FCC limits in spectrum auctions are a bad idea, it will hurt T-Mobile, Sprint, and consumers

This article may contain personal views and opinion from the author.
FCC limits in spectrum auctions are a bad idea, it will hurt T-Mobile, Sprint, and consumers
It is a forgone conclusion that Sprint and T-Mobile do not currently have the depth or breadth of financial resources that AT&T and Verizon have. Much has been made about the “duopoly” and its dominance in the wireless service sector, along with the massive lobbying efforts the two companies have in place.

There is more to this than meets the eye, however.  The issues are not simply about spectrum, but also demographics, and economics. In the end, putting limits on upcoming spectrum auctions will not only hurt Sprint and T-Mobile, we the consumers get the short end of the stick as well.

Just note that while T-Mobile’s gregarious John Legere puts on a great show in favor of “consumerism,” and he genuinely does advocate, he has proven his ability to disrupt the industry, he is managing to squeeze amazing returns out of what I would call a meager lobbying budget.  Sprint has managed the same, though less flamboyantly, when AT&T tried to acquire T-Mobile.  Beware the wolf in sheep's clothing.

Low hanging fruit

First, let’s get the easy targets out of the way, such as lobbying. Indeed, it is not a popular word, and there are no shortages in opinions about the issue. There are pros and cons, of course, but in the end, the efforts put forth by the industry at large have been a net-benefit overall. Don’t believe me? Disconnect your internet connection, deactivate your mobile phone, and go back to a twisted-pair phone line with a pulse (rotary) dialer.

The question then must be asked, if Sprint and T-Mobile, both multi-billion dollar concerns, are so interested in the regulatory environment coming out of Washington, DC, why are they not allocating more resources to fight for their cause? Even as leading members of the Competitive Carriers Association, T-Mobile and Sprint keep their purse strings pretty tight.

CCA, which has about 100 members, including T-Mobile, Sprint, and US Cellular, is supposed to advocate on behalf of the “little guys” in Washington, DC. Looking at their 2012 annual report, CCA spends more on its own salaries than on industry conferences and member advocacy (lobbying) combined. Mind you, lobbying is that association’s mission – to keep the good ideas “good” and to prevent the “great” ideas from ever seeing the light of day.

Remember, this is Washington, DC I’m talking about. It is the land of what I like to call “great f*****g ideas,” or “GFIs” as we called them in the Army. GFIs are not “great,” and they are often posited by someone with no experience on a given matter, or worse, relying on some insulated staff report prepared by people that did their research via Wikipedia instead of actually consulting real sources. Plainly, whenever someone says, “I’ve got a great idea...,” that is akin to the age-old adage from the south, “Hey y’all, watch this!” Such events rarely have a happy ending.

Instead, let’s just work on the premise of the benefits and the perceived value of lobbying. Verizon and AT&T outspend T-Mobile and Sprint in lobbying by more than 3-to-1. This is not just about wireless though. AT&T and Verizon are also local telephone companies. Basic telephony services are heavily regulated at federal and state levels. While wireless rates come and go, change on a nearly daily basis, traditional services have no such flexibility. The plain truth is that with the depth of services involved, Verizon and AT&T need an active lobbying presence to address a far wider array of issues than are of any concern to most other wireless carriers.

FCC Chairman Tom Wheeler is proposing that the regulatory body impose limits on how much spectrum may be won in the upcoming 600MHz auction. So, while Sprint and T-Mobile may extol the perception they are at a disadvantage, as advocates of these limits, their efforts may indeed bear fruit despite the “evil” spending of the “evil duopoly” that is Verizon and AT&T. That's not a bad return on investment for companies being outspent by millions for lobbying.

Perception cuts both ways

T-Mobile and Sprint have been bending the FCC’s ear heavily about the auction rules. T-Mobile in particular has more visits to the FCC than any other carrier recently and it has also been presenting a public image of “the little guy,” ready to mix things up at the drop of a hat. The strategy has worked well, over the past couple of quarters, T-Mobile has posted amazing gains in subscriber growth.

Based on that performance, any claim that T-Mobile makes about being at a disadvantage falls on deaf ears with me. The smallest of the big four carriers has literally turned the wireless industry in the United States on its head in less than 2 years and it is producing results that have forced the other three larger carriers to respond. If anything, T-Mobile has an industry advantage. T-Mobile has effected this change with zero government interference.

If I were an institutional investor, and John Legere pitched to me the roadmap the carrier planned to follow and that I should by large blocks of T-Mobile US stock which would in turn fund the carrier’s efforts to buy spectrum, I would probably get on board.  T-Mobile has a track record of results.

However, if all I am seeing in the press is “we are at a disadvantage and we need artificial caps for spectrum auctions,” why would I, or anyone, invest in a strategy like that? You want to artificially limit investment in infrastructure by limiting how much people or companies are willing to spend on it? As an investor, not only would I not invest, but if I were a current license holder of this low-band spectrum (most of the low band is owned by TV broadcasters), I don’t think I would want to put my licenses up for sale. Why would I if I thought someone with a “GFI” results in me not getting what I think my spectrum is worth (especially if I happen to be in a top 50 market)? The result of that is less spectrum available for auction which means less money all around.

