The FCC incentive auction results were published earlier today, and to everyone’s surprise, DISH ended up spending $6.2B to acquire a near national 10x10MHz footprint. T-Mobile spent $8.0B (which was only slightly above the predicted figure), but Verizon didn’t bid, and AT&T ended up with even less spectrum than predicted, spending only $900M. Comcast spent $1.7B, while two hedge fund-backed spectrum speculators, Bluewater and Channel 51, spent $568M and $860M respectively (after each receiving a $150M discount for being “small” businesses).
Some parts of this outcome (notably T-Mobile’s substantial purchases and AT&T’s bluff in bidding for a large amount of spectrum before dropping bids) are similar to my predictions, but I had expected Comcast rather than DISH to be the other large bidder. My assessment that DISH might have been pushed out of the bidding in Stage 1 was based on an assessment that DISH would initially focus on major cities to force up the price for others (as happened in AWS-3), but instead DISH played the role of a more regular bidder (presumably as a double-bluff to hide its intentions), and spread its bids fairly uniformly across a large number of licenses. In fact Comcast started with this drastically more concentrated strategy and then tried to drop bids, while AT&T also began to drop most of its bids before the end of Stage 1, with both Comcast and AT&T responsible for the dramatic falls in overall bidding eligibility from Round 24 onwards.
What did go as I predicted was that AT&T largely dictated the pace of the auction, reaching a maximum commitment of $7.4B in Stage 1 Round 21, before dropping eligibility rapidly in the latter part of Stage 1 and attempting to exit from all of its bids in Stage 2 and beyond. AT&T was only prevented from achieving this goal because Comcast apparently also got cold feet about being stranded after reaching a maximum commitment of $5.9B in Stage 1 Round 22 (based largely on concentrated bids within the largest PEAs in addition to its more modest bids for a single 5x5MHz block elsewhere).
It is unclear exactly what Comcast’s objective was, but Comcast may have been making these concentrated bids to push up the overall price to reach the reserve (which is measured on average across the top PEAs) in areas which it didn’t want, so that the price in areas it did want would be lower. However, Comcast didn’t want to be stranded and so when AT&T started dropping bids, I assume Comcast panicked and decided that it also needed to get out of those concentrated bids.
So in summary, despite its high exposure during Stage 1, I doubt Comcast really wanted to spend $6B+ on spectrum – instead it just wanted to get a limited 5x5MHz block of spectrum within its cable footprint at the lowest possible cost. AT&T apparently wanted to use its financial resources to game the auction and strand others (Verizon or DISH) with spectrum that they might struggle to put to use. T-Mobile was trying to get at least 10x10MHz of spectrum on a national basis, and succeeded, albeit with no other wireless operators now present to help ensure a quick transition of broadcasters out of the band. DISH also seems to have set out from the beginning to buy a national 10x10MHz block, with Ergen going all in on spectrum, presumably because he believed this spectrum would be cheap and could provide leverage for a subsequent deal. And finally, several speculators decided to acquire a more limited set of licenses that they hoped they could sell on to AT&T or Verizon at a later date, which now looks like a rather unwise bet.
Of course the most important, and puzzling, question is why did DISH set out to buy another 20MHz of spectrum when it already has a huge amount of spectrum that it has not yet put to use (and DISH’s current plan for that spectrum is a low cost IOT network to minimize the cost of meeting its March 2020 buildout deadline)? It seems Ergen concluded that this spectrum would either sell for a low price because of the sheer amount of spectrum available or (if AT&T and Verizon both turned up and wanted 20MHz+ of spectrum) then he could push up the price and make life difficult for T-Mobile just as in the AWS-3 auction. It turned out to be the former, but Ergen may not have expected AT&T to drop its bids at the end of Stage 1, which has resulted in both AT&T and Verizon likely having no long term interest in acquiring spectrum in this band (and potentially even an opportunity to push out the time period over which this spectrum is put to widespread use).
That leaves DISH with less leverage rather than more, because now DISH has spent so much on spectrum it can’t credibly play the role of disruptor in upcoming industry consolidation (either by building or buying) and instead Ergen has to wait for operators to come to him to buy or lease his spectrum. DISH may now want to shift into the role of neutral lessor of spectrum to all comers, but it seems unlikely that AT&T and Verizon will be prepared to enable that, while T-Mobile and Sprint now both have plenty of their own spectrum to deploy.
