02.26.17

Last man standing…

Posted in AT&T, DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 10:29 pm by timfarrar

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.

02.05.17

The price is right…

Posted in AT&T, DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 11:42 am by timfarrar

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.”

08.29.16

What’s Charlie’s game now?

Posted in AT&T, DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 3:44 pm by timfarrar

Back in November 2014, I published my analysis of what was happening in the AWS-3 spectrum auction to scorn from other analysts, who apparently couldn’t believe that Charlie Ergen would bid through multiple entities to push up the price of paired spectrum. Now we’re seeing relatively little speculation about who is doing what in the incentive auction (other than an apparently mystifying consensus that it will take until at least the end of September to complete Stage 1), so I thought it would be useful to give my views about what is happening.

The most important factor to observe in analyzing the auction is that overall demand relative to the amount of spectrum available (calculated as first round bidding units placed divided by total available supply measured in bidding units) has been considerably lower than in previous large auctions (AWS-1, 700MHz) and far short of the aggressive bidding seen in the AWS-3 auction.

That’s attributable partly to the absence of Social Capital, but much more to the 100MHz of spectrum on offer, compared to the likelihood that of the five remaining potential national bidders (Verizon, AT&T, T-Mobile, DISH and Comcast), none of them are likely to need more than about 30MHz on a national basis.

What’s become clear so far over the course of the auction is that most license areas (Partial Economic Areas) are not attracting much excess demand, apart from the top PEAs (namely New York, Los Angeles and Chicago) in the first few rounds. I said before the auction that DISH’s best strategy would probably be to bid for a large amount of spectrum in a handful of top markets, in order to drive up the price, and that appears to be exactly what happened.

However, it now appears we are very close to reaching the end of Stage 1, after excess eligibility dropped dramatically (by ~44% in terms of bidding units) in Round 24. In fact a bidder dropped 2 blocks in New York and 3 blocks in Los Angeles, without moving this eligibility elsewhere, somewhat similar to what happened on Friday, when one or more bidders dropped 5 blocks in Chicago, 3 blocks in New York and 1 block in Los Angeles during Round 20.

However, a key difference is that a significant fraction of the bidding eligibility that moved out of NY/LA/Chicago during Round 20, ended up being reallocated to other second and third tier markets, whereas in Round 24, total eligibility dropped by more than the reduction in eligibility in New York and Los Angeles. It is natural that a bidder such as T-Mobile (or Comcast) would want licenses elsewhere in the country if the top markets became too expensive, whereas if DISH’s objective is simply to push up the price, then DISH wouldn’t necessarily want to bid elsewhere and end up owning second and third tier markets.

This suggests that DISH has been reducing its exposure in the top three markets, in order to prevent itself from becoming stranded with too much exposure there. My guess is that DISH exited completely from Chicago in Round 20 and is now reducing exposure in New York and Los Angeles after bidding initially for a full complement of licenses there (i.e. 10 blocks in New York and Chicago and 5 blocks in Los Angeles).

If DISH is now down to about 8 blocks in New York and only 2 blocks in Los Angeles, then its maximum current exposure (if all other bidders dropped out) would be $4.52B, keeping DISH’s exposure under what is probably a roughly $5B budget. Of course DISH could potentially drop out of Los Angeles completely and let others fight it out (for the limited allocation of 5 blocks), if its objective is simply to maximize the end price, but this may not be possible in New York, because there are 10 license blocks available, which could give Verizon, AT&T, T-Mobile and Comcast enough to share between them.

Regardless, with the price increasing by 10% in each round, the price per MHzPOP in New York and Los Angeles would exceed that in the AWS-3 auction before the end of this week, implying that a resolution has to be reached very soon. If DISH is the one to exit, then it looks like Ergen will not be reallocating eligibility elsewhere, and DISH’s current eligibility (256,000 bidding units if it is bidding on 8 blocks in New York and 2 in Los Angeles) is likely higher than the excess eligibility total of all the remaining bidders combined (~182,000 bidding units at the end of Round 24 if all the available licenses were sold). This implies that a rapid end to Stage 1 of the auction is now likely, perhaps even this week and almost certainly before the end of next week, with total proceeds in the region of $30B.

Of course we will then need to go back to the next round of the reverse auction, but it looks plausible that convergence may be achieved at roughly $35B-$40B, potentially with as much as 80-90MHz sold (i.e. an average price of ~$1.50/MHzPOP). If DISH is forced out in Stage 1, then prices in key markets would probably not go much higher in future rounds of the forward auction, so the main question will be how quickly the reverse auction payments decline and whether this takes 1, 2 or 3 more rounds.

