Verizon Wireless (NYSE: VZ) entered the AWS-3 spectrum auction with at least 40 MHz of AWS airwaves covering around 70 percent of the U.S. population, but ended the auction with that figure around 95 percent. According to a senior Verizon executive, Verizon now has a combination of at least 40 MHz of AWS-1 or AWS-3 spectrum in 92 of the top 100 U.S. markets, which will help the carrier meet capacity needs as more traffic shifts to its LTE network.
Verizon won a total of 181 licenses in the AWS-3 auction covering 192 million POPs, or around 60 percent of the population. The company spent $10.4 billion in the auction, the second most after AT&T (NYSE: T), which spent $18.2 billion to acquire AWS-3 spectrum covering 96 percent of the population. (Dish Network's (NASDAQ: DISH) bidding entities bid a total of $13.3 billion but that figure will get knocked down to $10 billion if the FCC approves a 25 percent discount for the entities.)
In a conference call with investors, Tony Melone, Verizon Communications' executive vice president of network, said that "entering the auction there was no markets where we felt compelled to acquire spectrum, irrespective of the price." Verizon did not feel pressure to aggressively bid for spectrum because it already had at least 40 MHz of AWS-1 spectrum in many U.S. markets, especially in the Eastern United States, Melone said.
However, Verizon did want to acquire AWS-3 spectrum in most markets, especially because it will be treated as a common band with AWS-1 spectrum. In New York City, Verizon had 127 MHz of total spectrum going into the auction, but only 97 MHz in markets like Chicago, Philadelphia and San Francisco, Melone said, which made acquiring spectrum in those markets more of an imperative. Verizon moved to acquire spectrum in markets like Baltimore, Los Angeles, San Diego and San Francisco while forgoing AWS-3 spectrum in New York and Boston where it already had a strong position, Melone said.
Verizon said it significantly improved its spectrum depth due to the AWS-3 auction. Click here for the company's full PDF presentation.
Verizon's overriding objective for the AWS-3 auction was to acquire enough spectrum to give the company a minimum of 40 MHz of AWS spectrum in "most markets," Melone said, adding that Verizon wanted to achieve contiguity between the AWS-1 F Block and the paired AWS-3 G Block, which runs from 1755-1760 MHz and 2155-2160 MHz.
In total, Verizon now has at least 60 MHz of mid-band spectrum covering 84 percent of the population, according to the company, compared to 55 percent of the population before the auction. Verizon plans to refarm its existing PCS spectrum holdings for LTE service, Melone said.
Last year Verizon started refarming PCS spectrum for LTE in New York, Cleveland and around 10 more markets. Verizon plans to refarm its PCS spectrum for LTE as usage decreases on its 3G CDMA network; at the end of the fourth quarter of 2014, Verizon said 84 percent of its total wireless data traffic was riding on its LTE network.
Melone said Verizon plans to do more PCS refarming for LTE service in 2015 and that "over the next several we'll do a considerable amount" of LTE over PCS spectrum. Verizon will then also look to refarm its 850 MHz spectrum for LTE, he said, likely starting as a 5x5 MHz chunk, he added. That will likely come as more customers transition to Voice over LTE. Verizon will also be able to use carrier aggregation to meld together disparate spectrum bands for wider channels and higher speeds.
"Carrier aggregation gives us tremendous flexibility in leveraging our spectrum assets," Melone said.
Interestingly, Melone added that small cell deployments will become an "increasingly cost-effective" way for Verizon to add capacity. He also said Verizon is going to work on using LTE Advanced techniques to improve performance at the cell edge. Melone also hinted at interference mitigation techniques Verizon will use, likely a reference to enhanced inter-cell interference coordination (eICIC), which allows small cells and big macrocells to coexist in the same spectrum and talk to each other. Melone said all of those elements will drive improvements in bits per hertz and cost per bit.
As Wells Fargo analyst Jennifer Fritzsche noted in a research note, on the call Verizon Communications CFO Fran Shammo noted that Verizon's 2015 capital expenditure outlook of $17.5 billion $18.0 billion was in anticipation (and inclusive) of network densification efforts the carrier will undertake in across certain markets. He said he expects Verizon's capex to be flat over the next few years as higher wireless spending offsets lower wireline spending, with capex as percentage of revenue improving over time.
Melone also touched on LTE Unlicensed technology, otherwise known as License Assisted Access. Melone noted that Verizon is active in the standards process for LAA and likely will deploy a "pre-standard" version of the technology in the "not too distant future." Such technology would work in the 5 GHz band and will likely be centrally-scheduled, which Wi-Fi proponents fear could favor LTE more than Wi-Fi in unlicensed spectrum. Melone said it would be used for supplemental downlink.
Finally, there has been speculation that Sprint (NYSE: S) might sell some of its excess 2.5 GHz spectrum to other carriers. Melone did not rule out Verizon having an interest in those airwaves. He said that "provided the spectrum is a fairly common industry band and we have significant spectrum" that can be deployed fairly ubiquitously, "it's certainly a spectrum we can consider."
There has also been some speculation that Dish might lease some of its own AWS-3 spectrum to Verizon or another carrier. Melone said Verizon would be open to leasing spectrum if the deal was structured in the right way and the economics were geared toward maintaining control over the spectrum over the long term.
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