Instead it seems probable that Ergen might end up attempting to find other potential partners outside the wireless industry, but with cable companies are unlikely to deploy a network from scratch, he may have to return to Silicon Valley. However, with Google already having said no to a deal with DISH, the list of possibilities there is also pretty short. So yet again, we may end up with DISH on the sidelines, overshadowing, but ultimately not having much influence on the wireless dealmaking to come, whether that is a merger between a cable company and a wireless operator, or an attempt to get approval for a merger of T-Mobile and Sprint.
Is it too soon to ask whether another trip to the bankruptcy court is now a possibility for Ligado? Pressure is growing from all sides for Ligado’s proposed changes to its spectrum plans to be turned down by the FCC, culminating in yesterday’s op-ed in The Hill by former FCC Commissioner McDowell.
He noted that back in 2010 “the FCC pivoted away from physics and toward politics in making an ill-conceived decision that fundamentally endangered aviation safety and the operation of vital military equipment” and suggested that “Ligado…hasn’t changed its tactics, is pushing hard and is hoping today’s policymakers have short memories. It won’t succeed.” Most importantly, he states “the essence of the science behind their arguments hasn’t changed: Ligado’s plan still causes harmful interference to already-licensed neighbors such as satellite services providers, NOAA’s weather service and the aviation industry.”
It is particularly ironic that McDowell is adopting such an strident tone, when he served as an expert witness for LightSquared’s special committee and testified in the first bankruptcy confirmation hearing back in March 2014 that he believed the FCC will approve LightSquared’s applications by the end of 2015. He was quoted at that time as stating:
“The issues have been before the FCC for a long time. We’re almost two years away from the end of 2015, and that is more than ample time to come up with technical solutions. One component of their decision is resolution of this bankruptcy, it will be a huge issue off the checklist for the FCC. Once that’s behind us, the commission will act with alacrity.”
However, he’s not the only heavyweight opponent that Ligado is facing, with the American Meteorological Society and the American Geophysical Union urging the (previous) Secretary of Commerce back in December “to encourage the FCC to reject Ligado’s sharing proposal [for the 1675-80MHz band] outright without establishing a further FCC Notice of Proposed Rulemaking on this matter.”
Iridium has also shifted its position, from one of negotiating a compromise with Ligado over the uplink band to now telling the FCC that “Iridium’s technical analysis makes clear that a Ligado terrestrial network is virtually certain to cause substantial interference to Iridium users” so “absent an agreement in which Ligado sufficiently modifies its proposed ATC operations to avoid interference with the long-established Iridium services in the adjacent band, the Commission should deny Ligado’s effort to convert its operations in the 1627.5-1637.5 MHz band to a terrestrial wireless broadband service.”
Finally, by all accounts, last week’s Department of Transportation workshop for its Adjacent Band Compatibility (ABC) study was a train wreck for Ligado, with the DOT taking a very hard line on avoiding any possibility of interference, no matter how unlikely, and thereby insisting on extremely onerous power limits for Ligado’s operations, while Ligado continued its Sisyphean task of criticizing the 1dB C/N0 interference limit, which all other parties insist on using.
Moreover, last Friday Ligado filed an ex parte with the FCC indicating that for the 1526-1537MHz band “applying the model developed in consultation with the FAA and other stakeholders to potential tower sites has produced power ranges of 9 to 13 dBW EIRP” compared to the 32dBW Ligado originally proposed in its license modifications. Thus even if Ligado could resolve its issues with the DOT (which could ultimately restrict the transmitted power to an even lower level), the FAA model will make this part of the spectrum band at best only usable for small cells, and severely limit its value to any purchaser.
In summary, all the major components of Ligado’s potential spectrum portfolio now face significant challenges:
1) the FAA will severely limit the power levels in the 1527-37MHz downlink band, and the DOT may further constrain (or even effectively block) these operations;
2) the Earth science community is working to block an auction of the 1675-1680MHz NOAA spectrum, which is integral to Ligado’s other downlink band (1670-1680MHz);
3) Iridium is attempting to block use of the 1627.5-1637.5MHz uplink band which would be paired with 1670-1680MHz; and
4) The remaining uplink band (1647-1657MHz) is too close to 1670-1680MHz for it to be effectively paired (so it would only be used for the 1527-1537MHz low power downlinks).
So its quite plausible that the Reuters article a few weeks ago about Ligado hiring Goldman Sachs and PJT Partners to “consider a potential sale or new investment,” which were immediately followed by widespread rumors about whether DISH could buy into Ligado, was an attempt to boost Ligado’s credibility before all this bad news emerged.
But where do we go from here? Ligado still has some available cash, which could last well into next year, and permit the lobbyists to continue their work. However, unlike under past administrations, it may no longer be possible to just put off a difficult decision, because Chairman Pai has recently pledged that the FCC will follow Section 7, and supply an answer on petitions or applications for a new technology or service within one year. Ligado’s application and petition were put on public notice on April 22, 2016, so it is entirely possible that we could now see a yes or no ruling from the FCC within the next three weeks.
