Verizon Could Sit Out Incentive Auction, CFO Says

The CBO estimate was in a letter to Sen. Dean Heller, R-Nev., a member of the Commerce Committee. If the letter proves to be a good prediction, proceeds from the auction would come in considerably lower than the $41.3 billion in net bids raised by the AWS-3 auction, which ended Jan. 29.

CBO said there's lots of uncertainty about the auction. “Holding a two-sided auction for spectrum licenses is a complex and unprecedented endeavor,” the office said. “Until the auction begins, no one knows with any certainty how much spectrum the broadcasters will sell and at what price. Similarly, various technical and procedural factors could affect the prices that wireless firms are willing to pay for particular frequencies.” Broadcasters could opt to sell as little as 20 MHz to more than 100 MHz in the auction and the portion of auction proceeds they receive in return could range from about 25 percent to 75 percent, CBO said. It predicted “prices paid by wireless firms will be similar to those paid in the AWS-3 auction but will vary according to the number, location, and characteristics of the licenses.”

Shammo also raised doubts about the auction. “We’re just going to have to wait to see what the rules are before we decide how we're going to execute on or around the incentive auction,” he said Tuesday. “I think that’s still a little ways out before we can make that decision.”

Verizon is pleased with the licenses it won in the AWS-3 auction, Shammo said. “They will enable us to execute efficiently on our network strategy of adding capacity through a combination of spectrum deployment and small cell technology,” he said. “Our early experiences with small cell deployments have been very favorable and we believe that the industry is making good progress on standards for utilizing unlicensed spectrum with LTE, which is already being tested in our vendor labs.” Shammo also said Verizon is already well positioned in its spectrum holdings. LTE-unlicensed is “a really good fit with the licensed LTE piece, which will give us a lot more download capability,” he said. “There’s a lot that we can still do around our spectrum.” Shammo said Verizon will build out the AWS-3 licenses it bought “in a very financially disciplined manner.”

Verizon/Dish Deal Raises More Questions

BTIG analyst Walter Piecyk said one big wild card is the spectrum owned by Dish Network. “Regardless of what they say, Verizon needs more spectrum,” he said. “I would be surprised if they sat out of the incentive auction, but maybe they want to save up money to buy the deeper spectrum position offered by an acquisition of Dish.”

Preston Padden, executive director of the Expanding Opportunities for Broadcasting Coalition, said SNL Kagan, by contrast, estimated the auction would bring in $60 billion-$80 billion and auction economist Peter Cramton has projected a $84 billion auction. “Verizon has been consistent in not showing their hand and is using statements like this as part of their lobbying on the rules,” Padden said “But, they have the lowest ratio of spectrum to customers of any carrier and they plan to launch an [over-the-top] service on LTE that will require lots of spectrum. They will be in the incentive auction with both feet."

Shammo also recently mentioned that at the AWS-3 auction prices it could be more cost efficient to split cell sites rather than buy more spectrum, said Roger Entner, analyst at Recon Analytics. “The almost fever-pitched anticipation of the incentive auction to reach even higher auction results than AWS-3 is what led Shammo to make these remarks,” he said.

Entner said industry EBITDA in 2014 was roughly $57 billion. “The carrier community in general is rightfully reluctant to invest 1.5 times industry EBITDA in a market that has reached people penetration and where only one market participant -- T-Mobile -- is growing in the number of unique customers,” he said. “Even more so, restricting the amount of spectrum that would not be set-aside would artificially inflate prices for the larger carriers even further to the point where they are no longer economically sensible.”

Meanwhile, the Competitive Carriers Association said getting 600 MHz spectrum at competitive prices remains a key priority for its members. “The reality is that rural and regional wireless carriers face unique challenges in providing coverage in remote, rural and regional areas because the population density is often insufficient to allow for economically sustainable deployment,” CCA said. “It requires as many as three to thirteen times the number of base stations to construct a network with higher band spectrum as compared to deploying on low-band spectrum. Constructing all those additional towers gets very expensive, and there are simply too few potential users in many areas to cover the substantial cost of building so much additional infrastructure.”

Verizon Revenues, Earnings Increase

Verizon’s numbers were mostly positive Tuesday. The company had earnings of $1.02 per share in the quarter, up from 84 cents for the year-earlier period. Revenue increased to $31.98 billion from $30.82 billion the same period last year. Verizon reported 565,000 retail postpaid net adds in Q1, a 4.8 percent increase compared with Q1 2014, but below industry expectations.

Churn was 1.03 percent in the quarter, compared with 1.14 percent last quarter. Of the wireless adds, 820,000 adds came in the form of 4G tablets, with a net decline of 385,000 basic phones on the Verizon network. Capital expenditures for the full year are expected to be $17.5 billion-$18 billion, Verizon said.

"We are maintaining a disciplined approach with a focus on retaining high-value customers," Shammo said during the call. "We are seeing good results with our postpaid smartphone churn, less than 0.9 percent as compared to our basic phone churn at more than 1.2 percent in the quarter."

Shammo defended Verizon’s decision in February to sell wireline assets in California, Florida and Texas to Frontier (see 1502050059). “They were more or less islands to us,” he said. “If you look at the rest of our wireline footprint from D.C. all the way up through Boston, it’s very contiguous. It’s highly populated. We have almost 20 million homes passed now with FiOS. So, it’s extremely viable for us to continue to penetrate these properties.”

Jennifer Fritzsche, analyst at Wells Fargo Securities, said on CNBC’s Squawk Box Tuesday the numbers are impressive. “I think they offer further evidence this is a company seeking balance and profitable growth on both sides of its business, wireless and wireline,” she said.