of markets where that just isn't the case. Indeed, last month the FCC published a document that specifically lists every Partial Economic Area (PEA) where the four Tier 1 carriers can bid on reserve spectrum.
Sprint and T-Mobile can bid on the reserve spectrum in all 416 PEAs. AT&T, meanwhile, is eligible to bid in 242 of them (covering 81.8 million POPs, according to analysts at Wells Fargo), while Verizon can bid on reserve spectrum in 112 PEAs (covering 58.7 million POPs).
What does this mean in terms of which carriers will bid for reserve spectrum? It's hard to say at this point. Carriers, especially AT&T and Verizon, might eventually just decide to bid on non-reserve spectrum and take the lion's share of those airwaves. Or Verizon and AT&T could bid on every license for which they are eligible. We don't know. What we do know is that smaller carriers are going to have a lot of competition in rural areas of the country where they were hoping to score spectrum or where they are currently the dominant providers.
"AT&T and VZ's eligibility only overlaps in 69 markets with a population of 19 million," Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein said in a research note. "Therefore, AT&T could compete against only TMUS (and any regional carriers or other bidding entity) in 173 markets covering 62.8 million people (20% of the U.S.), while VZ faces the same opportunity in 43 markets covering 39.7 million people (13% of the U.S.). While both carriers plan to participate in the auction, VZ's recent messaging would suggest it is less likely than T to participate on a large scale. On its most recent earnings call, VZ noted interference issues with its existing 700 MHz holdings made the broadcast spectrum more costly to deploy, although this could partially be competitive posturing."
AT&T can bid in large markets like Cleveland and Phoenix, as well as Virginia Beach, Va.; Charlotte, N.C.; and much smaller markets like Springfield, Mo.; Ames, Iowa; and Cheyenne, Wyo. Verizon can bid on reserve spectrum in fewer markets, but can bid in huge markets like Dallas; Miami; Milwaukee; Orlando, Fla.; and San Antonio, Texas. Verizon can also bid on reserve spectrum in tiny markets like Yankton, S.D.; and Trinidad, Colo.
CCA, T-Mobile and U.S. Cellular (NYSE:USM) argued to the FCC that, regardless of the number of reserve-eligible bidders in a PEA, no reserve-eligible bidder should be permitted to purchase more than 20 MHz of reserve spectrum in any PEA, "in order to protect license diversity among reserve-eligible bidders." Accordingly, in its auction rules, the FCC adopted a cap of 20 MHz for "smaller PEAs" where 30 MHz of reserve spectrum is available. The FCC defined smaller PEAs as those with populations of 500,000 or fewer, which applies to 299 of the 416 PEAs.
The implications of all of this are quite significant. Although the reserve was intended to give a boost to smaller carriers, if Verizon and AT&T bid on the spectrum in markets where they are eligible to bid on reserve spectrum, they could bid up prices to such a point that small and rural carriers can't compete. Verizon and AT&T are also not likely going to make it easy for T-Mobile to walk away with 600 MHz airwaves in larger markets where they can bid on reserve spectrum.
Verizon will be barred from bidding in many urban markets, but will be free to bid on the reserve spectrum in most of Florida, as well as parts of the Midwest, Maine, Texas and Wisconsin, and several other markets scattered throughout the country. AT&T would face bidding restrictions in much of the Northeast, the West Coast, parts of the Southeast and in many of the largest metropolitan areas. However, AT&T would not face restrictions across vast swaths of the Midwest and Mountain states.
For a more detailed look at where Verizon and AT&T face restrictions, check out these maps produced by Brian Goemmer of AllNet Insights & Analytics. The AT&T map and the Verizon map show the low-band spectrum holdings of the carriers by PEA; areas that are shaded red are PEAs where the companies will not be able to bid on reserve spectrum. However, in all other areas the companies will be unrestricted.
In markets where Verizon and AT&T do acquire spectrum, especially rural markets, they could put significant pressure on smaller carriers. Many smaller carriers have survived by getting roaming revenue from larger carriers that have not built out footprints in areas where the Tier 1 players have found it uneconomic to build out native network footprints. With spectrum of their own, Verizon and AT&T won't need those smaller carriers nearly as much. Without that roaming revenue, many competitive carriers will likely be forced to fold as Verizon and AT&T build out their networks in the 2019-2020 timeframe. Verizon and AT&T will also likely exert even more competitive pressure on the smaller players than they do now.
Wireless is a scale business, and without scale, competitors often fall by the wayside. That's why smaller carriers have been so eager to get 600 MHz spectrum, to be connected to a larger device and network infrastructure ecosystem that will last into the next decade and beyond.
I don't doubt that the spectrum reserve was created with the best of intentions -- to help small and rural carriers, primarily. And I also don't doubt that it will help them, and smaller carriers will get some spectrum in their local footprints that they would otherwise not have been able to successfully acquire.
However, the reserve could also create some unexpected outcomes, especially if AT&T and Verizon buy up spectrum in rural areas where they are eligible to bid on reserve spectrum, or just bid up prices. There's nothing to stop them from doing so, and nothing inherently wrong with such strategies -- the carriers are allowed to do so under the FCC's rules and it seems unlikely the rules will be changed at this late stage.
The spectrum reserve was meant to help competitive carriers. But it could wind up crushing them in the long run.--Phil