Also, based on the bidding patterns to date, it seems likely that Comcast may well emerge from the auction with a significant national footprint of roughly 20MHz of spectrum, potentially spending $7B-$10B. In addition, unless the forward auction drops to only 70MHz being sold, all four national bidders could largely achieve their goals, spending fairly similar amounts except in New York and Los Angeles, where one or two of these players are likely to miss out. In those circumstances, it will be interesting to see who would feel the need to pay Ergen’s asking price of at least $1.50/MHzPOP (and quite possibly a lot more) for his AWS-3 and AWS-4 spectrum licenses.

UPDATE (8/30): Bidding levels in New York and Los Angeles dropped dramatically in Round 25 (to 10 and 8 blocks respectively), with total bidding units placed (2.096M) now below the supply of licenses (2.177M) in Stage 1. This very likely means that DISH has given up and Stage 1 will close this week at an even lower price of ~$25B, with convergence of the forward and reverse auction values probably not achieved until the $30B-$35B range. This lower level of bidding activity increases the probability that 4 stages will now be required, with only 70MHz being sold in the forward auction at the end of the day.

11.29.15

The analysts have a problem…

Posted in AT&T, Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Verizon at 8:32 am by timfarrar

I woke up this morning to read New Street Research’s latest 3Q2015 Wireless Trends Review, subtitled “Competition Gets Ugly: The Big Guys Have A Problem” and while I agree that competitive pressures in the US wireless market are getting ugly, I’m afraid it is the analysts rather the “Big Guys” that have a problem. In particular, New Street’s “network capacity framework” that suggests Verizon “have half the capacity they will need by 2020 to maintain current network quality” is based on a completely flawed premise, just like most other pronouncements of an imminent spectrum crisis.

This network capacity framework calculates the number of “MHz-sites” that Verizon has for LTE in the top 25 markets and assumes that data demand will grow at 30% from 2015 to 2020 (reaching 10GB/LTE sub per month by then). Ignoring the fact that New St doesn’t know its Petabytes (1 million Gbytes) from its Exabytes (1 billion Gbytes), Verizon’s “aggregate LTE data demand” is projected to increase five fold between 2015 and 2020, while Verizon is expected to increase its deployed LTE spectrum from 68 to 138MHz and its number of LTE macrosites in these markets from 21K to 27.2K over the period, which supposedly will result in 2.5 times growth in network capacity. Thus New St concludes that Verizon will have only half the capacity needed to meet demand, without buying more spectrum from DISH.

This thesis is even more flawed than the Brattle Group study for CTIA back in June, because it completely fails to consider the potential for improvements in network efficiency over the period as LTE-Advanced technologies are deployed. Even Brattle Group acknowledges that “LTE+” will carry over 70% more bps per Hz than 4G LTE, based on a move from 2×2 MIMO to 4×4 MIMO, and the original source for these estimates (Rysavy Research’s August 2014 paper on “Beyond LTE: Enabling the Mobile Broadband Explosion“) acknowledges that many additional improvements are feasible.

Correcting for this error alone, and assuming capacity constrained locations are upgraded to LTE-Advanced by 2020, New Street’s supposed capacity shortfall is reduced from 50% to 14%, and so the number of additional macro sites that Verizon would need to build is reduced from 26.7K to only 4.5K (which based on the FCC’s October 2010 estimate of $550K per cellsite would cost only $2.5B in incremental capex). That hardly seems to justify Verizon spending tens of billions of dollars to buy DISH’s spectrum.

New Street also ignore other sources of incremental capacity (such as LTE-U) and reject small cells as infeasible because they have supposedly only 1/3 the capacity of macro sites (Rysavy in fact points out in Figure 68 of his report that through careful placement to meet hotspot demand, four picocells per macrocell could produce roughly a 10x increase in capacity).

Its hardly surprising that New Street conclude Verizon’s behavior is “perplexing” and suggest that rather than “discounting to hang onto subs” Verizon “should be taking up price to shed subs faster in congested markets to preserve superior network performance for their most valuable subs.” But perhaps Verizon do actually understand network engineering and the potential for network capacity enhancements better than analysts with a simplistic, erroneous spreadsheet model?

