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Thursday, January 29, 2015

FCC Raises $44.9 Billion in U.S. LTE Advanced Wireless Spectrum Sale

As reported by The Wall Street Journal: The Federal Communications Commission’s biggest ever auction of wireless spectrum closed Thursday and raised a record $44.9 billion, a boon for taxpayers and a sign of the growing cost of supporting Americans’ smartphone habit.  The FCC said bidding in the AWS-3 spectrum auction had ended after 341 rounds.  Analysts had predicted that the auction would raise anywhere from $10 billion to $20 billion.

The haul is more than twice as much as the government brought in from its last major sale of spectrum in 2008, back when Apple Inc. ’s iPhone was only about a year old.

It isn’t yet clear which among the 70 participants who qualified may have won the licenses that were up for sale. Also unknown is how much big bidders like Verizon Communications Inc., AT&T Inc., T-Mobile US Inc. and Dish Network Corp. may have paid. Bidding is confidential, and the FCC says the results won’t be released right away.

Still, the auction’s aggressive bidding surprised analysts who thought it would be a quiet affair dominated by AT&T and Verizon. Anonymous results show multiple bidders fought hard for coveted licenses in markets like New York and Los Angeles, which commanded the largest sums. As of the auction close, the four main licenses for the New York region alone totaled about $6.2 billion.

Spectrum works like lanes on a highway, and carriers need more of it as their wireless traffic increases. The soaring prices in this latest auction reflect the pressure on carriers as their subscribers use their cellphones to watch more YouTube videos, stream music and share photos. Industry giants like AT&T and Verizon are encouraging that use, hoping to cash in as wireless data traffic grows.

The FCC started the latest auction on Nov. 13 without much fanfare and with a goal of raising at least $10.6 billion by selling about 1,600 licenses. That target was quickly surpassed, along with the previous auction record of $19.1 billion set in 2008.

Only 3% of investors surveyed by Morgan Stanley before the auction thought bids would top $35 billion.

The bidding highlights the enormous scale needed to compete in the U.S. wireless market, a reality that makes it hard for rivals to challenge the market’s leaders. AT&T and Verizon control most of the industry’s most lucrative customers and the bulk of its revenue and profits, which gives them enormous financial firepower in such auctions.

While big markets like New York, Los Angeles and Chicago drew the highest bids, smaller markets including Portland, Maine, and Louisville, Ky., received bids over $20 million. One license in American Samoa commanded the lowest bid, at $2,800.

In addition to the big wireless carriers, private-equity firms like Grain Management LLC and even some individuals took part in the auction. Satellite broadcaster Dish did as well. The company has amassed similar spectrum in recent years and says it wants to start offering cellphone service. Sprint Corp., which holds the industry’s largest stores of spectrum, even though much of it is of lower value, didn’t participate.

AT&T and Verizon have raised debt to help pay for the auction and are also selling assets. AT&T said that its recent spending—including corporate acquisitions-would leave it with a higher debt load than it had targeted and that it would make a priority of paying it down. The carrier is working to close a $49 billion acquisition of satellite broadcaster DirecTV and has cut two smaller deals for wireless carriers in Mexico.

The telecommunications industry had been more focused on an upcoming auction of spectrum held by television broadcasters. But that process was recently pushed back to early 2016, a delay that likely helped drive up prices in the current sale.

The airwaves in the just completed auction occupy spots around 1,700 MHz and 2,100 MHz (UMTS band IV and IMT-Advanced) are considered mid-band spectrum. Such frequencies aren’t typically as valuable as the low-band airwaves like those held by TV broadcasters that can carry signals deep into buildings and across the countryside. But the higher bands are useful in cities, because they can carry more data, albeit over shorter distances (i.e. multiple video streams).

Carriers are eager to put the airwaves to use, but what they’re buying won’t be available for some time. The Defense Department currently uses the frequencies for things like missile guidance systems and drone training programs. Some of the operations can be relocated in as soon as nine months, but others will take five to 10 years.

The government is likely to actually collect less than the headline number. Smaller bidders get a discount of up to 25%, which Nomura Securities estimates would bring total cash payments closer to $40 billion.

The AWS-3 auction closed less than 24 hours after the FCC had said that bidding had ended on the 50 MHz of paired spectrum being auctioned off. The FCC was also auctioning 15 MHz of unpaired uplink spectrum, the 1695-1710 MHz band.

The paired spectrum in the auction includes the G Block (1755-1760/2155-2160 MHz), H Block (1760-1765/2160-2165 MHz), I Block (1765-1770/2165-2170 MHz), and J Block (1770-1780MHz /2170-2180 MHz). The G Block is licensed in 734 Cellular Market Area (CMA) geographies and the other paired spectrum blocks are licensed in 176 geographically larger Economic Areas (EAs).

The paired spectrum licenses drew by far the largest bids, especially for the 10x10 MHz J Block in major metropolitan areas. The unpaired spectrum is generally seen as less valuable than the paired spectrum, and it is also encumbered by government users that must be moved off the licenses before they can be used.