Back in 2010 the FCC came out with its notorious forecast that there would be a 275MHz spectrum deficit by the end of 2014, based on projections of traffic growth, cell site growth and network efficiency. I pointed out at the time that there were problems with their calculations, and in reality it turned out that at the end of 2014 there was a nearly 300MHz spectrum surplus not a deficit.
The primary reason for this error was the flawed estimate of network efficiency, which was predicted only to double from 0.625bps/Hz to 1.25bps/Hz between 2009 and 2014 (note that in practice new cellsites are also placed to meet data traffic demand, but for simplicity I’ve rolled this into overall network efficiency).
In reality, if we plug in the actual growth in reported traffic and cell sites over the period from 2009 to 2014 (as summarized by Brattle in their 2015 CTIA-backed effort to continue the spectrum crisis narrative) the implied network efficiency (i.e. traffic per MHz per cell site) was 525% of the 2009 value by 2014, not 200% as the FCC predicted (i.e. a 425% improvement in efficiency, not the 100% predicted).
The chart above combines this data with Brattle’s predictions of traffic and cellsite growth from 2014-2019 and highlights that once again the prediction is for very modest network efficiency gains over this period, to only 139% of the 2014 figure in 2019, and Brattle use this figure to assert that there will once again be a spectrum deficit of over 300MHz by 2019.
Put another way, Brattle assert that the efficiency gains between 2014 and 2019 (39%) will be less than one tenth of the improvement that occurred between 2009 and 2014 (425%). Of course, in the real world, massive efficiency gains are already flowing from the deployment of MIMO technology, and Gigabit LTE is only just getting started.
Sprint stated in its October 2016 spectrum leaseback transaction that it is already achieving average spectrum efficiency of 1.6-1.95 bps/Hz, well above the Brattle predictions for 2019, and that it expects the average downlink efficiency in its Band 41 spectrum to reach almost 13bps/Hz by 2019 after the introduction of massive MIMO.
Indeed, the only way Sprint was able to justify the high valuation placed on its spectrum (based on a calculation of how much capex Verizon would be able to avoid by purchasing Sprint’s spectrum) was to assume that massive MIMO would not be feasible in paired spectrum bands. In practice massive MIMO is already being addressed in paired spectrum, and will simply be a bit less efficient than in TDLTE implementations. And if even a fraction of the efficiency gains set out by Sprint are applied to the FCC/Brattle model, then it is clear that there will continue to be a large spectrum surplus not a deficit.
So returning to my title, if spectrum is like oil, then MIMO is just as revolutionary for the spectrum market as fracking has been for the oil market. And as we are seeing in the incentive auction, where Verizon declined to participate, and AT&T has said it will be spending less than $2.4B, there are very similar implications for the price of spectrum as we’ve seen for the price of oil.
I’m unashamedly stealing the title of the book which chronicles the Iridium bankruptcy, because not only did John Bloom give a talk at this week’s Satellite 2017 conference, but discussion of new LEO satellite systems dominated the conference itself. The proposed merger of OneWeb and Intelsat is only the most visible sign of this return to the 1990s, when Iridium and Globalstar’s satellite phones and Teledesic’s proposed broadband system fascinated both the satellite industry and the wider investing community.
But below the surface there is an even more radical shift going on, as most leading operators are cutting back on their investments in high throughput GEO satellites for data services, and many of them are focused instead on the potential of LEO and MEO systems. Intelsat has already indicated that it is cutting GEO capex, and the merger with OneWeb will mean most of its future capex will be devoted to LEO, in line with Masa Son’s vision of a huge new opportunity for LEO satellites.
However, SES, whose CEO stayed away from the conference, is also hinting at a reallocation of its priorities towards O3b’s MEO system, probably accompanied by a sizeable reduction in overall capex. Telesat is also focused on developing its Ka-band LEO constellation for next generation data services, leaving only Eutelsat (which has already announced that it will cut capex substantially) amongst the Big 4 focusing solely on GEO.
This is deeply worrying for satellite manufacturers, and even the indication by Boeing that GEO demand will “remain soft” at “between 13 and 17 satellites in 2017″ may prove to be overly optimistic. All satellite manufacturers now need to play in the LEO/MEO world, with Thales constructing O3b and Iridium, and Airbus taking the lead role on OneWeb, with SS/L as a major subcontractor.
