After AWS-3: Shifting Realities for Wireless Carriers, Broadcasters and the FCC

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By Tim McElgunn and Lydia Beyoud and Paul Barbagallo

Feb. 17 — In the frenzied weeks following the close of the Federal Communications Commission's record-setting, $44.9 billion AWS-3 spectrum auction, one truth has emerged: The agency does not plan on taking a “pause.”

During the Consumer Electronics Show in January, FCC Commissioners Mignon Clyburn, Jessica Rosenworcel and Ajit Pai all suggested “pausing” the FCC's next auction—the far more controversial sale of broadcast TV airwaves—given the success of AWS-3. Rosenworcel said the FCC should “take a look at incentive auction assumptions and policies, from the values that we will provide to broadcasters returning their spectrum, to interest level of broadcasters, to our closing conditions for the auction, and even the timing of the auction itself.” Pai said a pause would give wireless carriers time to “get their financial houses in order.”

But all signs indicate that FCC Chairman Tom Wheeler will hold the auction in early 2016 as scheduled. At stake is 84 megahertz of 600 MHz spectrum, which the commission will try to reclaim from television stations and then sell to wireless carriers led by Verizon Wireless, AT&T Inc., Sprint Corp., and T-Mobile US Inc., with a portion of the proceeds paid back to the broadcasters. The wireless industry is expecting valuable, low-band spectrum; Congress is expecting between $15 billion and $30 billion for the General Treasury.

According to FCC sources familiar with Wheeler's thinking, while the success of the AWS-3 auction might afford the agency some breathing room from its Capitol Hill critics, the chairman is intent on conducting the auction ahead of the 2016 elections, when the Democrats could lose the White House (and the FCC chairmanship with it) and perhaps even more seats in the Senate and House.

Among Wheeler's concerns, a Republican FCC chairman might seek to adjust the agency's spectrum aggregation limits for both Verizon and AT&T, giving the respective No. 1 and No. 2 U.S. carriers more latitude to bid in the incentive auction. A GOP majority might also try to dial back the amount of unlicensed spectrum made available following the auction, giving the wireless industry more licensed spectrum, which could adversely impact Silicon Valley tech companies like Google Inc., Microsoft Corp., and Facebook Inc. and cable operators including Comcast Corp., Time Warner Cable Inc., Cox Communications, Cablevision Systems Corp., and Bright House Networks, which need unlicensed airwaves for their Wi-Fi networks.

But a key question for the FCC is whether the high premiums paid by the wireless carriers for AWS-3 licenses support an argument for delay. The pressure is now off the FCC to have a wildly successful incentive auction: The agency raised more enough to fund the First Responder Network Authority, or FirstNet, which created by Congress to oversee the building of the public-safety network. The commission also got more spectrum in the hands of the wireless industry.

So why the rush? Will the nation's largest carriers be able to replenish their war chests in time for an early 2016 auction? Is the broadcasters' spectrum still as coveted as it once was?

Verizon and AT&T

Spectrum in the 600 MHz broadcast TV band is desirable for mobile for one simple reason: Signals travel far distances and penetrate walls and windows, meaning wide-area indoor and outdoor coverage with fewer cell sites.

Put another way, the 600 MHz auction is about coverage for blanketing the country with 4G; the AWS-3 auction was about capacity for handling rapid increases in data usage in more congested cities.

Indeed, AT&T's aggressive pursuit of the AWS-3 “J Band” blocks appears to have satisfied the company's near-term capacity needs in many of those markets. The company emerged the top bidder, bagging 251 licenses worth $18.2 billion. (In five of the top markets, AT&T submitted the winning bid for between 40 and 50 percent of available licenses.)

Verizon, meanwhile, was disciplined in pursuing AWS-3 licenses, dropping out early in the bidding for licenses in markets where it already owns plenty of AWS spectrum. That said, the company still bid $10.4 billion.

In the meantime, both operators are selling non-core assets and raising debt to finance their AWS-3 bids. AT&T is looking to sell some data centers worth about $2 billion, while Verizon Communications Inc. is selling a big chunk of its landline telephone assets to Frontier Communications for about $15 billion. After paying for its AWS-3 bids, Verizon will use the remainder—$5 billion—to pay down its debt and also possibly help finance its participation in the FCC's 2016 incentive auction.

So despite seeming to be overleveraged, Verizon and AT&T may be in better financial shape come 2016, when that “beachfront” 600 MHz spectrum will be available. And their participation in the auction will be a key to the ultimate value of that spectrum.

“Coverage spectrum is, if anything, even more scarce than capacity spectrum,” Craig Moffett, a New York-based analyst with MoffettNathanson LLC, told Bloomberg BNA.

“The opposite argument is just as compelling, unfortunately,” he noted. “We've gotten to a point where the need for capacity is greater than the need for coverage. There's actually more demand for mid-band spectrum than there is for low-band spectrum.”

Jennifer Fritzsche, a telecom analyst at Wells Fargo Securities, agreed that the discussion is changing within the wireless industry about spectrum.

