With the 600 MHz auction results expected soon, it’s becoming increasingly clear that those results are likely to be disappointing. More and more industry observers are predicting that prices will be considerably lower than many initially expected — and lower they were in the 2015 AWS-3 auction, the most recent major spectrum auction.
What happened? We’ve heard several plausible explanations and also have some thoughts of our own.
Perhaps the bigger question is what this means moving forward.
Expected 600 MHz Auction Results
The 600 MHz auction is different from spectrum auctions that have occurred before it in that the spectrum is currently licensed to TV broadcasters, who will be able to voluntarily relinquish spectrum in exchange for sharing in the proceeds with the U.S. government.
After multiple bidding rounds, potential buyers — including large and small wireless carriers — had failed collectively to offer to pay enough to meet auction goals. But as telecom financial researchers at Moffett/ Nathanson explain in a research note, the gap has been closing and it appears the auction will not be deemed a complete failure.
“Despite the chorus of rhetorical questions about whether the auction has failed, either technically or symbolically, in truth it has done precisely what it was designed to do,” the researchers wrote.
“It has discovered a clearing price for a large (70 MHz) block of spectrum. The rules of the auction require that to be declared a ‘success,’ the auction must generate at least $12B in net proceeds ($10.05B to pay broadcasters, $1.75B to pay for spectrum re-packing and broadcaster relocation costs and $0.23B for administrative expenses) AND the auction must clear an average $1.25 per MHz-POP across the top 40 PEAs (partial economic areas). Despite hand-wringing that the auction might be declared a total failure, it appears as though we will achieve these low thresholds relatively easily.”
Moffett Nathanson analysts caution that bidding could go higher in final rounds but notes that broadcasters currently are asking an average of only 38 cents per potential end customer – a fraction of the average $2.71 per potential customer paid in the AWS-3 auction.
Moffett Nathanson’s Take
The Moffett Nathanson researchers pose several potential explanations for why the 600 MHz auction results appear poised to be considerably lower than the AWS-3 results.
One idea relates to the value of lower-frequency vs. higher-frequency spectrum in today’s market. It wasn’t long ago that many industry observers were referring to lower-frequency spectrum as “lakefront property” because of its excellent propagation characteristics, which enable a carrier to cover a large area with a relatively small number of cellsites – albeit with capacity constraints.
But the way Moffett Nathanson sees it, lower-frequency spectrum was best for carriers’ initial buildout of LTE networks because it enabled the carriers to build out large areas quickly, including meeting rural coverage requirements. The researchers argue that in today’s market, carriers are more interested in boosting capacity in high-traffic areas – a task better suited to higher-frequency spectrum such as the AWS-3 spectrum.
Another explanation that the researchers suggest is that potential bidders are cash strapped. They note, for example, that “Sprint has no money. AT&T is busy buying Time Warner. And Verizon has promised the ratings agencies and investors that it will de-lever.”
The researchers also note that some bidders may be waiting for other spectrum they like better such as Dish Network’s holdings or spectrum in the 28 GHz band.
What Happens Next?
All of these ideas make sense – in particular the idea that carriers might prefer spectrum in a different band. At the time 600 MHz auction results were first forecast, 5G appeared to be a more distant possibility than it has proven to be. Now that carriers are talking about beginning 5G deployments this year, I would expect to see much more intense competition for ultra-high-frequency spectrum best suited for 5G – including spectrum in the 28 GHz, 37 GHz, 39 GHz and possibly 12 GHz bands.
Readers may recall that Verizon’s plan to purchase XO Communications was motivated by a desire to obtain XO’s 28 GHz and 39 GHz spectrum. And the value of Straight Path Communications’ stock shot up earlier this month after the company settled with the FCC over spectrum squatting allegations involving the company’s ultra-high-frequency spectrum licenses, illustrating potential pent-up demand for the company’s licenses now that uncertainty about the FCC’s allegations has been resolved.
It’s also important to recognize that carriers may have overpaid for spectrum in the AWS-3 auction, as it came to light after the auction that big winner Dish was in a position to place higher bids than other carriers because it made bids through affiliates that initially were granted small business credits which later were denied.
Many people have speculated that Dish eventually will sell its spectrum rather than attempt to build an actual wireless network. The question now is whether the company’s AWS-3 holdings will hold up in value, perhaps because other carriers will want to use them to fill in coverage gaps, or if those carriers instead will opt to use their limited budgets for spectrum better suited to supporting 5G.