Analysts Skeptical of Spectrum Auction Predictions

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By Lydia Beyoud

Nov. 2 — As the Federal Communications Commission continues to lay the groundwork for the incentive spectrum auction, telecom industry analysts are increasingly skeptical about forecasts of how much of the airwaves will be cleared for wireless users, and how much money the auction will bring in.

That skepticism is fueled by a series of recent statements and financial reports from wireless carriers signaling that there isn't likely to be a land rush for new spectrum licenses from those companies.

Sprint Corp. bowed out of the auction and Verizon Communications Inc. has suggested it would only engage in limited, strategic bidding. T-Mobile U.S. Inc. Chief Financial Officer Braxton Carter said Oct. 27 auction participation would be “transformational” for his company, but analysts told Bloomberg BNA that the carrier could face challenges in obtaining sufficient funding to compete for new spectrum licenses with AT&T Inc. and any other large competitors.

One of the auction's biggest outside boosters fired back Nov. 2 with predictions of a wildly successful auction. In a blog post, Preston Padden, former executive director of the now-defunct Expanding Opportunities for Broadcasters Coalition (EOBC), said the FCC would clear 114 to 126 MHz of spectrum “with very low impairment enriching hundreds of broadcasters who will continue to serve their communities,” while bidding for those licenses will be “so strong that bidders will have to pay dearly to walk away with a piece of coveted 600 MHz spectrum.”

As the head of the EOBC, a group of nearly 100 broadcast stations, Padden helped lead the charge in encouraging broadcaster auction participation. But his boosterism is likely to do little to dispel a growing consensus that the auction is increasingly likely to play out on a smaller scale than initial projections.

“The more you hear from the carriers, the more you have to doubt that the auction is going to draw the kind of giant numbers that we saw” in the agency's last spectrum auction, Craig Moffett, senior research analyst with MoffettNathanson LLC, said.

FCC Chairman Tom Wheeler called the carriers' pre-auction announcements “positioning” and “pre-auction shenanigans” on Oct. 22. He added that the auction's measure of success wouldn't be determined “by dollars and cents. This is keeping score by how much spectrum can you allow the marketplace to repurpose,” he said.

Yet the signals being sent between Wheeler and the carriers appear out of sync, Wireless 20/20 principal consultant Berge Ayvazian told Bloomberg BNA.

Wheeler needs to keep momentum for the auction going by reassuring broadcasters that there will be sufficient interest from carriers in buying their spectrum, but carriers are considering their spectrum needs and the amount they can spend on acquiring new spectrum in light of their current holdings, available capital and the amount of debt they took on to help pay for spectrum they acquired during the AWS-3 spectrum auction, Ayvazian said.

The AWS-3 auction, which ended last January, brought in a record-breaking $41.3 billion in net revenue. That sky-high figure came with major carriers taking on significant debt—a financial reality that certainly will affect the carriers' ability to bid in the incentive auction scheduled to begin March 29, analysts said. AT&T and Verizon, in particular, had to sell off assets to help finance their license payments .

Several analysts said the timing of the auction of broadcasters' 600 megahertz (MHz) band spectrum—prized for its ability to carry signals through walls and other obstacles—comes when carriers are increasingly looking to expand their network capacity, rather than carriage.

“T-Mobile is talking about meeting its needs for $2 billion or so. Verizon is saying they think other spectrum bands are more valuable than low frequency, and so even if AT&T was hell bent on trying to get every last bit of spectrum that they could get—and I think that's pretty unlikely—you'd still have to think that the auction would be a little less hotly contested than the AWS-3, if only because everybody else is spoken for,” Moffett said.

The FCC could reach its projected 80 MHz spectrum clearing target, “but even that's not a slam dunk” given all the other factors at play, Moffett said. “I don't know how ambitious we should be in expecting that the auction draws more than that,” he said.