That leaves Boeing, which is not part of any announced LEO satellite contract, but has its own proposal for a V-band LEO system, which is under consideration at the FCC, along with several rival filings. While Boeing has suggested in the past that it was open to partnerships to develop this concept, most people in the industry are convinced that it already has funding from a potential customer, given the amount of effort that Boeing is putting into developing V-band service rules at the ITU and FCC. Boeing has also indicated to these people that it does not need export credit funding for the project, which supports the idea that this project is backed by a deep pocketed US entity.
There aren’t many possibilities for such a backer, and of the four large technology companies Boeing mentioned two years ago, Google and Facebook have apparently lost interest in satellites (although Google did invest $900M in SpaceX and Facebook tried with Amos-6), and Amazon is pursuing its own efforts in the launch market through Blue Origin. That only leaves Apple as never having discussed publicly its potential interest in space.
This aligns with the chatter I heard from a number of sources at Satellite 2017 that Boeing’s V-band development work is being funded by Apple, which is clearly trying to find the next big thing and has been exploring cars, TVs and other large market opportunities. Its not hard to discern why Apple might want to consider a satellite constellation, when SpaceX came out with a business plan last year that suggested SpaceX alone could generate $30B in revenue from satellite internet by 2025.
Just as in the car market there’s no guarantee that Apple would take this project forward to full deployment, but with SpaceX, SoftBank and now apparently Apple becoming enthusiastic about non-geostationary satellite systems, in addition to most of the main satellite operators, it seems that a dramatic reshaping of industry priorities is underway.
It remains to be seen whether this enthusiasm will last, or whether, like at the end of the 1990s, the pendulum will eventually swing back towards geostationary orbit. However, over the next few years, until we find out whether the ambitions of these visionaries can be realized, non-GEO satellite systems are likely to be the most important contributor to driving satellite communications technology forward.
Today’s announcement that SoftBank is investing $1.7B in Intelsat as part of a merger between Intelsat and OneWeb is eerily reminiscent of SoftBank’s investment in Sprint and subsequent purchase of Clearwire back in 2012-13. Then the motivation was acquisition of large amounts of 2.5GHz spectrum to be used with innovative small cells to revolutionize the cellular market. Today the motivation is acquisition of large amounts of NGSO spectrum to be used with innovative small satellites to revolutionize the satellite market.
There are certainly many synergies between Intelsat and OneWeb: Intelsat needs a next generation plan beyond Epic, to lower the cost of its capacity, and hamstrung by debt, it could not have afforded to build a new system on its own. OneWeb needs distribution and market access, as well as interim capacity so that it does not have to wait until the LEO system is fully deployed. So this deal makes a lot of sense, if you believe, as Masa clearly does, that new constellations will dramatically boost the future prospects for the satellite industry. On the other hand, if it doesn’t work out, would SoftBank get to the point where it is prepared to sell the assets and not even mention them in its vision of the future?
However, another potential parallel is that back in 2013, SoftBank faced a lengthy challenge from DISH, which mounted a bid for Clearwire and later made an offer for all of Sprint, and ultimately forced Masa to pay far more for Clearwire than he had hoped. Now EchoStar, which had made a $50M investment in OneWeb (then WorldVu) back in 2015, but has been far less prominently involved in OneWeb’s development efforts compared to Qualcomm (with DISH even objecting to OneWeb’s use of the MVDDS spectrum), has apparently seen its mooted partnership with SES put on hold.
Clearly Charlie Ergen needs to find a way forward for EchoStar to compete in the satellite broadband market on a global basis, building on the successful launch (and market lead) of Jupiter-2. Some analysts have been reiterating that this could involve a bid for Inmarsat, as I mentioned last summer, but the time for that has probably passed. So does Ergen use this development to revive the mooted SES deal, because SES will now need to compete more aggressively with Intelsat? Or does he want to be more actively engaged with OneWeb and get a larger slice of that development effort (and potentially use its capacity in the longer term)?
Either way it would not be surprising if DISH or EchoStar already holds some of Intelsat’s debt, and Ergen could even seek to maximize his leverage by acquiring a larger position in the company. Does Masa want a cooperative relationship with Ergen going forward (perhaps even with a view to collaboration between DISH and Sprint in the wireless sector), or is he still upset over what happened in 2013? And returning to the theme of Groundhog Day, will this movie end with the two protagonists eventually falling in love, or will we see a repeat of 2013, with yet another battle between Masa and Charlie?
Back in December, I suggested that AT&T could end up being the winner of the FCC’s incentive auction, by “dropping the licenses it held at the end of Stage 1 until broadcasters are forced to accept a tiny fraction of their originally expected receipts, leave T-Mobile (plus a bunch of spectrum speculators in various DEs) holding most of the spectrum…and screw DISH by setting a new national benchmark of ~$0.90/MHzPOP for low band spectrum.”
