Sprint Says It Won't Bid for Spectrum It Calls ‘Essential'

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By Tim McElgunn

Sept. 29—Sprint Corp. won't take part in the upcoming U.S. government airwaves auction, saying its spectrum holdings for current and future customers are “sufficient.”

The decision, revealed in a statement released on Saturday, Sept. 26, indicates that the company has decided to invest in maximizing use of its existing spectrum licenses to build out its network, with Chief Executive Officer Marcelo Claure saying in the e-mailed statement. “Sprint has the spectrum it needs to deploy its network architecture of the future.”

What the company apparently lacks, at this time, is the financial means to both improve its network and invest in additional spectrum licenses in the pending auction.

Sprint is carrying a heavy debt load, with about $17 billion coming due through 2020, the estimated date when some portion of 600 MHz spectrum will be cleared and usable for mobile services. And it has significant investment ahead of it to improve network performance—crucial to attracting and retaining more customers. Without that growth, the company's cash flow will be insufficient to keep the network running and pay down its debt.

Does Sprint Need More Spectrum?

Can Sprint be competitive without adding to its spectrum holdings? The company controls licenses covering more spectrum than any of the other large U.S. wireless providers, but lags its peers in deployed capacity and coverage.

Significant portions of Sprint's spectrum holdings are in the mid- and high-frequency ranges, where individual channels can deliver faster speeds, but over relatively limited areas. Because of the spectrum's propagation characteristics, delivering service in those bands requires a high number of cell sites to achieve wide coverage, compared to low-band networks. Sprint lacks spectrum in the lower frequency bands, where radio waves travel further and penetrate buildings more effectively, boosting coverage and saving on capital and operating costs by reducing the number of required cell sites.

Sprint's decision to sit out the next auction contradicts a number of statements by the company in recent years, which have highlighted the critical nature of lower-frequency spectrum like the 600 Mhz tranche, and have called for spectrum to be set aside for competitive carriers—that is, all wireless providers and would-be entrants besides AT&T, Inc. and Verizon Wireless.

In March 2014, Sprint submitted comments to the FCC stating, “Not all spectrum is created equal.” Sprint noted that the propagation characteristics of different bands have a direct competitive effect on carriers, with high-band spectrum requiring higher numbers of cell sites than mid-band spectrum, and significantly more than low-band operations. Sprint said that the disparity in technical performance is reflected in a carrier's operating expenses.

In February 2015, after sitting out the AWS-3 spectrum auction, Sprint submitted additional comments to the FCC that tie low-band spectrum directly to companies' ability to compete in the wireless market

In its filing, Sprint said, “For competitive wireless carriers that currently lack access to competition-enhancing low-band spectrum, the Incentive Auction's success cannot simply be measured by whether the auction is completed. Rather, to such carriers—and to future policymakers charged with ensuring competition in the market for wireless broadband services—the success of the Incentive Auction will be measured by the extent to which it provides these carriers the low-band spectrum essential to sustaining long-term competition, which in turn incents carriers to offer new and innovative services to consumers.”

Not Making Friends at the FCC

Sprint has been among the most vocal proponents of reserving spectrum for some of those smaller competitors, including itself. The company has lobbied heavily for so-called set-asides in each of the last three spectrum auctions and for the upcoming 2016 auction.

Part of the implied understanding between competitive carriers and the FCC is that if the latter would create set-asides, the former would actually show up to bid for them, creating healthy competition for licenses and helping to boost the total revenue brought in by the auction.

As noted, Sprint has now declined to enter three major spectrum auctions, the H block auction, the AWS-3 auction and now the 600 MHz auction, all of which included set-asides. Those decisions have led to harsh words for Sprint at the FCC, both off the record and, in the case of the 600 MHz auction, expressed in a press release issued by FCC commissioner Ajit Pai.

On Sept. 28, Pai issued a statement that said, “Sprint's decision not to participate in the incentive auction highlights the folly of the FCC's attempt to pick winners and losers before the auction begins. It also intensifies doubts about how competitive the bidding will be for set-aside spectrum and whether American taxpayers will receive fair compensation for that scarce public resource. Sprint's announcement only strengthens my belief that the FCC should not have granted a spectrum giveaway in this auction or placed artificial limits on carriers' participation.”

The company is unlikely to find much enthusiasm on the part of the commission for any future proposals, and could encounter outright hostility should it again explore a merger or acquisition to help gain the scale it clearly needs to compete over the long term.

Next Moves?

With the decision made to opt out of the auction, Sprint still needs to find a way to gain control of some low-band spectrum. As it notes in its FCC filings, the characteristics of those bands will provide a necessary competitive tool for wireless carriers. The company may be considering selling some of its 2.5 GHz licenses—which other operators would find useful for filling in coverage and increasing speeds in congested areas—and using the proceeds to try to buy licenses from competitors.

Although company CEO Claure has made it clear that Sprint sees its spectrum holdings as strategic crown jewels and that it has no current plans to sell, it is less clear whether the company would be averse to exchanging some of its high-band spectrum licenses for another operator's low-band spectrum—once it has been cleared. But, given the massive and accelerating demand for wireless capacity, there is no guarantee that Sprint will find a willing counterparty when the time comes. And unless the company manages to improve its free cash flow significantly over the next year or so, it may find itself no longer in a position to drive much of a deal if it does.

To contact the reporter on this story: Tim McElgunn in Cherry Hill, NJ at tmcelgunn@bna.com

To contact the editor responsible for this story: Bob Emeritz at bemeritz@bna.com