In these circumstances Verizon would also feel happy to say no to Ergen’s blackmail and refuse to pay more than their previous offer for DISH’s spectrum (which I guess is around $1/MHzPOP). In fact, it would seem likely that Verizon don’t want a deal at any price ahead of the incentive auction, if that would enable Ergen to bid up the price of spectrum once again. On the other hand, Ergen is undoubtedly keen to find a partner to endorse the value of his spectrum holdings and force Verizon back to the table. As part of that effort, I’m told he has been visiting Google again recently, just as he did back in 2012 when he was trying to pressure AT&T to do a spectrum deal.

One possibility for such a partnership would be to reinvigorate DISH’s rooftop small cell deployment plan, and meet Ergen’s AWS-4 buildout requirements, using the AWS-4 uplinks (2000-2020MHz) as downlinks in conjunction with his 1695-1710MHz uplink spectrum. Remember that Google has backed similar efforts in the past, when it funded Clearwire (rather than LightSquared) in 2008, in order to get a competitive 4G network built out quickly, and push Verizon and AT&T to do the same. However, Ergen has little more than a month left to get a deal done before the auction restrictions kick in, so time is not on his side.

06.05.15

Sorry Charlie…

Posted in AT&T, DISH, Operators, Spectrum, T-Mobile, Verizon at 4:25 pm by timfarrar

Two people have now told me that with 99% certainty, the leak about the DISH/T-Mobile talks came from T-Mobile itself, not from DISH, based on the authorship of the WSJ report. Although it might be tempting to conclude that T-Mobile is trying to prompt a cable operator to consider an alternative bid, Charter has indicated that it will focus on TWC’s MVNO agreement with Verizon to provide wireless services if its TWC bid is successful and Comcast could presumably do likewise if desired.

Moreover, it seems this was not some sort of “official” leak, but instead simply reflects general conversations which got blown out of proportion, because Bloomberg has reported that the talks, which have been going on since last summer, have not advanced significantly in recent weeks.

That still leaves the perplexing analyst event that DISH held on Tuesday, and there’s been no convincing explanation of why that event was scheduled at short notice. Nevertheless, there’s now a frenzy of speculation leaving some convinced about the “inevitability” of a merger. What none of the reports deal with at all is how T-Mobile would actually make use of DISH’s spectrum without AWS-3/4 interoperability, and even then half of DISH’s spectrum in PCS H-block and 2000-2020MHz would still have no ecosystem available.

Instead analysts simply assume that interoperability doesn’t even need to be considered, and that the FCC “buildout requirements of its spectrum are so far in the future it’s not even worth starting the discussion about the weak enforceability of those deadlines.”

Of course a merger makes all the sense in the world if you assume DISH’s spectrum is just as usable as any other spectrum and that the FCC won’t enforce its buildout deadlines (in March 2020) so DISH has all the time in the world to strike a deal at a full price. Unfortunately that simply isn’t the case, and both Verizon and AT&T know that only too well.

05.26.15

Heads we win, tails you lose…

Posted in AT&T, DISH, Financials, Operators, Regulatory, Spectrum, Verizon at 12:06 pm by timfarrar

Its been interesting to note that AT&T and Verizon did not file any petitions to deny the AWS-3 license applications of DISH’s two Designated Entities, NorthStar and SNR, despite Verizon and AT&T both having earlier been vocal in denigrating DISH’s bidding strategy in their comments in the FCC’s bidding procedures docket 14-170.

Instead the opposition was left to a couple of small bidders plus a collection of ‘public interest’ organizations, who followed the path set out by Verizon, and alleged violations of antitrust laws by DISH and its DEs. DISH’s response argued that there was no antitrust violation and that the joint bidding arrangements (including realtime coordination of bids during each round, which most people including myself thought was not allowed) were fully disclosed.

While the eventual FCC decision on DISH’s $3.3B discount remains uncertain (and according to FCC Chairman Wheeler would not in any case involve denial of the licenses or reauctioning of the spectrum), it is far from a slam dunk (as some argued originally) that DISH will keep the discount. Nevertheless, it seems to me that Verizon and AT&T could even be better off if DISH kept the DE discount, and that might provide one reason why they held back from challenging DISH’s licenses directly.

Of course DISH would lose $3.3B if the DE discount was rejected, but in that case, DISH would acquire NorthStar and SNR under the terms of its agreements with the DEs, and would be free to consolidate and restructure its AWS-3 and AWS-4 spectrum holdings. After that, in my view, the most likely end game would be to spin-off all of DISH’s spectrum (AWS-3, AWS-4, 700MHz E-block, PCS H-block) into a holding company, which could lease individual licenses to any wireless operator, and raise perhaps $20B-$30B of debt at the spinco level, flowing that cash back up to DISH (and perhaps allowing Ergen to take some chips off the table).