Broadcasters were certainly forced to accept a tiny fraction of their originally expected receipts, when the reverse auction ended Stage 4 with a total clearing cost of only $12B, and the auction has concluded with a national average price of just over $0.90/MHzPOP. However, by the beginning of this month, the clues to the incentive auction outcome derived from the splitting of reserved and unreserved licenses also suggested that T-Mobile might not have bid as aggressively as expected on licenses such as Los Angeles and San Diego, because only 1 license in these areas was classified as reserved.
Despite this, AT&T’s recently filed 10-K confirms that:
“In February 2017, aggregate bids exceeded the level required to clear Auction 1000. This auction, including the assignment phase, is expected to conclude in the first half of 2017. Our commitment to purchase 600 MHz spectrum licenses for which we submitted bids is expected to be more than satisfied by the deposits made to the FCC in the third quarter of 2016.”
The deposits made by AT&T totaled $2.4B, and commitments below this level indicate that AT&T has purchased no more than 5x5MHz on average across the US. That also suggests that AT&T very likely was responsible for dropping bids in Stages 2, 3 and 4, as I guessed back in December. But if both AT&T and T-Mobile did not bid as aggressively as expected in the auction, Verizon did not put down any material deposit and Sprint did not show up at all, that certainly raises the question of who is left standing as a winning bidder for over $19B of spectrum?
T-Mobile could well have bid somewhat more aggressively outside the southwestern US, and therefore may still be holding $5B-$8B of bids in total. It was also clear from the auction results that one or more designated entities are holding just over $2B of spectrum. But Comcast must certainly have winning bids for upwards of $5B, likely in the form of a national 10x10MHz license (and perhaps more in some markets), and it is even conceivable that DISH is still holding some licenses, despite the bidding patterns suggesting that DISH most likely dropped out in Stage 1.
But taken as a whole, the limited participation by AT&T and the lack of interest shown by Verizon could well have serious implications for the prospects of a rapid standardization and transition in this band. As I noted in December, AT&T could strand T-Mobile, Comcast and the various spectrum speculators by supporting the broadcasters in their efforts to delay the transition and ensuring that this spectrum remains non-standard because AT&T and Verizon won’t bother supporting the band any time soon.
Moreover, this outcome once again raises the question of how much AT&T and Verizon really need spectrum in the near term, or if they can instead make do with their current holdings until small cell networks based on 3.5GHz, 5GHz LTE-U and eventually mmWave spectrum create a new era of spectrum abundance and support vast increases in network capacity. Thus its somewhat ironic to see analysts speculating that Verizon is now more likely to buy DISH.
In fact, Charlie Ergen seemed to be hinting on DISH’s Q4 results call that Verizon and AT&T are no longer the most plausible partner when he stated that “I’m sure there will be discussions among any number of parties that are in the wireless business today and people who maybe are not in the wireless business today. And, I would imagine that – we’re not the biggest company, we’re not going to drive that process, but obviously, many of the assets that we hold could be involved in that mix.” However, it remains to be seen if any Silicon Valley companies are still interested in getting into the wireless business (most plausibly via the renewal of DISH’s previously mooted tie-up with Google and T-Mobile) or if something even more surprising like a reconciliation with Sprint and Softbank could be a possibility.
As we get closer to Satellite 2017, where major new deals and partnerships are often announced, it looks like a number of players may be getting cold feet about their future satellite plans. This may be partly attributable to fears that OneWeb will contribute to a eventual glut of capacity, now it has secured SoftBank as a lead investor and raised another $1.2B. Even though capacity pricing may have stabilized somewhat for now, its certainly the case that a satellite ordered now is likely to enter the market at a point when pricing is set to decline much further.
We’ve already seen a delay in Panasonic’s XTS satellite order, which was supposed to happen before the end of 2016. Ironically enough, Leo Mondale of Inmarsat said at the Capital Markets Day last October that he believed “Panasonic in Yokohama are a little wary of getting into the satellite business” and in the wake of the recent FCPA probe, Panasonic Avionics now has a new Japanese CEO.
Moreover, one way of viewing the recent announcement that Eutelsat will take its ViaSat JV forward (and include aero mobility, which was not part of the original agreement) is that Eutelsat no longer believes it will strike a deal to operate Panasonic’s XTS satellites. That’s a much better explanation than bizarre speculation that ViaSat is going to buy Eutelsat, especially when ViaSat is still struggling to fund its third satellite for Asia and is openly hinting that it will need US government contracts to close the business case. Eutelsat also seems to be cutting back elsewhere, with some speculation that the Ka-band broadband satellite previously ordered for Africa may now be repurposed for other (non-broadband) applications.
