(FROM THE WALL STREET JOURNAL 11/22/14) 
   By Thomas Gryta and Ryan Knutson 

The Federal Communications Commission's auction of wireless spectrum licenses has collected $34 billion in bids, turning what was expected to be a relatively sleepy affair into a likely windfall for taxpayers and an enormous commitment of capital for the carriers.

The offers reflect the surge in wireless traffic as Americans increasingly watch YouTube videos, stream music and share photos with their iPhone and Galaxy smartphones. Companies including Verizon Communications Inc. and AT&T Inc. so far have met that demand by stitching together smaller purchases of spectrum since the government's last big auction in 2008. Now, they are paying up to buy the crucial resource in bulk.

The auction, which is continuing, is poised to become the most lucrative ever in the U.S. The interest surprised many analysts, some of whom expected it to bring in less than half the current total. The communications industry had been more focused, said analysts, on a coming auction of spectrum now held by television broadcasters. That was recently pushed back to 2016, however, and there are concerns about further delays.

"This is happening because spectrum is the critical raw material for wireless data capacity, and it's in short supply," said Jonathan Chaplin, telecom analyst at New Street Research.

Spectrum works like lanes on the highway. Wireless carriers buy licenses to use it, and when growing traffic leads to congestion, they have to acquire more. The current auction has drawn participants including AT&T, Verizon and satellite broadcaster Dish Network Corp., which already owns a lot of similar spectrum and says it wants to start offering cellphone service.

The FCC has been charged since early last century with allocating the resource among government and commercial interests.

The government started the auction Nov. 13 with a goal of raising at least $10.6 billion. The bidding is confidential, so it is hard to know which companies are driving up prices in the current auction, but available data shows that multiple bidders are fighting hard for licenses.

A license covering a swath of the Northeast around New York City jumped from about $1 billion to $2 billion in about a dozen rounds of bidding as of Friday evening. While only one bidder was willing to pay that much, earlier Friday there were three bids at $1.8 billion.

"That we are seeing three new bids on a license for almost $2 billion is likely unprecedented," said Tim Farrar, who runs satellite and wireless consultancy TMF Associates.

The size of the bids highlights the enormous scale needed to compete in the U.S. wireless market. AT&T and Verizon between them control most of the industry's most lucrative customers and the bulk of its revenue and profits, giving them the financial firepower to keep bidding. Craig Moffett, an analyst at researcher MoffettNathanson LLC, estimates AT&T and Verizon may be committing close to a year's worth of free cash flow in the auction.

Investors are concerned about the outlays. AT&T's shares fell 1.7% this week, and Verizon's were down 2.5%. Shares in Dish soared 14%, as the auction led investors to raise their estimates of the value of billions of dollars in similar spectrum sitting on the company's books.

Dish Chairman Charlie Ergen projected in May that the auction would show his spectrum to be far more lucrative than many people were expecting. "I think it will be materially different than what people are analyzing," he said then during a conference call with analysts.

The more than 1,600 licenses up for auction cover what is called mid-band spectrum, occupying bands around 1,700 megahertz and 2,100 megahertz. It isn't typically as valuable as the low-band airwaves like those held by the TV broadcasters, which carry signals deep into buildings and across the countryside. But it is of high value in cities because it can carry lots of data traffic.

Bids for spectrum around Los Angeles have topped $1.6 billion. Those around Chicago topped $1 billion. Even in areas around Norfolk and Virginia Beach, bids neared $50 million. The value implied by the bidding is nearly four times the value assigned to similar airwaves during an auction in 2006, according to estimates by UBS and New Street Research.

Some of the spectrum up for sale had been set aside for other purposes, including a chunk previously used by the Defense Department for things like drone training programs and precision guided missile systems. The Defense Department has agreed to move some of the systems to other spectrum bands or to allow carriers to access airwaves in areas where the military isn't using it.

Carriers are eager to put those airwaves to use. While the amount of time Americans spend talking on the phone has risen only moderately over the past few years, the amount of data traffic has gone through the roof and shows no sign of slowing down.

In 2013, for instance, Americans spent 2.6 trillion minutes talking on cellphones, up from 2.2 trillion minutes in 2010 -- a 17% increase, according to industry trade group CTIA. Data usage, meanwhile, is up 732%, from 388 billion megabytes used in 2010 to 3.23 trillion megabytes in 2013.

The auction has drawn 70 bidders including AT&T, Verizon, and Dish. The roster includes T-Mobile US Inc., private-equity firms like Grain Management LLC, and even some individuals have submitted bids.

Analysts who had expected the auction to bring in a smaller haul did so because they thought it would be dominated by AT&T and Verizon. The results so far make clear, however, that there is at least one more aggressive bidder in the works.

John Hodulik, telecom analyst at UBS, said the auction results blew past Wall Street's expectations.

"We were debunked," he said.

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