The FCC on Tuesday published its final rules for next year's incentive auction of 600 MHz broadcast TV spectrum. Not including the statements of the commissioners, the agency's rules for the auction total 143 pages, and no doubt wireless carrier executives and their lawyers and accountants are poring over them to decide whether to participate in what FCC Chairman Tom Wheeler has called an "unprecedented two-sided auction with more moving parts than a Swiss watch."
I think every wireless carrier that wants to be relevant and competitive in 2020 and beyond should participate, especially Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T).
When every carrier that can participate does so, it creates a win-win situation for the entire industry. Most obviously, it will add to carriers' reserves of spectrum coverage and capacity and put the airwaves to a more efficient use. Also, simply participating and competitively bidding will deny spectrum to carriers' competitors. Many carriers, including smaller operators, are likely going to jump into the fray and win spectrum, but one carrier's loss is another's gain. The more carriers that participate, the lower costs will be in the future for network equipment and smartphones.
T-Mobile US (NYSE:TMUS) has so far been the only major carrier to express enthusiasm for the auction. That's not surprising since T-Mobile needs more low-band spectrum to expand its coverage footprint. The company's 700 MHz A Block spectrum only covers 190 million POPs and T-Mobile likely wants 600 MHz airwaves with a larger footprint. Even though T-Mobile lost its fight to expand the FCC's spectrum reserve for smaller carriers from 30 MHz to 40 MHz, it still got the reserve to begin with.
AT&T and Verizon have less incentive, pardon the pun, to participate. First, they already have nationwide 700 MHz holdings they are using for LTE, and they can refarm 850 MHz spectrum to support LTE service instead of voice over time. Second, since they also have customer bases that are twice as large as those of T-Mobile and Sprint (NYSE: S), they also are more interested in mid-band and high-band spectrum. Yet they just secured large troves of mid-band AWS-3 spectrum that they likely will be deploying by 2017 (Verizon's AWS-3 licenses cover 192 million POPs, or around 60 percent of the U.S. population, while AT&T's covers 96 percent of the population).
Verizon and AT&T might also look to lease 2 GHz AWS-4 spectrum from Dish Network (NASDAQ: DISH) in the years ahead. They could just be hoping that small cells, carrier aggregation, LTE-Unlicensed technologies, the 3.5 GHz band and millimeter-wave solutions will help them meet future capacity needs.
However, there is not a lot of licensed spectrum that is not in government users' hands coming to market any time soon. The 600 MHz auction is the last drink of water, so to speak, carriers will get for a while in terms of fresh spectrum.
Even though 600 MHz is not as useful for capacity, by 2019-2020, when carriers start deploying the 600 MHz band, Verizon and AT&T will need it. Consider that 87 percent of Verizon's total data traffic is currently on its LTE network and overall traffic on LTE has essentially doubled in the past year. AT&T CEO Randall Stephenson said in June that AT&T expects data traffic on its network to increase 10x by 2020. When the 600 MHz band becomes useable, I think every carrier is going to be happy to have all the spectrum they can get.
There are two other reasons AT&T and Verizon should participate: T-Mobile CEO John Legere and CTO Neville Ray. Legere and his team have been using their "uncarrier" initiatives to grow T-Mobile's subscriber base at an enormous rate. In the last six quarters T-Mobile has added 12.2 million total customers, including 7 million postpaid subscribers. While T-Mobile is nowhere near Verizon and AT&T in terms of subscribers, I don't think the larger operators want to give T-Mobile any competitive advantages.
Meanwhile, Ray leads one of the best network teams in the industry. The company has been rapidly deploying LTE, always seems to beat its coverage goals and is on track to have near-parity in terms of coverage with 300 million POPs covered with LTE by year-end and most likely before. Yet T-Mobile needs 600 MHz spectrum for more coverage. If I were Verizon and AT&T I would participate in the auction precisely to deny T-Mobile as much 600 MHz spectrum as possible, something T-Mobile has been very concerned about.
Sprint should participate, since it also needs to expand its coverage footprint with low-band spectrum while it works to deploy 2.5 GHz spectrum to boost data capacity and speeds. It's unclear how long it will take for Sprint to fully resolve its 800 MHz rebanding issues, so Sprint likely will want to participate. Smaller carriers that want to enhance their coverage will participate so they can be part of a large ecosystem of network gear and take advantage of economies of scale.
There are reasons for AT&T and Verizon to sit out. The auction will cost a lot. Analysts at New Street Research have noted that the FCC has set a reserve price of $1.25 per MHz-POP, and if 70 MHz is auctioned to carriers, the auction will raise $16 billion across the top 182 million POPs. If more spectrum is auctioned, the gross proceeds must be greater than $16 billion but the price per MHz-POP can come down.
The technical rules also have put AT&T off. The company is concerned that the FCC's rules will allow broadcasters to be assigned into the wireless bands after the auction, which could cause harmful interference; that the cleanest and least impaired spectrum will be set aside for reserve-eligible bidders to bid on, leaving AT&T and Verizon to bid on airwaves with the most interference issues; and that the FCC will allow unlicensed wireless use in the duplex gap, the space between downlink and uplink channels, which can also cause interference.
Also, sitting out, or signaling they will, likely would spook broadcasters into not giving up their spectrum over fears of low bids, which would help deny spectrum to T-Mobile. But having the broadcasters keep more of their spectrum doesn't help any of the carriers.
Sitting out also would deny Verizon and AT&T more spectrum, and in the long term would only strengthen their smaller rivals' hands. No one got everything they wanted out of the FCC's rules, including broadcasters. The FCC is trying to balance numerous competing interests. However, I think it's in every carrier's best interest to show up next year. Carriers will be sorry for years to come if they don't.--Phil
P.S. If you want to hear more about the incentive auction, I was a guest on the Kojo Nnamdi Show on NPR earlier this week, where I discussed the auction alongside Howard Symons, the vice chair of the FCC's Incentive Auction Task Force, and Mike Gravino, the director of the LPTV Spectrum Rights Coalition. The show can be found here.