But the biggest news appears to be a pull back on SES’s part from the long rumored global Ka-band GEO system that I noted last summer. SES announced only a single satellite (SES-17) for the Americas in partnership with Thales last September, but had plans for two additional satellites, and it seemed increasingly likely that a partnership with EchoStar would be announced soon to fund this development. Now it seems that effort is on hold, leaving EchoStar without an obvious way forward to achieving global coverage (as it seems EchoStar considered but rejected the idea of buying Inmarsat last fall).
There are also other more speculative projects that need to show some progress to remain credible. When it was disclosed by the WSJ last month, SpaceX’s business plan for its satellite internet service was widely dismissed as laughably unrealistic. However, I believe that in fact this is not the business plan that corresponds to the current system design, and instead SpaceX will be seeking a large amount of US government money to fund its constellation. Compared to SpaceX and OneWeb, Telesat’s constellation ambitions have largely been ignored by commentators, despite Telesat’s priority claim to the Ka-band NGSO spectrum band. So Telesat therefore also faces pressure to secure external investors in the near term so that it can keep pace with OneWeb.
Now the question is whether caution amongst major existing players will make it harder for new entrants to move forward. Will it signal to investors that they should be cautious about investing in any satellite businesses? Or will it be perceived that new opportunities will face less competition from existing operators? The NewSpace community certainly seems to still be living in a bubble, despite the deeply negative implications of Google’s decision to abandon its efforts in satellite and hand over Terra Bella to Planet (not least because a sale to Google or other internet companies was seen as the most plausible exit for VC investors). So I look forward to seeing how much reality intrudes on the discussions at Satellite 2017.
As the FCC’s incentive auction draws to a close, some further clues emerged about the bidding when the FCC split licenses between reserved and unreserved spectrum. What stood out was that in Los Angeles, San Diego and another 10 smaller licenses (incidentally all located in the southwestern US), only 1 license is classified as reserved. That means there is only 1 bidder that has designated itself as reserve-eligible when bidding for these licenses and that bidder only wants a single 5x5MHz block of spectrum. In contrast, in LA there are five 5x5MHz blocks going to non-reserved bidders (and 1 block spare).
This leads me to believe that T-Mobile may not be holding quite as much spectrum as anticipated, at least in that part of the country, while some potentially reserve-eligible bidders (i.e. entities other than Verizon and AT&T) have not designated themselves as reserve-eligible. That election can be made on a PEA-by-PEA basis, but it would be very odd for a major bidder like Comcast not to designate itself as reserve-eligible. On the other hand, speculators whose intention is to sell their spectrum to Verizon or AT&T, very likely would not want to be reserve-eligible, since that could cause additional problems in a future sale transaction.
A plausible conclusion is that if T-Mobile’s bidding is more constrained, then Comcast may be bidding more aggressively than expected, but is primarily focused on areas where it already has cable infrastructure (i.e. not Los Angeles, San Diego, etc.), and T-Mobile, AT&T and Comcast may all end up with an average of roughly 10x10MHz of spectrum on a near-national basis. We already know that one or more speculators are bidding aggressively, due to the gap between gross and net bids (note that the FCC reports this gap without regard to the $150M cap on DE discounts so it could be a single aggressive player with $2B+ in exposure) and thus the balance of the 70MHz of spectrum being sold would then be held by other players (but with these holdings likely skewed towards more saleable larger markets, including Los Angeles).
Its interesting to note that speculation is now revving up about the transactions to come after the auction is complete, with most attention focused on whether Verizon is serious about a bid for Charter, or if this is a head fake to bring DISH to the table for a spectrum-focused deal, after Verizon apparently sat out the incentive auction. Incidentally, Verizon’s expressed interest in Charter would also tend to support the notion that Verizon believes Comcast may want to play a bigger role in the wireless market, by acquiring a significant amount of spectrum in the incentive auction and perhaps even buying a wireless operator at a later date.
However, when you look at Sprint’s recent spectrum sale-leaseback deal, which was widely highlighted for the extraordinarily high valuation that it put on the 2.5GHz spectrum band, Verizon’s need for a near term spectrum transaction is far from compelling. I’m told that the appraisal analysis estimated the cost of new cellsites that Verizon would need to build with and without additional 2.5GHz spectrum, but that either way, there is no need for Verizon to engage in an effort to add substantial numbers of macrocells until 2020 or beyond, given its current spectrum holdings and the efficiency benefits accruing from the latest LTE technology. And if mmWave spectrum and massive MIMO are successful, then Verizon’s need for spectrum declines considerably.
