An extended auction of 600 MHz spectrum: Bad news for carriers, but good news for Dish and Ligado

Mobile carriers and would-be wireless service providers are highly unlikely to meet the FCC's enormous $86.4 billion clearing cost to acquire TV broadcasters' spectrum at auction. And while that may not be good news for existing network operators, it may boost the value of spectrum that's already being held by players such as Dish Network and Ligado Networks.

The commission this week announced the conclusion of the first stage of the incentive auction, setting a clearing cost to clear 100 MHz for use by wireless service providers. (Another 26 MHz will be set aside for "guard band" to address interference concerns.) If bidders don't pony up at least that amount during the forward auction, the FCC must reduce its clearing target to 90 MHz of freed spectrum and resume the reverse auction where it ended during the previous stage.

Shifting from reverse to forward… and maybe back to reverse

The process would continue until the forward auction generates enough to pay TV broadcasters for their spectrum as well as covering administration and repacking costs. Some deep-pocketed companies looking to move into wireless are sure to participate – Comcast is the most obvious name here – but incumbent carriers are expected to be the most aggressive bidders for the airwaves. And the nation's two largest operators simply don't have the financial leverage they did during the AWS-3 spectrum auction, which generated nearly $45 billion by the time it closed in early 2015.

"Verizon has already committed to a dramatic network densification campaign that will consume much of their 'excess' capital for years, perhaps decades, to come. AT&T has committed to a huge fiber build as part of their DirecTV acquisition," MoffettNathanson analysts wrote earlier this week.

Meanwhile, T-Mobile is expected to spend somewhere in the neighborhood of $8 billion at auction, and cash-strapped Sprint is sitting out. So while the auction could still conceivably wrap up in the next two or three months, it's highly likely to spill over into 2017, and might not be completed for another year or more.

"Remember the way it works is the FCC wanted to clear as much spectrum in the reverse auction as possible and then let the market decide through the forward auction what the spectrum is worth to carriers," Jennifer Fritzsche of Wells Fargo Securities wrote in a research note. "An important point to not forget: the auction does allow for multiple reverse rounds if lower clearing targets are indeed needed."

An extended auction would be bad news for T-Mobile, which – like Sprint – needs low-band spectrum to expand its coverage, particularly in the suburban and rural markets it has recently begun to target. Indeed, T-Mobile executives have said recently they hope to leverage at least some of those 600 MHz airwaves as early as 2017.

That's highly optimistic, of course, given the FCC's 39-month timeframe for repacking spectrum. But it will be nearly impossible if the auction extends into next year.

The increasing attractiveness of available spectrum

The sky-high clearing cost could be very good news for Dish Network and Ligado, however. Both companies have stockpiled spectrum but have yet to put those airwaves to use (for very different reasons). An extended auction would mean 600 MHz airwaves may not be available for wireless use until 2020 or beyond, but spectrum held by Dish and Ligado could be used much more quickly. So carriers in urgent need of more spectrum might consider leveraging those airwaves either through partnerships or acquisitions.

"Today's news suggests multiple stages, less spectrum re-deployed, a protracted timeline and greater likelihood of a failed auction," John Hodulik of UBS wrote Wednesday. "Less spectrum in the wireless market would put upward pressure on spectrum valuation in our opinion, a positive for holders such as DISH and Ligado Networks. Multiple stages will also prolong the quiet period and dampen any near-term strategic activity across the space, as we already expected given the upcoming elections."  --Colin | @colin_gibbs

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