Sprint on the other hand, seems to be stuck in a world of “can’t.” Sprint wants to buy T-Mobile. Without T-Mobile, Sprint “can’t” do this, or “can’t” do that. Regulators have not been receptive to the idea even though Masayoshi Son is promising the moon and the stars in terms of broadband services. Sprint’s own lobbying effort is not doing the carrier any favors on that angle.  Consultants for Sprint's lobbying arm argue, “Past European spectrum auctions indicate there’s no evidence that spectrum limits affect auction revenues, but ‘they do appear to have been effective at maintaining the number of mobile operators in the marketplace.’” So, does Sprint want four major carriers in the picture, or three?

Sprint is further hindered by the fact that if Masayoshi Son is looking to spend a heap of cash on T-Mobile, then why can’t he spend it on spectrum instead? Softbank is going to get a huge infusion of cash when the online retailer, Alibaba, goes public soon.  Sprint’s parent owns nearly 40% of that company.  The IPO could raise as much as $250 billion, that's a $100 billion infusion for SoftBank, enough to clear all debts, buy T-Mobile and buy spectrum.  Pardon me while I choke back a tear for the "underdog."

So, Sprint’s position of “can’t” doesn’t hold water with me either, even less so when you think of the fact that the company offered to fund rural carriers’ LTE network deployments.

We are witnessing an industrial rope-a-dope of sorts. Sprint and T-Mobile are positioning themselves on the ropes while the duopoly hammer away. The problem is that if auction limits get imposed, T-Mobile and Sprint will have nothing to counter-attack with.


Another factor to bear in mind here is basic demographics. The majority of the US population is concentrated in major cities, with the remainder still settled on the eastern seaboard. Large markets like New York City, Los Angeles, and Chicago, or any of the top 50 markets, are obviously going to see the most competitive bidding. Just like real estate, wireless spectrum will command a higher price tag in these areas.

If I am a license holder in San Francisco where the economy is booming, and prices for everything there are going up, and I think that participation or financial limits are going to drive down the cost of my spectrum, I'm not going to sell it.  Just ask anyone with a house for sale or apartment for rent in that city.  Would I take seriously the guidance of a GFI-guy 3,000 miles away as it relates to the sale of my property? 

An even worse case scenario is if I am a bidder with deep pockets, yet limited by what I can spend or win in an auction, I might choose to simply not show up.  That would do wonders for the bottom line.


If we use the 2008 auction as a model, understanding that of the $19 billion in winning bids, 80% or $15 billion came from Verizon and AT&T, then how does limiting the two players with the deepest pockets possibly yield more revenue overall? Verizon and AT&T will battle each other for markets that are in their respective strategic interests, so yes, basic economic theory accounts for higher prices with higher demand for limited commodities.

Since the FCC has not given any hint as to how it would “assure no one can monopolize the bidding,” it would either have to re-parcel the licenses differently (highly unlikely), or simply impose a dollar-limit. For simplicity’s sake, we will divide Verizon’s and AT&T’s 2008 auction bids in half, each carrier spent $7.5 billion on spectrum in that auction.

What might those limits be and how will they be determined? GFI-mantra almost makes it impossible that there would be a flat dollar limit. Some mathematician somewhere will devise a model which imposes limits relative to the size of the bidding company or the major market area that is part of a given license. It will have to be this way since smaller markets will be in play amongst smaller carriers too.

Such limits will also hurt T-Mobile and Sprint, even smaller carriers depending how the rules are written. The Alibaba cash-cow will be useless to SoftBank if it is limited in how it can spend its money to acquire more low band spectrum. Whatever cards T-Mobile is holding will also be limited, since it will not be able to pool resources, sell debt, or whatever, in the process either. None of the smaller carriers hold anything close to the financial assets that Verizon and AT&T have so the end result is less money spent, and everyone loses.

The next thing that will happen with auction limits (assuming bidders show up) will be collusive bidding. This is something that has happened to some degree even as far back as the PCS auctions in the 1990s. However, if companies are going to be forced into a corner, they are going to collude again and I don’t blame them. The result is less for everyone.

Learn from the 2008 auction

The spectrum auction of 2008 was a success, but not a runaway success. Yes, total winning bids ended up being 90% higher than total reserve prices set, but an entire block of spectrum went unsold. Block D, which was a nationwide 10MHz slice of bandwidth between 750-790MHz, had only one bidder, Qualcomm. The FCC set a reserve price of over $1 billion. The market did not bear it, and Qualcomm’s $472 million bid was rejected. That block remains unsold. Where were Sprint and T-Mobile then? Surely either of them could have floated a bid to win that block in the 700MHz band. I suspect my query would be met with the sound of crickets.

