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Wireless Providers Bid on FCC Spectrum

A massive, slow-motion FCC auction begun in March may take years to complete, and it is highly likely to affect your cell phone service.

In the Federal Communications Commission’s Broadcast Incentive Auction, TV broadcasters are selling portions of their licensed airwaves to wireless service providers. The FCC acts as a middleman to determine prices and organize the transition. A process called “reverse bidding,” by companies such as Verizon Communications, T-Mobile, AT&T and Comcast began May 31.

Spectrum bought during the current auction might not be deployed until 2020. But it will play a major role as carriers develop their strategies for the next decade, helping them meet growing customer demand and ushering in the age of 5G wireless.

The FCC’s current auction is the latest attempt to meet President Barack Obama’s memorandum from six years ago to free up 500 megahertz of new spectrum for wireless communications by 2020. Not counting the current auction, the government has so far failed to reach half of that amount.

Avoiding a Data Jam

Wireless Providers Bid on FCC Spectrum

New spectrum is critical, because Americans have developed an insatiable appetite for data. They consumed more than twice the amount of wireless data in 2015 that they did in 2014. And the 9.65 trillion megabytes of data used last year was three times what they used in 2013, according to mobile industry trade group CTIA.

Another examination of mobile traffic, by Cisco Systems, suggests mobile data globally will reach 30.6 “exabytes” per month by 2020, the equivalent of 7.64 billion DVDs each month, up from 3.7 exabytes per month in 2015.

This massive consumption of data traffic is why wireless industry advocates are clamoring for more wireless spectrum — which carries signals to and from smartphones and other mobile devices.
The wireless carriers, led by Verizon, AT&T, T-Mobile and Sprint, currently have enough spectrum for near-term expansion needs. Down the road, consumers heartily embracing smartphones and tablets will overrun that capacity. The Internet of Things — the process of connecting cars, appliances, home energy systems, etc. via the internet — is also expected to drive added demand for capacity.

A $50 Billion Slice of Air

The current FCC auction will free up an estimated 126 megahertz of spectrum, currently owned by local TV broadcasters, in the highly sought-after low-band spectrum. This spectrum, in the 600 megahertz area, is coveted due to its ability to travel longer distances and penetrate buildings better than higher-band spectrum.

The current FCC auction will free up an estimated 126 megahertz of spectrum

In 2008, the FCC auctioned spectrum in the 700 megahertz range, which raised $19 billion. The most recent auction, which ended in January 2015, raised a record $45 billion, shattering expectations and marking the highest amount yet in the wireless industry’s appetite for more spectrum.

AT&T and T-Mobile are each expected to bid about $10 billion, and Verizon may bid $5 billion, in the current auction. U.S. Cellular is also in the running. Notably absent from the bidding is Sprint.

Comcast is also registered to bid, as are a number of regional players in cable and wireless. All told, the FCC says 104 companies or organizations could participate.

Estimates vary widely as to how much the auction will raise. High-end projections exceed $50 billion, though it could go higher as bidding is expected to be aggressive. (Though, technically, reverse bidding is generally a process of prices moving lower.) A portion of proceeds will go to broadcasters, and the rest will go to the federal government.

Brawling for New Subscribers

The new spectrum will help carriers chart out their long-term strategies. But among the current challenges they face is finding a balance between cutting prices to attract new customers and investing in faster, more reliable network infrastructure to keep them.

“All the carriers are looking at various ways to increase revenue, as net customer growth is likely to be flat or lower in next few years,” said Bill Menezes, analyst at research firm Gartner.
It’s become a very promotion-driven environment, with a lot of customers shuffling between carriers, Menezes said. T-Mobile, which raked in more than $32 billion in 2015 revenue but is still only a fraction the size of Verizon or AT&T, has been the biggest beneficiary in the last few years with its innovative offerings and the aggressive expansion of its cellular network.

“T-Mobile continues to expand the reach of its network, with a footprint that is now almost comparable to AT&T and Verizon,” said Menezes.

Sprint made its decision to not participate in the auction in September, with company CEO Marcelo Claure saying Sprint has the spectrum it needs to deploy its network architecture of the future.

“When Sprint says they don’t need spectrum from the current auction, that’s not true,” said Berge Ayvazian, wireless industry analyst at research and consulting firm Wireless 20/20. “What they’re really saying is we can’t afford it right now. They’ll have to rely on the spectrum they have now and hope they won’t lose subscribers.”

Sprint has made impressive progress in cutting costs, analysts say, as it navigates difficult financial waters. But questions remain about whether it can continue to attract subscribers, trim its budget and maintain its network at the same time. Cost-cutting could decrease marketing budgets and lead to slower customer gains. That raises concerns as to whether it can keep pace with its three larger rivals.

“For us, the issue with Sprint remains the uncertainty on the company’s ability to grow the subscriber base and return to revenue growth on a sustainable basis, while also aggressively cutting costs (including marketing, making it harder to attract gross adds),” said a research note from UBS analyst John Hodulik.

Though Sprint has made progress on its most pressing issues of returning to postpaid sub growth and improving liquidity, more work needs to be done.

“While the company is laying the groundwork to become a more viable competitor, execution risk is high amid aggressive cost-cutting,” Hodulik wrote.

Revenue at Sprint has fallen for four straight quarters, year over year. The company is majority-owned by Japan-based Softbank.

T-Mobile Rising in Mature Market

Sprint’s losses deepened in its fiscal fourth quarter, reported May 3, but it added postpaid phone subscribers for the third straight quarter. “Postpaid” refers to customers who are billed monthly and tend to spend more than prepaid customers, who buy minutes as needed.

T-Mobile added the most subscribers in the group during its first quarter, reported April 26, with 2.2 million net additions. AT&T followed with 1.7 million newbies, vs. 1.3 million for Verizon and 445,000 for Sprint. Verizon has the most subscribers overall, followed by AT&T, T-Mobile and Sprint.

“Similar to the December quarter, the March quarter for wireless carriers was characterized by a lackluster upgrade cycle and moderate promotional activity,” wrote Nomura analyst Jeffrey Kvaal.

Attracting subscribers is expected to remain increasingly difficult, even though usage demand is high.

“We’re in period now where the market is quite mature,” said Ayvazian. “Smartphones are already very smart, and there’s not a lot of new technology or services driving demand, and we’ve seen a slowdown in smartphone buying and upgrading.”

But that hasn’t slowed the momentum of T-Mobile. Controlled by Germany-based Deutsche Telekom, T-Mobile has been gaining subscriber market share vs. Verizon, AT&T and Sprint for more than two years. Its first-quarter earnings topped elevated expectations, as it raised 2016 guidance across the board.

“As the other carriers continue to focus on profitability over chasing net adds, T-Mobile should continue to capture the lion’s share of net adds into the second half,” wrote Kvaal.
SOURCE: Investor’s Business Daily

SOURCE: Investor’s Business Daily