Any repricing of the AWS-3 spectrum would presumably increase Ergen’s asking price for his leases, meaning that Verizon and AT&T might ultimately be the ones to suffer from the removal of the discount. In fact Verizon might even decide it had to pay up and pre-empt the spinoff because of the prospect that this arrangement would make more spectrum available in key markets for both T-Mobile and Sprint.

However, in order to execute these spinoff plans and enter into meaningful leases of AWS-4 spectrum, it is critical that DISH secures interoperability for its AWS-4 downlinks (2180-2200MHz) with the AWS-3 blocks. T-Mobile and Sprint know all too well that building out networks in bands without an ecosystem (such as T-Mobile’s deployment of WCDMA/HSPA in the AWS-1 band, which was ultimately abandoned, and Sprint’s PCS G-block LTE network) makes it much more difficult and expensive to secure handsets (hence there was no WCDMA iPhone operating in AWS-1 and Sprint had to guarantee billions of dollars of purchases to secure a G-block iPhone). As a result, they are unlikely to want to get into bed with DISH and make use of AWS-4 unless and until there is some guarantee of a handset ecosystem.

While DISH can pursue a band class designation for AWS-4 supplementary downlinks through 3GPP, we only need to look at the story of Band Classes 12 and 17 (in the lower 700MHz band) to see that a band class designation on its own, without any regulatory mandate for interoperability, is insufficient to ensure a handset ecosystem is created. And at the end of the day, the FCC was forced to intervene and broker a deal to ensure interoperability in the lower 700MHz band, before T-Mobile moved to buy 700MHz A block licenses for its low band coverage buildout.

Its therefore hardly surprising that AWS-3/4 interoperability was a key request of DISH in March 2014 before the auction, and fiercely opposed by Verizon and AT&T. At the time, the FCC decided not to impose a mandate, but strongly suggested that cooperative efforts should be made to ensure interoperability with AWS-4:

In the absence of technical impediments to interoperability, if the Commission determines that progress on interoperability has stalled in the standards process, future AWS-3 licensees are hereby on notice that the Commission will consider initiating a rulemaking regarding the extension of an interoperability mandate that includes AWS-4 (2180-2200 MHz) at that time. Should we undertake such a rulemaking, relevant considerations may include considerations of harmful interference, technical cost and difficulty of implementation, and the extent to which licensees are common to both the AWS-3 and AWS-4 bands.

Given the likelihood that AT&T and Verizon will engage in delaying tactics (not least due to the relatively short period in which DISH needs to start moving ahead on deployment), DISH will very probably need help from the FCC to push AWS-3/4 interoperability forward. However, if DISH is seen to have gamed the auction rules and secured an unwarranted multi-billion dollar discount, it will be far more difficult for the FCC to help out DISH on interoperability over AT&T and Verizon’s objections.

That might in fact be AT&T and Verizon’s ultimate goal: box DISH in with no possibility of a deal with T-Mobile or Sprint to put its AWS-4 spectrum to use, and wait for Charlie to cry uncle when he runs up against his AWS-4 buildout deadlines. Note that it is pretty much a foregone conclusion that the 4 year interim deadline to cover 40% of the population in each Economic Area by March 2017 will be missed, which will bring forward the final 70% coverage deadline to March 2020 (the timeline was extended to 8 years as part of the H-block deal in December 2013, but one year will be deducted if the interim deadline is not met).

Thus if DISH is unable to reach lease agreements with T-Mobile and/or Sprint for an AWS-4 buildout by the first half of 2017 at the latest (which will require interoperability to be secured in the next 18 months or so), Ergen will be under considerable pressure to moderate his price demands for a sale to Verizon or AT&T. As a result, AT&T and Verizon may win even more if DISH keeps the DE discount, than the $3.3B that DISH loses if the discount is rejected.

01.31.15

How to blow up a spectrum auction…

Posted in AT&T, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 4:00 pm by timfarrar

Despite it coming as a “surprise” to many reporters (and Wall St analysts) that DISH ended up with more total winning bids (before DE discounts) than Verizon in the AWS-3 spectrum auction, and that DISH got a 25% DE discount on its bids, the outcome is exactly what I predicted from the bidding patterns back in November. I was particularly amused to look back at Jonathan Chaplin’s comment from his December 7 report which poured scorn on my thesis, stating:

Some have suggested that DISH is distorting prices by bidding against themselves (DISH has three bidding entities that can’t communicate with each other during the auction). While possible, this is highly, highly unlikely.

