700 MHz Auction Opens Under Dark Economic Cloud

FCC and industry sources said Wednesday Chairman Kevin Martin has grown increasingly anxious as the auction approached, since it will be a major part of his legacy as chairman. Several sources pointed to his unusual press conference last week, called in part to address concerns about Frontline Wireless’s departure from the auction (CD Jan 16 p1).

Stifel Nicolaus said in a research note Wednesday “anything can happen in an auction and there may yet be surprises in store” but recent developments could make the auction less competitive than expected. “We noted last fall that the credit crunch could make it even more difficult for a new entrant to obtain the financing necessary to participate in the auction, which apparently proved to be true in the case of Frontline,” the firm said. “Moreover, we think the current economic climate could cause a lot of assumptions about the auction to prove inaccurate, including about the winning bids meeting the reserve prices and how high the bidding for a number of licenses could go.”

By delaying the auction until January, one source said, the commission opened the door to more uncertainty, such as the recent downturn in economic markets and the tightening of the credit market. “It’s not the best time to be doing this, but here it is,” the source said of the auction. “It has to be done and we'll have to hope for the best.”

A wireless industry source said Martin must take some of the blame for delays, which pushed the auction until this year. “You just can’t predict that kind of thing, but it was boom times last summer and there was an outpouring of interest in this auction,” the source said. “The FCC could have done this auction by the end of the year and be taking in money now.”

The commission had hoped to approve a 700 MHz order in June, but never voted out an order until July 31. The final rules were unusually complicated. For example, to spur open access in wireless, the commission imposed rules for the 22 MHz C-block under which open access is required as long as total bids surpass the $4.6 billion reserve price threshold. Otherwise that block will be reauctioned without the open access requirements. Delays also came as the commission structured rules for the public safety D-block, but those plans may have been derailed by the departure of Frontline Wireless.

A wireless industry attorney said the auction may take in less revenue than originally expected but is likely to be successful by other measures. “It’s really high quality spectrum. There are bidders. You still have a number of the major players involved,” the attorney said. “The primary reason for auctioning spectrum is getting it into the hands of those who value it most highly and who will build it out most quickly.”

Among Stifel Nicolaus’s other observations is that Google will likely bid high enough to trigger the C-block open-access condition, but Verizon Wireless will likely end up buying the 22 MHz regional licenses. “Other possible, though we believe less likely, scenarios are that Google picks up one of the six regional licenses that comprise the continental United States, and that Verizon and/or perhaps AT&T pick up the rest,” the firm said.

Stifel Nicolaus said AT&T is most likely to win the D- block, if any company bids above the reserve price. If AT&T bids “we believe Verizon will be reluctant to let AT&T get it at a cheap price, and perhaps will want to bid to obtain both the C and the D anyway,” the firm said. “Verizon remains far behind AT&T in spectrum holdings and can’t afford to let AT&T widen the gap.” Leap, MetroPCS, Alltel, the cable companies, and possibly Vulcan are likely to focus on the A-block with its mid-sized geographic licenses, the firm said. “The B Block is likely to be the cheapest spectrum on average because of its small geographic license areas, and we would expect this to be the focus of speculators and rural carriers.”

Wall Street analysts said smaller bidders will be impacted by the environment, but larger players’ auction strategies are largely unaffected. “Certainly one can’t argue against the fact that recent economic weakness increases the possibility that the reserve prices won’t be met and that turbulence in the credit markets may discourage some bidders,” said Moody’s analyst Dennis Saputo. “That said, I believe the reserve prices are set reasonably low enough (about $10B in total) and will generally be met. Verizon and AT&T are likely to be very active but any hopes that the government had on getting near or above $15B should have faded a few weeks ago.”

The economic slowdown most significantly hurts a new entrant or private equity’s ability to bid in the auction, said Stanford Group analyst Michael Nelson, noting it already killed Frontline. It also will make it more difficult for anyone bidding on the D Block to meet the reserve price, he said. Verizon and AT&T bidding strategies aren’t affected, because they have solid balance sheets and deep pockets, he said. The economy hurts MetroPCS and Leap Wireless’s potential to raise additional capital, but considering the prepaid carriers’ winnings in the AWS auction, they probably wouldn’t have bid aggressively anyway, he said. Meanwhile, Google probably wasn’t going to bid to win the C Block anyway, and the search giant still has enough capital to trigger the open platform requirement, he said.

“At the end of the day, this is still beachfront property necessary for rolling out a 4G network,” said Jefferies analyst Jonathan Schildkraut. Many smaller players won’t be able to get financing, while Verizon and AT&T will buy up the biggest spectrum blocks, “maybe on the cheap,” he said. “Hitting the reserve price will be based on the particular licenses, with the bigger blocked national license likely to hit the minimums, but other regional licenses possibly coming up short.” Incumbent carriers “will still go for the spectrum, perhaps with their ceilings readjusted in light of the credit market,” agreed Current Analysis’s William Ho. “Smaller players will probably be more affected and limited in their desires.”