So it seems there is little reason for Verizon to cave now, and pay Ergen’s (presumably high) asking price, when it does not need to start building until after the March 2020 buildout deadline for DISH’s AWS-4 licenses. It would not be a surprise if Verizon were willing to pay the same price as is achieved in the incentive auction (i.e. less than $1/MHzPOP), but the question is whether Ergen will be prepared to accept that.
Of course, DISH bulls suggest that the FCC will be happy to simply extend this deadline indefinitely, even if DISH makes little or no effort to offer a commercial service before 2020. The most important data point on that issue will come in early March 2017, when DISH passes its initial 4 year buildout deadline without making any effort to build out a network. Will the FCC take this opportunity to highlight the need for a large scale buildout that DISH promised in 2012 and the FCC noted in its AWS-4 order? Certainly that would appear to be good politics at this point in time.
“…we observe that the incumbent 2 GHz MSS licensees generally support our seven year end-of-term build-out benchmark and have committed to “aggressively build-out a broadband network” if they receives terrestrial authority to operate in the AWS-4 band. We expect this commitment to be met and, to ensure that it is, adopt performance requirements and associated penalties for failure to build-out, specifically designed to result in the spectrum being put to use for the benefit of the public interest.”
“In the event a licensee fails to meet the AWS-4 Final Build-out Requirement in any EA, we adopt the proposal in the AWS-4 NPRM that the licensee’s terrestrial authority for each such area shall terminate automatically without Commission action…We believe these penalties are necessary to ensure that licensees utilize the spectrum in the public interest. As explained above, the Nation needs additional spectrum supply. Failure by licensees to meet the build-out requirements would not address this need.”
Given the current status of the FCC incentive auction, which is making broadcasters (or at least their auction advisers) suicidal and leaving Wall St analysts perplexed, it important to note that this really is a “great game” with billions of dollars at stake for the winners and losers. So I though it might be helpful to summarize the winners and losers in previous large FCC auctions, and take a stab at predicting how this time will be different.
2006 AWS-1 auction: Winner: SpectrumCo, Loser: Wireless DBS (DISH/DirecTV), Biggest Loser: Verizon
In the AWS-1 auction, SpectrumCo picked up a national 20MHz block of licenses at the cheapest price per MHzPOP of any participant due to smart advice from Paul Milgrom, which saved them over $1B, as highlighted in this excellent paper. In contrast, Wireless DBS, the partnership of DISH and DirecTV pulled out early without buying any licenses, while Verizon paid the most for its F-block spectrum and didn’t even come away with a national footprint because it ran out of eligibility.
2008 700MHz auction: Winner: Verizon, Loser: Google, Biggest Loser: AT&T
In the 700MHz auction, AT&T painted a target on its back by buying Aloha’s lower C-block spectrum just before the auction. That made it entirely predictable that AT&T would want to acquire the adjacent lower B-block, allowing Verizon to park eligibility in that block and push up the price, while leaving Google to bid against itself for the upper C-block with its open access conditions. This was so obvious that I pointed the situation out while the auction was still going on, even though the bidding was anonymous. Verizon ended up getting the 22MHz upper C-block spectrum very cheaply, while AT&T paid at least $5B more for a similar amount of spectrum.
2014-15 AWS-3 auction: Winner: DISH, Loser: T-Mobile, Biggest Loser: AT&T
In the AWS-3 auction, DISH confused all the other bidders and most external observers, by bidding through three entities simultaneously, and ultimately acquiring all of its licenses via its two Designated Entities, Northstar and SNR, while pushing up the prices to astonishingly high levels. This forced T-Mobile to exit from the auction without gaining the spectrum it wanted, but more importantly, AT&T’s fixed going in position of “get 10x10MHz everywhere” caused it to spend far more than either DISH or Verizon (which was either smarter or just read my blog post on what was happening). Again AT&T spent at least $5B more than necessary in the auction.
