Wireless Bidders Get Their Kicks in Auction 66

The FCC began a much-anticipated wireless spectrum auction in late August — covering 1,122 licenses and 90MHz of airwaves at 1710-1755MHz and 2110-2155MHz — the largest chunk ever to be auctioned off in the United States.

Auction 66, which has been delayed several times, was nearing completion of the bidding process at press time in early September. The auction concludes only when all 168 participants stop bidding. The Advanced Wireless Spectrum (AWS) bidders include big names like Cingular Wireless, T-Mobile USA LLC and Verizon Wireless as well as SpectrumCo LLC, which is Sprint Nextel Corp.’s joint venture with cablecos Bright House Networks, Comcast Communications, Cox Communications and Time Warner Cable. MetroPCS Communications Inc., Leap Wireless International Inc. and a handful of regional wireless and small rural communications companies round out the participants.

The AWS is being reapportioned away from military and law enforcement and earmarked for broadband communications services. It’s a multimillion-dollar affair to secure chunks of this spectrum, which will be used in various ways. Mobile carriers without an existing 3G footprint (such as T-Mobile) need this to compete with those that offer 3G; AWS spectrum is high-capacity and appropriate for “4G” buildouts for mobile TV and other services that will stretch the existing 3G network capacity if widely adopted. Cellcos also can use it to expand 3G capacity in crowded urban markets. Cablecos and others can use it to attain the wireless piece of the quad play. CLECs can use it to build out WiMAX or other BWA networks to solve the last-mile issue and avoid the RBOCs. And big wireless players simply may want to prevent non-3G operators from getting their hands on spectrum and becoming a competitive threat.

Satellite TV companies DIRECTV and EchoStar, which teamed under the “DBS LLC” moniker to bid, were unsuccessful and dropped out of the bidding. This disappointment has put a damper on plans for the satellite players to launch their own mobile services based on WiMAX and likely will pave the way for the DBS players to partner with a WiMAX operator such as Clearwire, notes ABI Research principle analyst Michael Arden. “The DBS operators are looking at how they can utilize wireless spectrum for two-way data services as well as mobile voice services,” he says. “The development of a mobile service connected to satellite-video service would be one more piece of a service bundle that would help to reduce customer churn and to create an opportunity for convergence of services — such as broadcast and mobile video. It looked as though they were well positioned to become big players directly. However, given their lack of bidding success, they are going to have to rely on partnerships in provisioning mobile services.”

At press time, T-Mobile was leading the bidding with $4.2 billion pledged on 116 licenses. It was blocked on the 20MHz license front from cobbling together a nationwide footprint when Verizon Wireless raised the stakes on four of the six big regional 20MHz licenses, including a coveted one in the Northeast. At press time, Verizon Wireless was the No. 2 bidder with $2.8 billion pledged on the four licenses. T-Mobile has won the other two 20MHz blocks, in the Western and Central United States, and has been picking up smaller licenses to round out the footprint.

Meanwhile, the Sprint/cableco joint venture was in third place, winning 133 licenses for $2.3 billion in metropolitan markets throughout the country, with a concentration in New York City.

“With the generous assortment of licenses available in the AWS auction, both in terms of market sizes and MHz amounts, there will be a number of different ways for bidders to put together their targeted spectrum portfolios,” Sharon Armbrust, a senior consultant at Kagan Research LLC, says.

Geography naturally determines much of the value of licenses. Licenses — at 10MHz or 20MHz in size — vary in price per PoP according to the perceived value of the geography covered. The country is separated into 170 economic areas (EAs). The fastest-growing EA is Las Vegas, with a 3.21 percent population growth rate forecast for 2005-2010. Washington, D.C.-Baltimore sports the highest mean household income at $64,174 per family. Population density is an important characteristic because of its direct correlation to buildout and marketing costs and implied return-on-investment potential. It can vary dramatically from one license type to another within the same general geography, depending on which counties are included. For instance Tampa/St. Petersburg, Fla. is the most densely populated EA, followed by New York City/Long Island, according to Kagan Research.

“Bidders face a sort of multidimensional chess game in identifying which population groups, which geographies and which clusters they will go after to achieve the best economies and competitive positions at the best prices,” says Armbrust.

The government collected $4.3 billion in upfront payments, including ones from DBS LLC, which paid $972.5 million; SpectrumCo, which paid $637.7 million; and T-Mobile, which paid $583.5 million. The auction should raise about $15 billion for the U.S. government total. At press time, about $13.8 billion in bids had been made.