UPDATED: AWS-3 auction nets $16.4B in bids so far, with Dish as a wild card

The AWS-3 spectrum auction has surpassed $16.4 billion in provisional winning bids through 15 rounds, meaning that the most valuable chuck of spectrum being auctioned has met the reserve price the FCC set prior to the start of the auction.

After 15 rounds of bidding, the total amount of winning bids reached $16.43 billion. As the bidding has intensified, prices for paired spectrum in the country's major markets have continued to rise. The heaviest bidding continues to be concentrated on licenses in the New York City metropolitan area, Los Angeles, Chicago, Dallas, Boston, Philadelphia and San Francisco.

Verizon Wireless (NYSE: VZ), AT&T Mobility (NYSE: T), T-Mobile US (NYSE:TMUS) and Dish Network (NASDAQ: DISH) are likely the heaviest bidders thus far, though it's impossible to tell since bidders' identities are confidential.

After round 12, analysts at Jefferies declared that the cumulative reserve price of $10.07 billion for the AWS-3 paired spectrum licenses had been met, with the block receiving $10.38 billion in bids at that point. Other financial analysts, including those at J.P. Morgan, agreed that the reserve has clearly been met for the paired spectrum, much earlier than expected. The paired spectrum in the AWS-3 auction runs from 1755-1780 MHz for uplink operations and 2155-2180 MHz for downlink.

However, the unpaired uplink spectrum licenses running from 1695-1710 MHz continue to draw little interest, and remain far away from the FCC's reserve price of $580 million.

The AWS-3 auction consists of two sub-bands of spectrum:

  • One of the sub-bands consists of one unpaired 5 MHz block (1695-1700 MHz) and one unpaired 10 MHz block (1700-1710 MHz), licensed in EA geographies.
  • The other sub-band consists of paired spectrum. It includes one 5x5 MHz block (1755-1760 and 2155-2160 MHz) licensed in Cellular Market Area (CMA) geographies.
    There are also two 5x5 MHz blocks (1760-1765 and 2160-2165 MHz, and then 1765-1770 and 2165-2170 MHz) licensed in EA geographies. And finally there is one 10x10 MHz block (1770-1780 and 2170-2180 MHz) licensed on an EA basis.

According to the FCC, the highest provisional winning bid through 15 rounds was around $1.19 billion for a 10x10 MHz license of paired AWS-3 spectrum in the J-Block covering the New York City area. That license has consistently been the most heavily bid-on license. That block, which runs from 1770-1780 MHz and 2170-2180 MHz, received three new bids in the 15th round.

Analysts at Jefferies tracked the progress of AWS-3 bids so far, citing the FCC and Jefferies research. The firm said individual blocks may not be included in the legend.

"Through 15 rounds of bidding, the 50 MHz of paired spectrum has raised $16.25 billion, or $1.04/MHz-POP," New Street research analyst Jonathan Chaplin wrote in a research note. "AT&T and Verizon will likely both go after a 10x10 MHz pair in all of the critical markets, which means the J-Block (10x10 MHz) and H-Block (the middle 5x5 MHz) are the critical blocks. This is where bidding has been most intense, with prices reaching $1.12 and $1.11 respectively."

"The remaining two 5x5 MHz blocks have reached $1.05 (I-Block) and $0.79 (G-Block). The G-Block is likely seeing lower prices because the licenses are broken up into CMAs (smaller markets) rather than EAs (larger markets)," Chaplin continued. "Prices have been rising an average of 18% per round. If bidding continues at this pace through four rounds tomorrow, the average for paired spectrum would be closing in on $2, for a total auction value of $31 billion. There has been little activity on the unpaired blocks with prices at $0.04/MHz-POP on average."

Analysts at J.P. Morgan, including Philip Cusick, agreed with those prices and noted that paired spectrum overall is currently trading at an average of $1.04 per MHz-POP. The J.P. Morgan analysts said the rising prices are bad news for AT&T and Verizon especially, but also potentially for T-Mobile and U.S. Cellular (NYSE:USM) as well.

"We believe that T-Mobile's plan had been to back off as prices rose so its overall spend may not be too much, while we believe [U.S. Cellular] is more determined and could spend more than the $150-250m we expected (10 MHz in St Louis is already running ~$1.00/pop and Milwaukee ~$0.70/pop)," they added. "We believe the high prices reflect carriers need for more capacity long term, which is positive for the tower" companies.

BTIG analyst Walter Piecyk said prices for paired spectrum rose quickly on Tuesday, jumping around 10 cents per MHz-POP per round--an extraordinary rate, he said.

While it's unclear which company is bidding for what, TMF Associate analyst Tim Farrar has made some educated guesses. He indicated that he thinks Dish is actively bidding up the prices on the paired spectrum.