Its notable that AT&T has been the biggest loser in both the 700MHz and AWS-3 auctions and has wasted over $10B in the process. But as I noted above, I think this time will be different, presumably because AT&T has hired some smart consultants, and decided to play the game strategically rather than conforming to a fixed spectrum target from the start. So my prediction for the incentive auction is as follows:
2016-17 Incentive auction: Winner: AT&T, Losers: T-Mobile, DISH, Biggest Loser: Broadcasters
AT&T appears to have been the driving force in Stage 1 of the auction, threatening to strand DISH in a handful of expensive top licenses (New York, Los Angeles, Chicago and San Francisco) in Stage 1 and forcing DISH to exit. Then with Comcast also trying to get out after its MVNO deal with Verizon, Verizon not even playing the game, and AT&T set to win the FirstNet spectrum, AT&T clearly holds the winning hand. AT&T can now keep dropping the licenses it held at the end of Stage 1 until broadcasters are forced to accept a tiny fraction of their originally expected receipts, leave T-Mobile (plus a bunch of spectrum speculators in various DEs) holding most of the spectrum (that AT&T can later strand, by supporting the broadcasters in their efforts to delay the transition and ensuring that it remains non-standard because AT&T and Verizon won’t bother supporting the band) and screw DISH by setting a new national benchmark of ~$0.90/MHzPOP for low band spectrum (helpfully also making sure T-Mobile doesn’t need any more spectrum from DISH because it has a surfeit of low band holdings).
Am I giving AT&T too much credit? After all, there is not much existing evidence that they know how to behave smartly in FCC auctions. Perhaps, but on the other hand, I think this is the scenario that best fits what we’ve seen so far (though by stating it so explicitly, I do worry that I might trigger a rush for the exits in the next stage(s) of the forward auction).
What will broadcasters do now? Will they cave on price and accept less than $14B for 84MHz of spectrum cleared (so the auction can close at the Stage 4 reserve price)? Will this drag on further, with both the dollars raised and spectrum sold falling further? That’s unclear, but either way, its not going to be a Happy New Year if you are a broadcaster trying to sell your spectrum.
Here’s a question for FCC incentive auction watchers: why did Stage 1 of the forward auction stop suddenly in Round 27 with proceeds of $23.1B? After all, that was substantially more than the first component (reserve price) target of $15.9B and dramatically less than the second component target (clearing costs) of $88.4B. So was it just random, or was there a deliberate decision by one or more large bidders to stop in that round by dropping demand to match supply in all of the top 40 high demand markets?
If you analyze the data carefully, you can see that in fact that stopping in Round 27 was precisely calibrated to match the reserve price target in Stage 4 and beyond, when it resets to a subtly different formulation. To be specific, “the first component, which aims to ensure that winning bids for forward auction licenses reflect competitive prices, will be satisfied if, for a given stage of the auction:
The clearing target is at or below 70 megahertz and the benchmark average price per MHz-pop for Category 1 blocks in high-demand PEAs in the forward auction is at least $1.25 per MHz-pop; or
The clearing target is above 70 megahertz and the total proceeds associated with all licenses in the forward auction exceed the product of the price benchmark of $1.25 per MHz-pop, the forward auction spectrum benchmark of 70 megahertz, and the total number of pops associated with the Category 1 blocks in high-demand PEAs.”
[UPDATED 12/21] Its clear that Round 27 was the first round in which “the benchmark average price per MHz-pop for Category 1 blocks in high-demand PEAs in the forward auction is at least $1.25 per MHz-pop” (although this will only be achieved in Stage 4 if one or more of the spare licenses in Los Angeles is taken up). Thus, at least one bidder was looking ahead to a situation where the auction would have to go into Stage 4 or beyond (the FCC pointed out in its public notice that the starting price for high demand markets in Stage 4 was $1.22/MHzPOP). That conclusion very likely explains why we saw no further bidding in Stages 2 and 3, as additional bids were dropped. It also tends to confirm that DISH was no longer present at the end of Stage 1 to force up the price of spectrum above the minimum necessary.
Now we’ll have to see how the game continues (and you can read more about who we think is responsible in our industry report for subscribers published last week), but the carefully calibrated outcome of Stage 1 ensures that the first component can be met as soon as one or both of the spare licenses in Los Angeles are taken up, but (if they still have eligibility to play with in the top 40 markets) the bidders could continue to drop license demand and simply wait until the clearing costs drop below the total forward auction bids. That would mean a realized average price for spectrum across the US as a whole of less than $0.90/MHzPOP.
When could that happen? Well, with FCC staff apparently suggesting that as little as 40MHz of spectrum might be sold, it could be a while yet, and net proceeds might be as low as $10B (at 40MHz sold in Stage 7) or $12-13B (at 50MHz sold in Stage 6). With $1.9B deducted from that figure for repacking costs, broadcasters could quite plausibly be left with little more than $10B in reverse auction payments. That might be too pessimistic, but at this stage it seems like a decent bet that the final net proceeds in the forward auction will be below the $19B raised (from 52MHz of spectrum sold) in the 700MHz auction back in 2008 and essentially certain that the average price per MHzPOP will be lower than the $1.28/MHzPOP achieved back in 2008.
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