T-Mobile’s Big Move in AWS Auction Should Mean 3G Future

“I can only assume that folks basically got what they wanted, but it’s hard to distill from the results whether it was good or bad for the companies,” said Rebecca Arbogast, analyst with Stifel Nicolaus. “One doesn’t know what they were really seeking.” DBS’s early departure from the auction and the strong bid by cable operators grabbed headlines, but the auction also is proving significant for wireless carriers.

T-Mobile was the high bidder on 118 licenses late Fri., with total bids of $4.18 billion. Sources agreed that with its spectrum additions T-Mobile will soon be in a position to announce a 3G rollout, putting it on a more equal footing with its national competitors Cingular, Verizon Wireless and Sprint Nextel. By Stifel Nicolaus’s count, T-Mobile had only 27 MHz of spectrum on average across the U.S., compared to 57 MHz for Cingular, 50 MHz for Sprint Nextel and 37 MHz for Verizon Wireless.

T-Mobile has the high bids on 7 of the 18 regional licenses put up for sale by the FCC, including 2 of the crown jewels, the 20 MHz licenses for the West and Central regions. T-Mobile has filled major gaps. For example, according to a report before the auction by Stifel Nicolaus, T-Mobile has only 20 MHz in N.Y. It will add 10 MHz through a Northeast regional license, and a 20 MHz cellular market area (CMA) block for N.Y.-Newark. T-Mobile will still have less spectrum than its national rivals -- Verizon Wireless had 65 MHz before the AWS auction -- but it narrows the gap.

In L.A., T-Mobile has only 20 MHz. The carrier will add 20 MHz through a West regional license and 10 MHz through an economic area (EA) license for L.A.-Riverside-Orange County. In Chicago, T-Mobile has 30 MHz but will add 20 MHz through a Central regional license and 20 MHz through a CMA license for Chicago.

“T-Mobile has proved to be the aggressive bidder that everybody expected them to be because they had to be,” said Rudy Baca, former FCC legal adviser and analyst, now at Rini Coran. “They're going to announce they're going to be able to do 3G and they going to, at least in their major markets, roll out a competitive product simply because they have to.”

“Prior to Auction 66, T-Mobile had the worst spectrum position of the national carriers with an average of just 25 MHz in the top 200 markets,” said Raymond James in a research report. “We felt T-Mobile would need to be the most aggressive bidder in the auctions, and that has certainly been the case.”

Arbogast cautioned: “T-Mobile needed a lot and they got a lot, but did they get all the markets they targeted at the price limits they set for themselves going in? Without knowing their goals going in it’s hard to assess whether this was a successful auction or not for any particular company.”

Verizon Wireless is the 2nd-highest bidder in the auction, with bids of $2.8 billion and 8 provisionally winning bids, including 4 of the 6 20-MHz regional licenses offered, for the Northeast, Southeast, Mississippi Valley and Great Lakes regions.

Verizon’s strategy is the hardest to assess. The carrier won’t add to the western and central markets where it is thin: The company has only 25 MHz in San Francisco, 30 MHz in Detroit, 35 MHz in Phoenix and 30 MHz in Milwaukee. But it will add to its dominant position in such cities as Philadelphia, with 65 MHz after the auction, and N.Y., with 85 MHz. In late bidding, Verizon Wireless also added 3 licenses in La. and one in Honolulu.

“I think what has been surprising to people is how aggressive Verizon and Cingular have been,” Baca said. “It looks like they are taking the advantage of the trend of much lower spectrum prices on a per POP basis… Given the usefulness of this spectrum, given the prices that it’s going for, I think that has really increased the aggressiveness of the major companies.” Baca said that, without active bidding by designated entities, “there’s a lot of supply and it’s going for a relatively low price and it’s exactly the spectrum they need… You can’t have too much spectrum.”

Raymond James said post-AWS auction Verizon Wireless will still need to add spectrum in the western markets where it remains thin. But the firm said it wasn’t surprised by the carrier’s strong bidding.

“Before the auction began many investors had heard that Verizon Wireless might take a pass on Auction 66. This made absolutely no sense to us since Verizon Wireless had the 2nd smallest spectrum position of the national carriers,” Raymond James said. “We felt Verizon Wireless needed additional spectrum to correctly deploy its 3G network and prepare a competitive response to Sprint Nextel’s recent 4G roll-out announcement. We also believed that Verizon Wireless would need significantly more cell sites to make the physics work and provide truly comparable POP coverage and realizable data speeds versus Sprint and Cingular.”

The Stanford Group said Verizon Wireless stands to add about 189 million POPs through the major licenses it’s acquiring. “Verizon’s strategy appears to be focused on obtaining large swaths of spectrum in geographies where the company is experiencing the most rapid subscriber growth,” the firm said.

Cingular has also been bidding aggressively, with 48 provisionally winning bids worth $1.3 billion as of late Fri. Cingular’s biggest bid was for a 10 MHz regional license serving the West and a 20 MHz CMA license in L.A. The carrier was strong in the region, with 65 MHz in L.A. and San Francisco, and will emerge stronger. Cingular also stands to pick up a 10 MHz Central region license and 10 MHz EA licenses for the Chicago, Baltimore-D.C., Boston and Dallas- Fort Worth areas. Cingular already had at least 65 MHz in all of them. Raymond James said Cingular is “filling in an already strong hand.”

Among smaller carriers, low-cost carrier Leap Wireless has come on strong, with 98 provisionally winning bids totaling $707.9 million late Fri. Leap is poised to pick up a 10 MHz license for the Central region, as well 20 MHz CMA licenses in D.C., Philadelphia, Baltimore and Minneapolis. MetroPCS, meanwhile, has 7 provisionally winning bids for 7 licenses, including 10 MHz regional licenses in the Northeast and West and a 10 MHz EA license for the N.Y. area.

“Leap has an opportunity to extend its growth opportunity as the company acquires additional spectrum in existing markets to support advanced data services, expands existing market clusters and potentially builds-out new market clusters,” the Stanford Group said. The firm added that Leap and MetroPCS are targeting the largest cities in the East, which could mean pricing pressure for the entire sector. “It’s a very, very interesting move,” Baca said of Leap. “They're basically telling the world we're here to stay and we want to play.”

“We expect MetroPCS and Leap will each build out about 30 million POPs of new areas in the Top 50 markets (including N.Y., Chicago, Philadelphia, and Boston) while hopefully not competing against other unlimited wireless plan operators,” Raymond James said.

Arbogast told us she has seen few major surprises other than the strong cable play. “At least at the level I'm able to assess the outcome… it seems to me a pretty unremarkable auction overall,” she said. “Virtually all the spectrum got picked up by somebody. There weren’t any real aberrant values that are going to saddle any companies with undue burdens.”