Cable, DBS Up Ante for T-Mobile as Make-or-Break Auction Begins

Wireless DBS, a DirecTV and EchoStar joint venture, led the list of companies buying bidding units for the auction (CD July 31 p1). SpectrumCo, a cable/Sprint Nextel partnership, was #2. T-Mobile was 3rd. Coming weeks will see the bidders reveal more about what they're willing to spend.

“This is a make or break auction for T-Mobile -- they are bandwidth starved,” Scott Cleland of Precursor said: “For DBS, you don’t park $1 billion with the government if you're not serious. Cable doesn’t park more than $600 million if they're not serious. That is real money… You don’t do that lightly.”

“I have to think T-Mobile was unpleasantly surprised by the presence of two much larger bidders showing up,” a lawyer who’s following the auction closely said: “Without Wireless DBS or cable they're in a pretty strong position in this auction. Now with the potential for two possible nationwide plays the price tag may have just gone much, much higher.”

Participation by cable and DBS could boost competition - - a boon for consumers, a 2nd regulatory attorney said. But if both bid aggressively, T-Mobile could face a rough few weeks, the attorney said: “In general, the more companies in the auction, especially companies that have the resources to go after a sizable number of licenses, the more difficult it’s going to be for T-Mobile to obtain a wide footprint in this spectrum… It depends on what these new entrants are willing to pay… They both made significant commitments. They put a lot of money down.”

“DBS operators] clearly need another leg to their business and it could even be a prelude to get Washington to work with them on agreeing to a merger,” Matthew Harrigan, an analyst at Janco Partners, said: “With the cable companies it was a little bit more surprising, but I thought it was fairly broadly telegraphed who the bidders were going to be… I think it’s more of an imperative for satellite than it is for cable.”

The FCC’s recent broadband competition report points to why cable and DBS both want AWS spectrum, Cleland said. The report said of new adds in the 2nd half of 2005, 2.75 million (35%) were for mobile wireless -- compared to 41% for DSL and 20% for cable, he noted. “Wireless broadband is obviously going to be big,” Cleland said: “The fact that the DBS players and the cable players are bidding in this auction is another affirmation that wireless broadband will be big.”

The auction will bring $7-$10 billion -- roughly $0.25- $0.40 per MHz/per POP, UBS said last week. EchoStar-DirecTV might bid aggressively “as they increasingly view a broadband wireless strategy as essential to supplementing their existing video-only product offering,” the firm said. SpectrumCo is likelier to be “disciplined” in its bidding, UBS said.

Raymond James expects the auction to bring $12-$15 billion, it said. “The biggest surprise was the size of the upfront payments by the satellite TV bidding entity Wireless DBS, and… SpectrumCo,” the firm said: “The satellite partnership will be a very active participant in the auction, looking to piece together a nationwide network or significant large market presence to better compete against the major cable companies.” The cable companies may be looking to a new generation of wireless service beyond 4G, the firm said: “SpectrumCo has submitted the second largest upfront deposit for the auction… so we would expect the partnership to be an active participant in the auction.”

But Raymond James said T-Mobile will be the auction’s most active bidder, spending $4-$5 billion as it tries to bring its average spectrum holdings to 40-50 MHz nationally, in parity with other national carriers, so it can offer 3G service.

Cable and DBS bidders’ strategies probably will be similar, said analysts and cable lawyers: Add spectrum to offer video subscribers wireless services. SpectrumCo wants to add capacity so consortium members including Comcast and Time Warner can offer enhanced video features on cellphones, said analysts including Jefferies & Co.’s Robert Routh. Wireless DBS members DirecTV and EchoStar have the greatest need for spectrum among pay TV companies because they can’t provide broadband widely themselves, we're told.

DBS can’t keep selling broadband for long without help from Bells, said New America Foundation’s Jim Snider. “The partnership that DBS has had with the telcos is probably a short-term marriage of convenience,” he said: “They are going to need to do something once they lose those partners.” Wireless carrier bidders that have plenty of capacity will eventually find use for more, a telecom lawyer said. “There are so many possibilities for what they could do, it makes sense for them to keep the door open,” the attorney said: “They always run out of spectrum sooner or later, and the more or better set of services you are able to provide, the sooner you run out of spectrum.”

The cable consortium can use spectrum to let customers talk on cellphones at home using cable IP-based networks, said Snider. “The key executives think they need one-stop shopping for telecom services going forward,” he said. Dual mode phones that can use home and nationwide wireless networks will be “seamless technically” for customers, said Snider.

