In the wake of the AT&T/T-Mobile bombshell and the CTIA wireless industry confab, the US telecommunications industry teems with controversy. The industry is pleading for new spectrum. The FCC is wrestling with Congress to gain approval for incentive auctions. AT&T faces a minefield in gaining approval for its merger, which may hinge on a resolution of the spectrum stalemate. Meanwhile, everybody hates Sprint. We believe that the twin negotiations over spectrum and deal approval are linked and will have far reaching implications for the entire industry.
Yes, we need more spectrum. There are three ways to increase wireless capacity. The first is to upgrade technology – 4G carries more data than 3G. The second is to increase the number of cell sites – one busy cell can be split into two less busy cells. The third is to add more spectrum. Obviously, operators are upgrading to 4G, but note that this also requires spectrum, as the existing bands are already in heavy use for 3G. Splitting cells is also happening, but gets to be expensive, particularly if new towers must be added to the network. New spectrum makes it much easier and cheaper for carriers to roll out wireless broadband capacity, while drawing data traffic off of 3G networks now clogged to capacity. While we acknowledge the pressing need for more spectrum, we also note that network utilization is measured by the performance in the busiest cells at the busiest times of the day. Wireless networks typically have ample capacity away from the most crowded locations and during off hours.
Congressional action on spectrum is coming sooner rather than later. The FCC has strongly advocated incentive auctions, which would pay television broadcasters a portion of proceeds to induce them to voluntarily surrender their spectrum rights and circumvent legal and operational delays. While the WSJ recently opined that broadcasters should simply be granted rights to sell their spectrum directly, this would greatly diminish its value as it would not be sold in the contiguous blocks needed by wireless carriers. Two separate bills have been introduced to the Senate proposing to grant the FCC authority to conduct these auctions. Senator Warner’s (D-VA) bill turns the details to the FCC in a brief 4 pages, while Senators Kerry (D-MA) and Snowe (R-ME) offer 51 pages of instructions, but both would enable the FCC to begin the auction process as soon as early 2012. Not so Rep. Barrow’s (D-GA) bill in the House, which would delay any auction until after an exhaustive broadband spectrum inventory report has been completed and made public for comment – likely adding 6 months or more. Given the election timetable, proponents of the FCC proposal will push to debate soon, with the aim to enact legislation well before year end.
The FCC can tie merger approval to action on spectrum. The contentious political climate would suggest that legislation noted as a priority in President Obama’s State of the Union address could become subject to partisan delay tactics. Interestingly, the AT&T merger may break the ice. Given that the combined entity would control nearly half of the commercial spectrum below 2 GHz, the FCC would likely block the reassignment of the T-Mobile spectrum absent pending availability of additional spectrum. We note that the political forces that would oppose incentive auctions of broadcast spectrum would likely favor merger approval. It would seem that a compromise could hasten congressional approval.
The deal is good for Sprint. The consensus has anointed Sprint the primary loser from an AT&T/T-Mobile deal. We see it differently. First, Sprint has already been losing to both AT&T and Verizon for high ARPU users due to its poor coverage – this deal does nothing to change that. However, Sprint can aggressively go after the value segment, churning T-Mobile users fearful of future price hikes under AT&T. Sprint may enjoy the shade of a big, sturdy T/VZ price umbrella. Second, Sprint should be a below market price beneficiary of any spectrum or market divestitures mandated by the DOJ/FCC. Third, we believe approval of the deal would likely come with new spectrum auctions, which would likely be structured to favor broader competition – i.e. discourage leaders AT&T and Verizon and promote smaller competitors like Sprint. Fourth, Sprint shouldn’t have been looking to buy T-Mobile anyway, as the incompatibilities of their networks would have created an expensive and messy transition, like the one Sprint suffered through with Nextel. MetroPCS, US Cellular and Leap Wireless all use the same technology as Sprint and operate in similar frequency bands. Any of them would be a better target than T-Mobile.
The deal is not that bad for tower companies. While AT&T will certainly look to gain efficiencies by consolidating 2G/3G cell sites and eliminating redundant tower leases, this could be mitigated by 4G network deployments. Moreover, new spectrum would enable more aggressive 4G build outs, both by existing competitors Verizon and Sprint, and by relative new comers. Given also that many of AT&T’s tower leases are far from expiration, fears over a near term impact on industry revenues are overdone.