Analysts Disagree Whether Wheeler Was Right in Dismissing Carrier Incentive Auction Concerns

Sprint already had said it won’t bid in the auction. Verizon Chief Financial Officer Fran Shammo last week said the carrier needs mid-band capacity spectrum more than low-band spectrum (see 1510200058). AT&T CFO John Stephens wasn't asked about the auction and didn't discuss latest thinking by the carrier in a Thursday call with analysts (see 1510220063).

Industry lawyers said Friday AT&T continues to have deep concerns about interference, especially given the company’s experience with the 700 MHz A block. T-Mobile CFO Braxton Carter said at a recent financial conference that T-Mobile could spend as much as $10 billion in the incentive auction but may spend much less (see 1510160066).

“There’s some truth” to the chairman’s view that carriers are engaging in pre-auction positioning, said Craig Moffett, analyst at MoffettNathanson. But there's also a “dose of honest self-reflection on the part of potential bidders,” he said. “The carriers are all strapped for cash at the moment, and Verizon and AT&T already have ample capacity in rural markets,” he said. “It is not unreasonable to think that 600 MHz spectrum will be judged suboptimal in urban settings, not least because of its interference with their pre-existing holdings of 700 MHz spectrum. I have to concede that I am still among the skeptics when I see some of the more ambitious targets that have been floated for this auction.”

“It’s more complicated than posturing,” said a former FCC spectrum official. Wall Street has raised real questions about the timing of the auction, in a tough financial market so soon after the record-breaking AWS-3 auction, the former official said. Carriers have to “turn over every pebble,” before deciding whether to bid.

The FCC could raise more by delaying the incentive auction, said BTIG analyst Walter Piecyk. “But that doesn’t mean that AT&T and Verizon will not want to grab as much spectrum as possible,” he said. “The price they are willing to pay, as always, will be determined by auction dynamics rather than the intrinsic value of that spectrum.”

With Dish Network likely out of the running, the incentive auction is shaping up to be an “old school” auction “in which the dominant operators stick to their corners and keep prices low rather than be bid-up closer to the true intrinsic value of the spectrum, as we saw in the AWS-3 auction,” Piecyk said. That could mean less money for the Treasury and broadcasters “but a win for the wireless operators and consumers that will see that spectrum deployed,” he said. “Spectrum truthers who claim that wireless operators are stockpiling spectrum should take a closer look at how fast and how much of this spectrum has been deployed for LTE as capacity clogs and slows existing networks."

Wall Street's view of the auction is mixed, said Paul Gallant, analyst at Guggenheim Partners. "Some expect limited, very disciplined carrier buying," he said. "Others see AT&T and Verizon being aggressive because this is the last auction for a long time, and maybe also to keep T-Mobile from cleaning up. Broadcast investors have their fingers crossed that deep-pocketed nontraditional buyers like cable, Google or Apple will show up.”

Carriers have to satisfy the expected return requirements of their shareholders and bondholders, said Jim Patterson, analyst at Patterson Advisory Group. “Since the opportunity to pursue alternate architectures exists, it’s logical to assume that there is an auction ceiling.” When spectrum pricing starts to exceed 20 or 30 percent of the current combined postpaid subscribers’ customer lifetime value, “investors get worried,” Patterson said. “It’s not marketing, just the product of diligent alternative analysis. Expectations are rightly being lowered.”

Wireless carriers need spectrum “but not at any price,” said Roger Entner, analyst at Recon Analytics. The 3G auctions in Europe are “a chilling example of what can happen when carriers overspend on spectrum,” Entner said. “The repercussions of the overspend can be seen in the depressed wireless usage patterns of European consumers to this very day, 15 years later.” The U.S. wireless industry overall has only about $40 billion in annual operating income and spent that much in the AWS-3 auction, he said. If carriers overspend, it “would cause significant investor backlash and rob the industry of the necessary access to capital to build out the newly won spectrum,” he said. “What we sorely need are rational expectations of what is achievable and reasonable.”

But other observers said Wheeler wasn't far off in his statements Thursday. They noted that industry associations have lobbied hard for the FCC to move forward on the auction and have promoted spectrum legislation as well.

There are “real questions” about just how much spectrum the companies need and can afford to buy, but there is gamesmanship going on, “trying to convince other companies that their bids will be smaller than they will be in reality to throw off their strategies,” said Jan Dawson, analyst at Jackdaw Research. “Every one of these carriers needs more spectrum over the medium to long term, and some of them also need to fill in gaps in their current low-band spectrum holdings,” he said. “So, with the exception of Sprint, which seems to have decided it can't afford to bid in this auction, they'll all be buying something, and in most cases quite a bit, because this is one of the only big opportunities to acquire significant spectrum in the near future.”

Often carriers try to reassure Wall Street that “'we're not going to go crazy and overspend,'” said Harold Feld, senior vice president of Public Knowledge. “Here, carriers are also trying to push broadcasters to lower their prices. The message is very plain that broadcasters could price themselves out of the market, so broadcasters need to dampen their expectations.” But there's also truth behind some of the carrier claims, said Feld, who also is on the Commerce Spectrum Management Advisory Committee. Valuations for the AWS-3 were “not in line with global auction valuations, and it is not at all clear whether the AWS-3 valuations were a unique event or whether they represent the real valuation of spectrum in the United States,” he said. “So while all carriers do play these kind of games, and we would expect carriers to try to dampen broadcaster expectations ahead of the auction, it is also entirely possible that broadcasters will price themselves out of the market.”

The world has changed since Wheeler left the CTIA in 2004, said Richard Bennett, network architect and founder of the High Tech Forum. The iPhone and its siblings turned the wireless industry “into a broadband business with more concern for capacity than for voice coverage,” Bennett said. “The incentive auction will probably fail because all potential bidders but T-Mobile are either too cash-strapped or regulation-limited to make substantial plays. Acquisitions in 600 MHz will expand the T-Mobile footprint and fill in a few gaps for regional carriers, but nothing more. Like the failed white spaces initiative, the incentive auction is the FCC throwing a party without any guests.”