Spectrum is the buzz word in the U.S. wireless industry. Growing data demand and rising popularity of smartphones and tablets has put huge pressure on telecom carriers who need more airwaves. Understanding the pressing need, the proposal of an incentive auction was introduced in 2010, and the Federal Communications Commission started planning the auction on a more serious scale. The auction is scheduled for mid next year.
FCC realized that the demand for spectrum would continue to increase dramatically as national carrier Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) complain that their existing spectrum holding isn’t enough to manage the burgeoning need. As a solution the regulator came up with the idea of transferring unused spectrum from television operators to the wireless carriers.
- Warning! GuruFocus has detected 7 Warning Signs with T. Click here to check it out.
- T 15-Year Financial Data
- The intrinsic value of T
- Peter Lynch Chart of T
Now why would an operator relinquish its airwaves? There’s no compulsion. The entire process is voluntarily parting with the unused spectrum. Obviously they would be rewarded for their act as the FCC would compensate them by giving a part of the proceeds collected from the auction. But the solution to the spectrum fight doesn’t end here.
The two largest U.S. wireless operators, Verizon and AT&T, have been accused on several occasion of possessing undue advantage by virtue of their position. They have the required resources and are seated on piles of cash that makes their task much easier at the auction, leaving Sprint and T-Mobile helpless. The two biggies have deep pockets and could easily bid higher during the auction, while smaller carriers would be more of spectators than participants unless FCC crafts some restriction.
Keeping this in mind, the FCC is contemplating to set some rules that could restrict the purchase of spectrum by a carrier. This means that both Verizon and AT&T might have to face a ceiling with respect to the spectrum they bid for.
AT&T’s “Untenable and Unacceptable Position”
The second largest U.S. mobile operator has expressed its annoyance and has giving a warning that it might rethink on whether or not it would participate in the incentive auction of the 600MHz spectrum. The FCC is trying to keep rules that would restrict the bidding process, and leave room for smaller players too. A threshold would be determined, and in case the bidding crosses the permitted limit in a particular market, the FCC would keep away 30MHz in that market as a reserve.
So who would bid for those reserves used? Telecom majors who have one-third of low band frequency in that particular market would be barred from participating in the auction of the 30MHz spectrum. However, deciding the threshold or the limit is a difficult task. And as pointed out by AT&T vice president Joan Marsh, FCC wouldn’t get good prices from smaller players eligible to participate in the auction. They would bid for a much lower rate given their finances, and FCC would have to part of with the most priced and coveted spectrum at discounted rates.
AT&T has never been a spoil sport in any of the big spectrum auctions. But if its position is limited or restricted, the Dallas carrier would continue its spectrum hunt, and weigh other options that could give better value for its capital contribution.
At this juncture, when Sprint and T-Mobile are gathering resources to intensify competition, it’s crucial for both Verizon and AT&T to continue to strengthen their LTE coverage to maintain their strong lead. Marsh wrote that if such demarcations or restrictions are made, smaller carriers would virtually have no competition from bigger player. Not just this, they would be able to get most valued spectrum at petty prices.
It’s hard to believe that AT&T might actually not participate in the process if it considers the restriction to be unreasonable and something that’s not doing justice to the bigger players. If this is the case, then I’d say that AT&T needs to be more watchful regarding its future. The incentive spectrum auction could be a turning point for ones who are able to grab it. AT&T’s absence means more of spectrum for Verizon. And once Verizon crosses the threshold, the rest of it would be distributed between Sprint and T-Mobile. Food for thought for AT&T!
Complications are only increasing. Maybe the carrier is trying to build a pressure to influence the FCC decision regarding making restrictions by saying that it might withdraw its participation in the spectrum. It’s just a matter of time, and we’d know if AT&T means what it says.