04.13.17

Bluff and double bluff…

Posted in AT&T, DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 7:18 pm by timfarrar

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.

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