Telecom Investors, Dish Could Pump Up Level of Bidding in AWS-3 Auction

Industry observers said some well-heeled investors are behind some of the other, nontraditional potential bidders that filed initial applications to bid in the auction. The industry officials said fewer small carriers than in the past will likely jump in (CD Sept 12 p1), but other bidders could make up the difference.

Among the big money investors with a stake in short-form applicants are Columbia Capital and Kohlberg Kravis, said a lawyer who’s following the auction closely. Other investors behind applicants include Sanjiv Ahuja, chairman of Eaton Towers and former CEO of LightSquared; Amos Hostetter, founder of Continental Cablevision; Arun Sarin, former CEO of Vodafone; and Charlie Townsend of Aloha Partners.

The FCC Wireless Bureau said Oct. 1 the agency received 80 short-form applications for the AWS-3 auction, which starts Nov. 13. In contrast, the FCC had received 175 short-form applications for the AWS-1 auction in 2006. In 2008’s 700 MHz auction, 214 bidders qualified to participate. Hogan Lovells released data on who’s behind various AWS-3 applications in a blog post Wednesday (http://bit.ly/1nZOxA1). Startup costs of FirstNet, the national network for first responders, will be funded through auction proceeds, including from the AWS-3 auction.

"There’s plenty of guys who are showing up for this auction, including the big guys,” said Brattle Group economist Coleman Bazelon. He said the amount of spectrum being offered in the AWS-3 auction is smaller than for 700 MHz and the total budget of about 100 AWS-1 applicants “didn’t add up” to more than a few tens of millions of dollars. “The missing bidders are mostly just incredibly small guys,” he said.

"Bidder quality matters more than quantity, and the right bidders are at the table,” said Paul Gallant, analyst at Guggenheim Partners. “The long term spectrum pipeline is pretty limited, and there’s a clear path to deployment with AWS-3. So I wouldn’t worry about the raw number of companies signed up to bid."

"With the number of big players involved, you can expect major dollars, especially for this valuable globally synchronized band,” said a wireless industry lawyer. The FCC approved service rules for a 65 MHz AWS-3 auction March 31 (CD April 1 p1). The paired 1755-1780/2155-2180 MHz bands are widely expected to bring in far higher bids that the unpaired 1695-1710 MHz band.

Craig Moffett, analyst at MoffettNathanson, sees plenty of reasons for skepticism that the AWS-3 auction will be a huge success. “Sprint isn’t participating, so there are only three majors who will bid,” Moffett told us. “Second, the wireless industry currently isn’t generating enough cash to cover its dividends, so there is an obvious affordability problem. And third, you've got a more attractive spectrum band coming up right behind this in 2015, so the smaller operators will have to keep some dry powder. T-Mobile, in particular, needs low-band spectrum much more than they need more mid-band, so you'd have to assume they will proceed cautiously.”

Moffett said it remains unclear how big a play Dish will make for the spectrum. “The investment community still sees Dish as a seller rather than as a buyer,” he said. “Most investors view Dish’s participation in the auction primarily as a way to drive prices higher for the benefit of the spectrum they already own rather than as a way to acquire more."

AT&T and Verizon generate 80 percent of the industry’s EBITDA, so it’s not unlikely they will outbid others for the spectrum blocks they want, said Walter Piecyk, analyst at BTIG. “The auction is likely to be dominated by AT&T and Verizon, which need the incremental capacity to support the data growth that they are increasingly relying on to generate revenue and profits,” he said. “T-Mobile does not have the balance sheet to compete for a nationwide license and is likely to save its powder for secondary market transactions of low-band spectrum.” Piecyk expects Dish to play a role as the satellite company tries “to assemble the assets required to enable a new entrant into the market."

Goldin Associates Managing Director Armand Musey said the sharp decline in applicants “is a very telling fact that few people are aware of.” Musey predicted the lower number of bidders will be a bigger factor in rural markets. “This is where many of the smaller carriers who are not participating operate,” he said. “In major metro markets there will still be a few operators competing to help maintain the prices there. So the price gap between large and small markets is likely to be more extreme than in the past.”

Dish and Chairman Charles Ergen are a big unknown, Musey said. Ergen “probably wants 10-15 MHz of uplink spectrum and is trying to figure out if it is cheaper to get it in the auction or by doing some deal with LightSquared,” Musey said. He said small carriers are more interested in the 600 MHz incentive auction spectrum than mid-band spectrum. Data capacity issues are often exaggerated, he said. “Until recently Verizon was running its whole LTE network on 22 MHz of 700 MHz spectrum. Smaller carriers are also disproportionately short of sub one GHz spectrum. If they want to stay competitive, they'll need to get more and this auction is the last foreseeable opportunity."

With industry consolidation, the level of bidding in the auction has been a concern, said Harold Feld, senior vice president at Public Knowledge. “The good news is that Dish has come prepared to bid seriously, and T-Mo is more flush than they have been,” Feld said. “We have to hope that the few remaining players are strong enough to get AT&T and Verizon a run for the money. It is also possible that some of the smaller carriers hoping to jump to better regional coverage ... will bid aggressively for adjacent spectrum."

Fred Campbell, director of the Center for Boundless Innovation in Technology and former chief of the Wireless Bureau, said the number of applications is high enough to indicate “substantial interest” in the auction. “Sprint’s non-participation also isn’t surprising,” he said. “It’s flush with 2.5 GHz spectrum and hasn’t been a factor in spectrum auctions since the PCS auctions in the 1990s.”