Investor Chamath Palihapitiya made waves earlier this month when he said a company he and other investors are backing plans to bid much as $4 billion to $10 billion in next year's incentive auction of 600 MHz broadcast TV spectrum. However according to analysts at investment research firm Evercore ISI, the company, called Rama, is unlikely to become a major player in the U.S. market.
Palihapitiya's venture capital firm, Social Capital Partnership, has already made waves in the telecommunications market in Asia by backing LotusFlare, a software startup that plans to partner with the likes of Facebook (NASDAQ: FB) and Google (NASDAQ: GOOG) to expand access to the mobile Internet in emerging markets. Social Capital is investing a lot of money but other unnamed companies that are "recognizable names" will be investing in Rama. Those will be disclosed next year, Palihapitiya said at the Mobile First Summit in San Francisco earlier this month.
Rama intends to be the carrier and to use spectrum microcells in customers' homes and elsewhere to offer better coverage than traditional carriers. Rama also plans to allow the use of any device and provide simpler billing.
In a research report, Evercore analysts Jonathan Schildkraut, Robert Gutman, Justin Ages and Michael Hart said the use of microcells, located primarily on customers' homes, are intended to "mitigate the cost of construction and operation" of a new wireless network.
"Given the significant amount of time before this spectrum is cleared and available for use, Mr. Palihapitiya will have the opportunity to develop the ecosystem to support his vision," they said. "That being said, we see a number of obstacles to implementation of the idea -- and continue to see the economics of building a new wireless network from the ground up as prohibitive."
The analysts noted that Palihapitiya has acknowledged that building a network from the ground up will be expensive. Palihapitiya believes using microcells "will be faster, cheaper, and provide better coverage."
However, the analysts also have several questions about the plan, including whether customers will "want a transmitter/receiver attached to their homes (Comcast customers have demonstrated pushback against that company's use of homes as Wi-Fi hotspots)." They also wonder if "the transmitter/receiver require permitting similar to a tower or a small-cell site," what "level of power will the transmitter/receiver be tuned to," and "what level of radiation will this expose home-owners to (will it require testing)."
"Even under the best set of outcomes to these questions, we would still see a need for macro-sites (though the propagation and penetration characteristics of 600 MHz could reduce the number of sites needed to establish broad coverage)," they said.
The analysts do not think it will be economically feasible to build a new wireless network from scratch (Rama's proposed network notwithstanding) and therefore "see only three types of wild-card bidders in the auction: (1) those buying as a precursor to acquisition of an existing player, (2) spectrum squatters, and (3) players simply keeping an option on longer-term market entrance (and as leverage in negotiating for access on existing providers networks). In our view, Mr. Palihapitiya likely falls in category 2 or 3."
Bidders that want to participate in the incentive auction now have a window from Jan. 26 until Feb. 9, 2016, to do so, after the FCC shifted back its filing deadline dates earlier this month.
Related articles:
Chamath Palihapitiya wants to bid billions in the 600 MHz incentive auction to challenge Verizon, AT&T
Analysts: Comcast, Charter, Dish and Google might bid in 600 MHz auction - but won't be building out networks
Sinclair, CBS, Gray voice support for FCC's 600 MHz incentive auction, other TV broadcasters on the fence
Comcast, Charter may participate in 600 MHz auction, while Time Warner Cable plans to stay home
T-Mobile seen as favorite to win spectrum in 600 MHz auction, but smaller carriers likely to jump in as well
FCC's Wheeler: Carriers are engaging in normal pre-auction positioning and 'shenanigans' ahead of 600 MHz auction