The many moving parts of the first-of-its-kind incentive auction and issues associated with repurposing broadcasters’ “beachfront” spectrum for wireless don't make for easy comparisons with prior auctions.

“Previously, we could depend on carriers having almost an insatiable appetite for spectrum. I think what we're seeing right now is the direct trade-off being made on capital for spectrum and capital being used for densification,” Ayvazian said.

AT&T is expected to bid in the auction, which reassures broadcasters considering relinquishing their spectrum. But that might not be enough to ensure a successful auction.

“AT&T we know will be there, but they will not overpay, especially if they're the only one there,” Wells Fargo analyst Jennifer Fritzsche said. While other bidders are likely, including smaller carriers and hedge fund investors, they are not likely to be “needle movers,” she said.

Carriers and other bidders for broadcasters' spectrum have until Jan. 28 to file applications to participate in the forward auction. Until then, nothing is set in stone with regard to actual participation, several analysts said.

There is some truth to the notion that the carriers also are positioning themselves, Ayvazian said. “This whole auction depends on there being a lot of pieces in place that aren't fully baked,” he said. “There's a lot of caution among the carriers about making commitments. And they realize that Wall Street's watching them very closely.” Any signal they provide is going to be an indicator of how they're doing financially, and “they don't want to reveal that right now,” he said.

Projected auction revenues differ widely and depend on how many broadcasters choose to relinquish their spectrum. The FCC hasn't released an official clearing target yet, but a goal of clearing at least 84 MHz is generally believed to be the threshold the agency is looking to hit.

The Congressional Budget Office estimated in April that revenues could range between a conservative $10 billion to $40 billion, with an expected mid-range of $25 billion. A June report commissioned by Padden's former coalition said net auction proceeds could range far higher, perhaps up to $84 billion, with a low estimate of $35 billion.

Will Cable Step Up?

If the auction is to bring in anywhere near that amount, many more deep-pocketed bidders will need to participate, in addition to incumbent carriers. The wild card in the auction is the level of cable company participation. Cable executives have been vague in recent statements.

Comcast Corp. CEO Brian L. Roberts was brief on the subject during an Oct. 27 quarterly earnings call, during which he said the cable giant recognized wireless as “an important area for consumers and how they are in the future and today,” just before underscoring the success of its Wi-Fi network.

However, the Comcast announcement that the company would invoke a three-year-old agreement with Verizon to operate as a mobile virtual network operator (MVNO) has sparked more speculation that the cable and Wi-Fi company could be a major auction contender .

“Comcast's exercise of its contract option is likely the first domino to fall in a series,” Moffett said in an Oct. 22 e-mail.

The spectrum broadcasters have to offer could be of great benefit to a cable company looking to expand its network coverage to places where Wi-Fi doesn't reach, Moffett told Bloomberg BNA. “It's now easier to envision a scenario where they try to build a low frequency high canopy” for areas without Wi-Fi, but at this point they're more likely to focus on what would be primarily a Wi-Fi first mobile network, he said.

Charter Communications Inc. CEO Thomas M. Rutledge provided slightly stronger signals of auction participation Oct. 29, saying his company was “studying” and “interested” in the auction and opportunities in being in the mobile business.

However, he tapped the brakes on any stronger indications with the statement that the company is in “a very awkward situation given the pendency of our deal to be able to participate in that, but we are exploring it,” referring to the ongoing merger review of the Bright House Networks-Charter-Time Warner Cable Inc. transaction.

Time Warner Cable (TWC) made its own position clear Oct. 29 with a statement that it has no intention of participating in the auction.

“We're going to continue to pursue our strategy of adding mobility to our offerings by continuing to deploy Wi-Fi hotspots,” TWC CEO Robert D. Marcus said during a quarterly earnings conference call.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bna.com

To contact the editor responsible for this story: Keith Perine in Washington at kperine@bna.com

For More Information

Text of Padden's blog post is at http://boulderpreston.com/2015/11/01/some-boulder-thinking-about-the-600-mhz-auction/.