“Mid-band and high-band spectrum will be more important for ‘fattening the pipe’ in key markets,” Fritzsche told Bloomberg BNA. “The low-band spectrum may be less important, so if you're removing two key buyers [Verizon and AT&T], that will bring down the market value of the 600 MHz spectrum.”

Fritzsche said the FCC's incentive auction could be more critical for Sprint, which already has an ample amount of high-band spectrum—at 2.5 gigahertz, 800 MHz, and 900 MHz—and by far the smallest tranche of low- and mid-band spectrum of the four nationwide wireless carriers.


Desperately needing coverage spectrum, Sprint is certain to be an active bidder in the incentive auction.

However, even without a hefty bill from the FCC for AWS-3 spectrum, Sprint will be scrambling to pay for any 600 MHz bids.

At year-end 2014, Sprint had liquidity of just $7.5 billion. Sprint reported a loss of $3.12 billion for the full year, and free cash flow was down from $1.98 billion in 2013 to $1.68 billion in 2014.

It's worth noting that Sprint's parent company, Japan's SoftBank Corp., does not appear committed to investing in acquiring more spectrum, even coverage spectrum. But Sprint's existing holdings may provide a solution: During its year-end earnings call, SoftBank Chairman Mayayoshi Son said that Sprint could sell some of its spectrum to help finance its ongoing efforts to stave off competition from both Verizon and AT&T and rapidly growing number No. 4 carrier, T-Mobile.

By selling or leasing out high-band spectrum—particularly Clearwire's 2.5 GHz spectrum, however, Sprint would see a decent return on its original investments.

Sprint originally paid $0.30 per MHz-Pop (the standard unit for measuring spectrum prices) for Clearwire's spectrum. The AWS-3 auction yielded an average price of $2.71 per MHz-Pop (However, that average includes unpaired spectrum, commanding as little as $0.51 per MHz-Pop and paired spectrum in the most competitive markets reaching $2.92 per MHz-Pop).

Even if the Sprint's 2.5 GHz licenses sell at a discount to AWS-3 licenses, the company should be able to double its investment without impacting its own network plans or important wholesale revenue stream; Sprint increased its wholesale net adds from 38,000 customers to 53,000 in 2014 and reported a 178 percent increase in wholesale revenue for the year to $50 million.

The income from the high-band spectrum sales could then be used to bid aggressively in the 600 MHz auction.


Looking ahead to the FCC's incentive auction, T-Mobile finds itself in a similar situation.

In the AWS-3 auction, T-Mobile bid $1.8 billion, picking up licenses to fill in its extensive mid-band spectrum holdings, mostly in second- and third-tier markets. But, like Sprint, the company still needs to add significantly to its low-band spectrum footprint to improve its 4G coverage. Despite recent strong additions, T-Mobile's reputation for poor coverage continues to limit the company's ability to win, and more importantly keep, new customers.

Also like Sprint, T-Mobile is owned by a foreign-based telecom giant. And recent public friction between Deutsche Telekom AG and T-Mobile's chief executive John Legere seems to indicate that T-Mobile's parent will be less patient than Sprint's. Whether that impacts the No. 4 carrier's ability to bid for 600 MHz spectrum remains to be seen, however.


Dish Network Corp. did not win any licenses in AWS-3 auction, but holds majority ownership stakes in SNR Wireless LicenseCo and Northstar Wireless, which had a net bid amount of $10 billion and were especially aggressive in L.A., NYC, and Chicago.

Working with Dish, the companies used the FCC's pro-small-business Designated Entity (DE) program to claim more than $3 billion in discounts in the auction, drawing the ire of public-interest groups and at least one FCC commissioner in the process.

That aside, however, Dish is now the biggest wild card for the FCC's incentive auction.

By all accounts, Dish is sitting on the richest untapped wireless spectrum reserves in the country. And the company has yet to make its plans for that spectrum known. The options include building a mobile broadband network from scratch; partnering with or buying another carrier to build a network; selling or leasing the spectrum; or simply holding onto the licenses as they appreciate in value.

For starters, building and operating a nationwide network would require billions of dollars of infrastructure investment to reach the FCC-required 40 percent of the population covered by its “S Band” licenses population by the end of 2017. At the corporate level, Dish does not have existing expertise in wireless infrastructure deployments and would have to build a new organization from scratch. Similarly, with the 2017 deadline looming, any negotiations on partnering with or buying another carrier to build such a network would have had to be long underway by now.

Selling or leasing the spectrum creates further complication.

Adding the company's spectrum holdings to Verizon's, AT&T's, or even Sprint's would push all past the FCC's spectrum limits in many markets. They all would need to divest licenses—many covering top markets—which makes the Dish license portfolio less valuable.

Adding Dish's spectrum holdings to T-Mobile's portfolios would still leave the No. 4 without much low-band spectrum, which they badly need for 4G coverage. And it would not bring with it any paying subscribers to help offset the expense.

Lastly, holding onto the S-band licenses as they appreciate in value has an FCC-set expiration date, putting pressure on Dish to reach an agreement quickly—and at a lower price. That, and the planned 2016 auction adding substantially to the overall amount of spectrum available to the wireless industry, might limit the appreciation of Dish's assets.

