It's Verizon and AT&T vs. Sprint and T-Mobile in the 600 MHz auction battle

Phil Goldstein

There is a titanic struggle brewing in the wireless industry, pitting AT&T Mobility (NYSE:T) and Verizon Wireless (NYSE:VZ) against pretty much everyone else, including Sprint Nextel (NYSE:S) and T-Mobile US (NYSE:TMUS), and it's going to get a lot uglier as time goes on. The carriers are fighting over the rules that will govern next year's 600 MHz spectrum auction, with the smaller carriers fighting for rules that will ensure they get a piece of the pie.

The dustup kicked off in April when the Department of Justice called on the FCC to create auction rules that would ensure Sprint, T-Mobile and other smaller players get a chance control some of the airwaves, perhaps by capping how much spectrum AT&T and Verizon can get.

AT&T blasted the DOJ's proposal, arguing it was effectively trying to pick winners and losers of the auction. A study released in late April by the Center for Business and Public Policy at Georgetown University's McDonough School of Business found that excluding AT&T and Verizon from the auction could reduce auction revenues by about 40 percent, lowering the amount raised from as much as $31 billion to around $19 billion.

I spoke with Dr., Robert Shapiro, one of the authors of the study and an economist who is the co-founder and chairman of Sonecon, a technology consulting firm that has had companies such as AT&T, Google (NASDAQ:GOOG) and Fujitsu as clients. Shapiro argued that rules that limit how much spectrum AT&T and Verizon can get at the auction would be counterproductive because AT&T and Verizon have been efficient users of spectrum.

Sprint, T-Mobile and their allies have pushed back against those ideas. In a letter to the FCC last month, Sprint, T-Mobile and others wrote that AT&T and Verizon should not be forbidden from participating in the auction. Instead, the argued that the two carriers should be prevented from gobbling up the vast majority of the 600 MHz spectrum, as they did in the 700 MHz auction in 2008.

"Reasonable spectrum aggregation rules would not preclude AT&T and Verizon from bidding for 600 MHz licenses," Sprint and its allies wrote. "A robust and competitive auction structure that promotes broad bidder participation is likely to enhance revenue for the U.S. Treasury while simultaneously furthering Congress' pro-competitive goals for the wireless industry and for American consumers, as expressed in the legislation authorizing the 600 MHz auction." Further, they argue, the legislation lets the FCC create rules "concerning spectrum aggregation that promote competition." This position was reinforced by recent statements from T-Mobile and Sprint.

I'm sympathetic to the arguments from Sprint and T-Mobile. In 2008, AT&T and Verizon won the lion's share of 700 MHz spectrum (they spent a combined $16.3 billion out of a total of $19.6 billion in bids). The 600 MHz auction is likely going to be the last auction for a long time in which low-band spectrum will be up for grabs. Why shouldn't the smaller carriers push for rules that guard against a repeat of 2008?

It should be noted, though, that neither Sprint nor T-Mobile had the financial wherewithal to go toe-to-toe with Verizon and AT&T in the 700 MHz auction. This time around, if Sprint's deal with SoftBank goes through, it will be flush with $8 billion in fresh capital. However, it's unclear how much of that money would be used to fund Sprint's existing Network Vision plans and how much could be used to buy new spectrum. T-Mobile is now a public company and parent Deutsche Telekom will be committed to it for the foreseeable future, though it's not clear how much new capital it will pump into the business. Still, T-Mobile executives seem confident the company will play in the auctions, with CTO Neville Ray saying last month that carrier would look to use 600 MHz spectrum to expand its national footprint.  

Still, there are other considerations at play. BTIG analyst Walter Piecyk said that the smaller carriers' perspective isn't off base but that Sprint, for example, has materially underinvested in its network over the last several years compared to AT&T and Verizon. He said that if AT&T and Verizon win large amounts of 600 MHz spectrum, they might be able to leverage their extra network capacity to cut costs for subscribers--thereby furthering the FCC's goal of lowering the cost of Americans' mobile service. 

I doubt AT&T and Verizon would lower their prices if they won extra spectrum. However, Piecyk pointed out that Sprint might not immediately need extra spectrum (if the SoftBank and Clearwire (NASDAQ:CLWR) deals go through) and that T-Mobile might not have the finances to build out the spectrum. Piecyk said giving 600 MHz spectrum to carriers that can't quickly build it out would not serve the interests of consumers. "The best interest of the consumer is to get as much spectrum and capacity built as possible," Piecyk said. He said that the FCC should ensure that the 600 MHz licenses have strict buildout requirements to make sure that whatever spectrum is won gets put to use in a timely manner.

I still think the auction can be designed in a way that maximizes revenue and ensures smaller players get a share of the pie. There are a multitude of uncertainties though, including how many broadcasters will actually give up their spectrum and when the auctions will take place (with FCC Chairman-in-waiting Tom Wheeler's confirmation date unknown, the auctions could be pushed from 2014 to 2015). What is certain is that the carriers will keep this fight going for the foreseeable future.--Phil