Cablevision’s controlling family is a wildcard in the AWS auction. Dolan Family Holdings, not part of Cablevision, is expected by analysts and cable lawyers to use its $150 million deposit to add to existing Cablevision spectrum in the Long Island, N.Y., area. Cablevision kept about 11 MHz of spectrum covering parts of the N.Y. area after selling wireless assets, said Routh. The family could give the spectrum to Cablevision to set up a venture similar to the Sprint one, said analysts. Cablevision isn’t part of the Sprint deal. “They need to offer some kind of bundled offering, and right now they can’t,” Routh said of Cablevision: “Right now they can offer video, video and more video, and that’s all they can do by themselves.” The company, which sells wireline VoIP and broadband, declined to comment.

While the DBS company’s goals are clear, SpectrumCo is harder to read, an attorney said: “It is always true that you make higher revenues on a network that’s your own than on a network when you're reselling somebody else’s service… That part makes sense to me. The part that doesn’t is what is the role of Sprint. They're part of this bidding consortium…. The problem is Sprint isn’t especially spectrum constrained so they don’t really need this.”

Wildcard DBS

DirecTV and EchoStar -- known since Dec. to be working on a wireless broadband venture -- are seen as the auction “wild card” by many onlookers. Officials of the satellite TV companies have said they're keen for a nationwide wireless broadband play; the main hurdle to that is amassing enough licensed spectrum. It remains to be seen whether AWS is the solution. “Wireless DBS has a number in mind that they're willing to pay, or else they wouldn’t have put down a billion dollar deposit,” a satellite industry analyst said: “As to how much, that’s anyone’s guess. Clearly, if they think they can steal the auction, then great.”

Central to the DirecTV/EchoStar bid strategy will be the feasibility of cobbling together a nationwide footprint, said analysts. “Their main conundrum is classic game theory: What’s the point of being partially successful with half a nationwide license? If they have a nationwide customer base, then it doesn’t do them much good to win half a nationwide license,” said Tejas Securities analyst Darren Meyers. So Wireless DBS may bid assertively in early rounds, UBS’s Areh Bourkoff speculated in a research note. If the company needs upwards of 30 MHz to enter a market, it will need to win 2 auctions in every market, we're told.

But if AWS gets too costly, Wireless DBS could bow out, tilting toward another option: MSS spectrum. Many in the satellite industry believe L-band and S-band mobile satellite services spectrum could play 2nd fiddle to the auction, as an alternate spectrum source for failed AWS bidders -- or for nonbidders (CD May 12 p8). DirecTV and EchoStar long have been rumored to be in talks with Mobile Satellite Ventures and other MSS operators about ways to tap their satellite spectrum on the ground, under an Ancillary Terrestrial Component (ATC) license from the FCC. “The DBS players want a national footprint. They have a choice between AWS, ATC, and perhaps Clearwire as a third alternative. It comes down to a pricing issue,” said satellite analyst Tim Farrar.

Inmarsat officials confirmed Fri. they're working with competitor Mobile Satellite Ventures to reorganize interleaved L-band spectrum to make it more useful advanced services. “We've worked very closely with MSV, cooperatively, to put a service proposal together that looks more refined than before. If players in the AWS auction look with open eyes… we are clearly in an advantageous position relative to other options,” CEO Andrew Sukawaty said Fri. in an earnings report call: “I think the big players will wait to watch the AWS auction to see how their long term spectrum needs will be met.”

Cable Coy

Comcast and Time Warner executives have been coy with investors about their wireless plans. Time Warner COO Jeff Bewkes hinted at wireless’s potential for cable, telling investors last week that the Sprint joint venture provides access to a 3rd screen in addition to PCs and TV sets. The joint venture will start sales in months, Comcast CEO Brian Roberts told investors in separate comments. “The real commitment first and foremost is to rolling out with the Sprint [joint venture] that we have and those markets will be up and running by the end of the year,” he said. Comcast declined to comment on the auction.

Cable’s longstanding relationships with TV programmers might smooth entry into mobile video -- but content owners probably won’t hand over mobile rights inexpensively, independent analyst Bruce Leichtman said: “It doesn’t give them the product, but it does give them the knowledge [of negotiating]. We're not in an age where programmers are going to just give the operators their content to have fun with.”

Cable companies want to show investors they'll be part of whatever develops out of the wireless auction, said Leichtman. Cable is looking beyond bundling toward mobile integration, he said: “The understanding of the mobility of video is still undetermined, and I think that’s what all providers are looking into. They know the potential is there. They don’t know how big that potential would be.”

Programmers are willing to sell mobile licenses to 3rd- party operators but they frequently ask for the same rates they receive from cable operators, said Scott Wolf, vp- content acquisition for Virtual Digital Cable. The firm delivers video online to Wi-Fi devices. “I don’t see the cable companies being able to offer that same kind of service with a large channel offering” unless programmers drop their prices, Wolf said: “Comcast is either going to have to get it for a lot less money or for free… It’s hard to offer a $40-$50 a month mobile product.”

Demand for mobile video in the U.S. remains questionable, Wolf said: “Is linear video on a cellphone a huge market? In certain places in the world it is. In this country, probably not,” except for sports.