Still, Dish Chairman Charlie Ergen has a well-earned reputation as a winning gambler who sees many moves ahead.

The Broadcasters

On Feb. 6, days after the FCC announced the results of the AWS-3 auction, the agency released new opening bid estimates for spectrum blocks now controlled by broadcast TV stations.

In many cases, the new proposed opening values for spectrum in 210 markets nationwide are significantly higher than those issued in October as part of the FCC's Greenhill book.

Under the revised formula, a broadcaster that fully relinquishes its spectrum in Los Angeles could receive an estimated maximum opening bid of $510 million, with a median opening bid for that market at $410 million. A New York City broadcaster could receive a maximum of $460 million, with the median price for the market set at $380 million. Broadcasters in market areas below the top 30 could still receive maximum opening bids totaling hundreds of millions, such as Milwaukee, with a maximum opening bid of $170 million and median bid of $160 million.

The FCC's revised Greenhill book also includes the $2.53 price per MHz/population (POP) figure that wireless carriers bid in the AWS-3 spectrum auction as evidence of the increasing value of spectrum for mobile data.

Preston Padden, executive director of the Expanding Opportunities for Broadcasters Coalition, a group representing broadcasters interested in selling their spectrum to the FCC, said the AWS-3 results are an “extremely bullish sign for the 600 MHz auction.”

“We absolutely want the FCC to stick to the current schedule and hold this auction in early 2016,” Padden told Bloomberg BNA.

Padden said his group on Feb. 20 will file with the FCC an “exhaustive and authoritative” financial analysis that will show that wireless carriers have the “incentive and access” to bid aggressively in a January 2016 auction.

In a Feb. 4 ex parte filing, Padden's group asked the agency to revise the formula for calculating starting prices for TV stations, arguing that figures in the FCC's first Greenhill book were set before the AWS-3 auction “went through the roof.”

The Expanding Opportunities for Broadcasters Coalition has also been pressing the commission to change the incentive auction's secret bidding procedures to allow broadcasters to see—in real time—who is bidding.

“All of that informs your bidding,” Padden said. “We'd like broadcasters to have access to that information.”

For broadcasters that do not plan on selling their spectrum back to the FCC, a delay in holding the incentive auction could allow for more time to work out the complexities with “repacking.”

Said one broadcast attorney, the extra time would give the FCC time to work out the “re-banding controversies.”

In the “reverse” part of the incentive auction, once all participating broadcasters give up their spectrum, those remaining will be “repacked” so they could still remain on the air. Then the FCC will conduct the “forward” side, in which wireless carriers will bid on what was given up.

But while the National Association of Broadcasters is in court with the FCC over the rules for the incentive auction, the group is not advocating for a pause.

“If the auction drags on, it will be a serious regulatory overhang for broadcasting,” Rick Kaplan, NAB's ýgeneral counsel and executive vice president for legal and regulatory affairs, told Bloomberg BNA. “Getting the rules right: That might be a good reason for a pause, but if it's just waiting for the carriers' financial picture to become clearer, that only further hurts broadcasters.”

The association sued the FCC last August, claiming that the agency's rules would diminish broadcasters' coverage areas and could result in a loss in viewership.

The NAB more recently criticized the FCC's use of “optimization” methodology for shifting broadcasters around in the band after they surrender their spectrum.

“If the commission remains intent on conducting optimization only after the auction, it will have greatly limited its ability to apply optimization factors, as it will have already backed itself into a sub-optimal corner,” Patrick McFadden, NAB's vice president of spectrum policy, wrote in a Dec. 5, 2014 ex parte filing. “Even the best optimization techniques can do little to help at that point in the auction—it is the equivalent of calculating the shortest driving distance between Washington and Florida only after one has already driven to Chicago.”

For low-power TV stations, which are prohibited by Congress from relinquishing their spectrum for an FCC incentive auction, the hugely successful AWS-3 auction presents an opportunity worth fighting for.

Mike Gravino, director of the LPTV Spectrum Rights Coalition, said he plans to file suit to force low-power TV station participation.

“Between channels 51 and 38, in all 210 TV markets, there's 2,650 or so low-power TV licenses and permits, including translators. That represents 15,900 MHz of spectrum which is 90 percent of spectrum between 51 and 38,” Gravino explained, speaking at the Spectrum 2025 conference in Washington Feb. 5. “The AWS-3 auction, to us, said ‘our spectrum—the 15,900 MHz—is now worth some $50 billion dollars.' As far as low-power is concerned, we're worth $50 billion, even though Congress isn't allowing us to monetize that. We want a taste of that pie.”

Commenting on the issue at the same conference, PBS’ Eric Wolf said that while AWS-3 demonstrated that the demand for spectrum is increasing, it's still not clear whether that makes the auction “more doable or less doable.”

“There isn't a one-to-one link [between spectrum released by broadcasters and demand from cellcos],” he said. “The dollars flowing in may be for spectrum in New York; there may not be enough people who sell spectrum in New York.”

To contact the reporters on this story: Tim McElgunn in Cherry Hill, NJ at; Lydia Beyoud in Washington at; and

To contact the editor responsible for this story: Bob Emeritz at