So, while Verizon and AT&T were the deep pockets of the auction, they were only two out over 100 companies that won licenses during the auction. Despite that, not all licenses were sold.

Results matter

Another thing the FCC needs to look at is how auctioned spectrum is being used. No one can say that Verizon did not do a masterful job of rolling out its LTE network using the blocks of spectrum it won in 2008.  Big Red hit a home run getting nearly a 100% overlay of its CDMA footprint in less than 5 years. Even AT&T, who in 2008 and 2009 was having horrendous network troubles due to all the iPhone-fueled growth, has been able to enhance its network in critical areas as well and the plagues of a few years ago are largely a memory.

T-Mobile has been working with what it has and has, by many accounts, built a great network in its core (urban) areas. It got some spectrum from AT&T as part of the break-up fee, and it will be building out even more since it is in the process of acquiring licenses from Verizon.

Sprint holds more spectrum than anyone. Granted, it is in the higher frequency bands but that does not mean it is useless. It also does not help that the carrier changes its mind on which standard to pursue every 5 minutes either. The result is you have a contiguous PCS CDMA network across the nation with a smattering of other standards along the way, WiMAX, LTE, and TD-LTE (not to mention refarming the Nextel spectrum). Is there room for improvement? You bet. Why not add some move spectrum adjacent to the 1900MHz band? Sprint has chosen not to, forgoing a bid in an auction held this past January for a nationwide license of Block H spectrum (10MHz paired in the 1900-2000MHz band).  Sad thing is, whatever spectrum Sprint picks up, I'm worried the carrier will adopt a new carrier standard that no one will use (EV-DO Rev. B anyone?), and then be forced to re-farm the spectrum anyway. 

Who got Block H instead? Dish Network got all of it, beating out 23 other qualified bidders for a little over $1.5 billion total. What is the company going to do with it? Hopefully deliver some 150Mbps+ LTE-Advanced service. We don’t know because Dish, while holding enough spectrum to be a wireless carrier, hasn’t built anything yet.

Limits will not change reality

The fact is that AT&T and Verizon dominate nearly all the profits, and two-thirds of the US market. Limiting their participation will not magically make more capital appear amongst the other bidders. Moreover, the FCC needs to understand that some of the players from 2008 merely bid and won licenses so they could eventually resell service or sell the license altogether (presumably for a profit). That is how investments work.

Here is another reality, part of the 2015 auction is also supposed to set-aside a dedicated fund for the development of a national public safety network, known as FirstNet (First Responder Network Authority). Based on how things are now, that minimum dollar amount is said to be roughly $7 billion. That tally will certainly be bargained downward, or even eliminated if auction limits are imposed.

If limits are imposed, it makes a very tenuous assumption that the remainder of the market will be able to fill the revenue gap left by the big players. That follows no linear line of thinking I can create.  When you take the top five carriers, Verizon, AT&T, Sprint, T-Mobile, and US Cellular out of the picture, the next largest player is C Spire, then nTelos – less than 2 million subscribers combined, and net incomes that can be measured in tens-of-millions. The scale simply isn’t there to even meet the reserve prices that the FCC will have in place.

There is nothing wrong with any of these companies, but limiting auction participation is going to result in fewer bids, smaller bid, less sales, and a likelihood of no sales for some licenses. Simply, companies like nTelos or Cellcom, and even larger regional carriers like US Cellular, do not have the resources to pick up premium licenses in major markets where they have zero operations to begin with.

Build confidence, build partnerships

T-Mobile and Sprint run the risk of psyching themselves out of the game if they don't behave like the national carriers they are on some issues. As competitors to Verizon and AT&T, a more careful analysis of possible weaknesses are in order. Verizon just choked up a huge sum of money to take 100% ownership of Verizon Wireless. AT&T has been spending money hand-over-fist to upgrade its network to keep up with demand, more than $14 billion in the past couple of years.  I'm not saying count Big Red or AT&T out, but no one in this game has a bottomless pit of cash.  If no limits are created, do I think AT&T and Verizon will grab the lion's share?  Yes.  Do I have any doubts about them putting that spectrum to work quickly?  No. 

If T-Mobile and Sprint really want to make the auction interesting, then pool resources and create a partnership company between the two carriers, invite US Cellular, Dish, and whomever else from the CCA wants to join, and dominate the auctions. Have the partnership company sell access on a share-based, market-based, fee and revenue structure to the partner carriers and everyone makes use of it. Players like C Spire and nTelos would find themselves with access to a larger network and direct service in more markets.

Of course, I don’t expect T-Mobile and Sprint to actually do that, as it would increase competition across the board, we wouldn’t want that now, would we?  All I know is this, if I am raising money for something, I don't "not invite" the richest people I know to the party.  If the rules, already very complex, get even more ridiculous, then don't count out the possibility that AT&T and Verizon may choose to sit out of the auction altogether.  Chalk it all up to a GFI.

Recommended Stories

Loading Comments...
FCC OKs Cingular\'s purchase of AT&T Wireless