"By now it would have been expected that the three operators would sort themselves out and bid on a self-selected subset of licenses (e.g. AT&T for 20MHz in H+I, Verizon for 20MHz in J and T-Mobile moving to the smaller CMA G-Block license as it did successfully in the AWS-1 auction in 2006)," Farrar wrote in a blog post. "However, it appears that this has all been disrupted by Dish's desire to drive up the price. Dish has presumably concluded, logically, that the major operators will have to buy the New York and LA licenses (plus a few other places such as Chicago, Washington, Boston, San Francisco and Dallas) whatever the cost, so has been bidding simultaneously across all of the main licenses in these cities."

Farrar noted that Dish is part of three separate bidding entities: American AWS-3 Wireless I, Northstar Wireless and SNR Wireless LicenseCo. "Given Ergen's interest in pushing up the price that the operators have to pay, it would not be in the least surprising if all three have been bidding simultaneously against one another for all of these licenses," he wrote. "The resulting higher level of bidding activity would potentially sway the decisions of AT&T, Verizon and T-Mobile, making them think they face more competition from each other than is actually the case, and thereby persuading them to bid more than they originally expected. After all, if AT&T thinks Verizon wants all 50MHz and Verizon thinks the same about AT&T, they are both likely to bid more aggressively, since both will think they had underestimated how valuable the spectrum is."

Dish could have "instructed each bidding consortium to cease bidding at the same level, minimizing the risk that it would be stuck with licenses it didn't actually want," Farrar said, noting that would not require coordination but merely setting the same limit.

Farrar told FierceWireless he expects a sharp drop in bidding activity on the paired spectrum very soon, and for Dish to then bid on the 1695-1710 MHz band. That spectrum is situated close to spectrum controlled by bankrupt wireless firm LightSquared, which Dish Chairman Charlie Ergen is looking to gain a controlling interest in through a bankruptcy court process. Harbinger Capital Partners, the hedge fund that controls LightSquared, has argued that 20 MHz of uplink spectrum LightSquared controls is worth billions, so Dish would likely want the final price for the 1695-1710 MHz band to be not much higher than the $580 million reserve price, thereby undermining Harbinger's claim.

The analysts at J.P Morgan expect Dish to be the only real bidder for the unpaired 1695-1710 MHZ band, "ultimately securing them at around the reserve price, while dabbling in various larger cities in order to drive the price up for the others." They expect T-Mobile and smaller regional carriers to mainly be bidding on the 5x5MHz G-Block that has been allocated into 734 CMA licenses as opposed the other blocks that have been allocated into the 176, larger EA licenses.

"If this is actually what is happening, then I'd expect criticism of how the FCC has enabled Dish to game the system (by participating in multiple consortia), just like there was criticism of their decision to auction off the H-Block earlier this year in what some likened to a 'retail sale' to Dish," Farrar wrote. "However, the result will be the opposite to the H-Block, which only just reached the reserve price, because in this case the auction revenue will be significantly higher than expected. Nevertheless, I'd expect mobile operators to be even less enamored of Dish than they were already, because Ergen will have just cost them billions of dollars they didn't want to spend, just like he cost Masa Son billions of dollars by forcing him to raise the price that SoftBank paid for Sprint and Clearwire last year."

Farrar said that the longer the bidding goes on, the more potential there is for AT&T and Verizon to call Dish's bluff. The problem, Farrar said, is that if AT&T and Verizon have been bidding for licenses in smaller markets, will they have enough money to pay for licenses in New York, Los Angeles and other big markets? If Dish wins them, Dish might want to sell them to other carriers, but only if it gets a guarantee that AWS-3 spectrum will be interoperable with Dish's existing and nearby AWS-4 spectrum holdings.

Dish's 40 MHz of AWS-4 spectrum runs from 2000-2020 MHz (for the uplink) and 2180-2200 MHz (for the downlink). Dish asked the FCC to let it use the 2000-2020 MHz band for downlink operations instead of uplink as a condition for agreeing to bid the $1.56 billion reserve price in the H Block auction.

Either way, Farrar said, Dish could come out a winner. "Either they [Verizon and AT&T] leave him with the licenses and he can demand interoperability," he said. "Or they pay through the nose to acquire the licenses and he can say, well now my spectrum is worth even more."

For more:
- see this TMF Associates blog post
- see this FCC page

Special Report: AWS-3 spectrum auction primer: What you need to know

Related Articles:
AWS-3 auction nets $4.7B in bids over 2 days, but analysts say prices will rise over time
First round of FCC's AWS-3 auction draws $1.77B in bids, nearly 17% of total reserve price
FCC allows 70 companies - including AT&T, Verizon, T-Mobile and Dish - to bid in AWS-3 auction
AT&T, Verizon, T-Mobile, Dish and smaller carriers line up for AWS-3 auction
AWS-3 auction: DoD pledges to enable greater access to shared spectrum

Article updated Nov. 19 at 10:30 a.m. Eastern Time with additional information and analysis.