[As a reader suggests, perhaps I should take this opportunity to note Chaplin's follow-up proposal on January 11 that DISH should do a LightSquared and set up a wholesale capacity business generating $10B per year. While possible, this is highly, highly unlikely.]

Its useful to examine exactly why DISH was so successful in driving up the price of the AWS-3 paired spectrum to a price far beyond anyone’s expectations. One of the key objectives for a bidder in the early rounds of an auction is to discover the amount of spectrum that its rivals are looking to acquire (only later does it become possible to discover how much they are prepared to pay for that spectrum). The price usually rises fastest in the key cities and then as the mix of demand becomes clear, bidders can switch over to second tier licenses knowing roughly how much spectrum they will end up being able to win.

We know that AT&T was looking to buy a paired 10MHz block, and it seems likely that Verizon would have been seeking roughly the same. Meanwhile T-Mobile wanted to selectively pick up one or two paired 5MHz blocks. If DISH hadn’t been bidding then everyone could have got what they wanted at close to the reserve price. However, adding DISH to the mix meant that the four key players were trying to buy more than the 2x25MHz of paired spectrum that was available.

More importantly, DISH was bidding through three separate entities and instructed them to bid on all the licenses simultaneously in key cities, to ensure that AT&T, Verizon and T-Mobile simply didn’t know how much spectrum each other and DISH were looking to buy.

The chart below shows the bidding patterns for the G, H, I and J blocks in New York (the G block is a smaller 2x5MHz CMA license, while the H and I blocks are 2x5MHz BEA licenses and the J block is a 2x10MHz BEA license).

We can see that all three DISH entities bid on every one of the New York paired license blocks they weren’t already holding all the way through Round 15, by which time the total combined gross price had reached $2.81B ($2.28/MHzPOP). In fact, it wasn’t until Round 18 (when the price reached $3.81B or $3.12/MHzPOP) that DISH’s bidding on these licenses began to slow (and SNR even overbid its own winning bid in Round 17).

[Incidentally, DISH's 3 entities combined were the biggest bidder for much of the auction, notably as late as Round 63, where they held $14.7B of gross PWBs or 35% of the $41.6B total, compared to $12.6B for AT&T, $10.5B for Verizon and $2.1B for T-Mobile. When the reserve price was met in Round 13, DISH held a total of $5.4B of PWBs, 44% of the $12.3B auction total at that point in time, compared to only $2.7B for AT&T, $2.1B for Verizon and $1.3B for T-Mobile.]

DISH clearly wrote the instructions to its DEs very well, because in the end there were very few cases where the final winning bid from SNR was topping an existing bid from NorthStar or vice versa (the largest license I’ve seen where this happened is the B1 unpaired license in Tampa BEA034 which sold for $21.4M before the DE discount). And it does seem that DISH complied with the letter of the rules: even though the FCC still needs to rule on whether the DE discount should be granted, it seems unlikely the FCC would want the auction to descend into chaos (which could theoretically result in a re-run).

However, its clear that the rules for future auctions will need to be rewritten significantly – I would expect severe restrictions on DE discounts and common ownership of different bidding entities at the very least. Indeed, it will now be very difficult to come up with a workable structure to advantage smaller operators like Sprint and T-Mobile in the incentive auction next year.

Where does the outcome leave us? Ergen did not buy a readily deployable collection of spectrum, instead seeking a blocking position in key cities (including New York and Chicago) in an attempt to force other operators to make a deal with him. Interestingly, most of DISH’s paired AWS-3 spectrum is in the G block, which is adjacent to and perhaps more quickly usable with the AWS-1 spectrum band, rather than being aggregated directly with the adjacent AWS-4 downlinks in the longer term like the J block. DISH also acquired most of the unpaired uplink blocks, which appears to be a hedge against the potential (and now perhaps likely) loss of LightSquared.

However, with AT&T winning enough AWS-3 to meet its spectrum needs (and make it highly indebted) for the next few years (not to mention AT&T’s ownership of DirecTV which makes a tie-up with DISH very difficult), it seems clear that Ergen is setting his sights squarely on a deal to sell DISH (or perhaps more likely lease its spectrum, given the difficulty of reaching agreement on a sale price) to Verizon.

