(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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