So now, as I pointed out in November, the key question is whether Sprint will take this opportunity to satisfy Verizon’s spectrum needs through a sale of 2.5GHz spectrum? Given everyone in the industry is fed up with Charlie, that certainly seems like a plausible next step.

05.18.14

Buying dishes not DISH?

Posted in AT&T, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 8:01 pm by timfarrar

So now AT&T has finally announced that it has agreed to acquire DirecTV for $95 per share, and has indicated that “AT&T will use the merger synergies to expand its plans to build and enhance high-speed broadband service to 15M customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today, utilizing a combination of technologies including fiber to the premises and fixed wireless local loop capabilities.”

That sounds a lot like AT&T intends to steal DISH’s concept of a fixed wireless broadband connection to rooftop antennas collocated on a satellite TV dish. Indeed, its hard to think of any other way for AT&T to advance an out-of-region TV+broadband strategy, in places where it isn’t the incumbent telco. Of course, the obvious rejoinder is “so why didn’t AT&T buy DISH instead and get hold of its spectrum”.

However, its important to remember that AT&T has already turned down the opportunity to buy DISH twice in the last few years, in 2007/8 and 2012, both times apparently because it refused to pay Charlie Ergen’s asking price. And it seems the same is still true: my understanding is that Ergen has advertised his price to AT&T (and presumably Verizon as well) and indicated it was take it or leave it. Once again AT&T chose to leave it and this time moved on to negotiate with DirecTV instead (just like AT&T jumped to NextWave back in spring 2012).

DISH’s price is pretty clear: in DISH’s Q1 conference call Ergen indicated that his spectrum should be valued at twice the amount that the AWS-3 spectrum is sold for in the upcoming auction, and that he expected the AWS-3 price to be higher than the $5B-$10B range cited by analysts. That implies a price of $20B+, in line with the value ascribed to spectrum in DISH’s current stock price, although perhaps not quite as high as the $26B cited by some reports.

I’ve been skeptical of such high valuations, and think that the value of DISH to an acquirer should include value for both its spectrum and its 14M rooftops, which are potential sites for future small cell network deployments. I would go as far as to say the $20B of value could be attributed half to the spectrum and half to the sites, since 1M small cells generating $100/month in small cell hosting fees would certainly be worth $10B.

If AT&T is thinking likewise, and expects future spectrum auction values to be rather lower than Ergen’s purported $1.33+/MHzPOP ($20B for 50MHz), then even if AT&T was prepared to pay $20B for DISH’s assets (excluding the satellite TV business itself) it would make more sense to buy DirecTV, which can provide the rooftop sites, and for AT&T to acquire the spectrum later. AT&T can look forward to a fairly clear run in the auctions, due to the amount of spectrum on offer over the next year, especially if Sprint and T-Mobile are consumed with trying to get regulatory approval for a merger during that period.

Indeed AT&T has indicated that it plans to buy spectrum in the incentive auction next year and will bid at least $9B for 20MHz of spectrum. That is only $1.50/MHzPOP, little more than Ergen is valuing his spectrum at, for spectrum that should offer rather better deployment economics for rural wireless broadband. It hardly seems to be a coincidence that the DirecTV deal was secured just a few days after the FCC came out with revised incentive auction rules that were acceptable to AT&T.

Ergen has justified placing a higher value on DISH’s spectrum because the AWS-4 band can all be converted to downlink, which should be much more valuable than uplink, as the majority of traffic is directed to the user. Even if that is true (and AT&T doesn’t seem to agree, because it appears to have foregone the option to convert the WCS A and B blocks to all downlink), it is partially offset by the lower efficiency (bps/Hz) of uplink traffic. More importantly, if DISH (or a buyer) actually deployed a fixed wireless broadband network using DISH’s spectrum, it would need to use uplink as well as downlink, so AWS-4 could not simply be all converted to downlink. Only if DISH’s spectrum were to be used in mobile networks, as supplementary downlink for the PCS and AWS bands, could it be used in an all-downlink configuration, and then AT&T or Verizon would have to buy the spectrum and put the effort into standardizing these new bands.

So it would be entirely logical for AT&T to conclude that for fixed wireless broadband and small cell hosting, its simply not worth paying Ergen’s asking price. Instead, by buying DirecTV, AT&T gets the sites it needs thrown in for free with DirecTV’s satellite TV business, and the FCC has now created the right conditions for AT&T to buy the spectrum it needs in the upcoming auctions.

This of course leaves DISH in a difficult position, because Verizon has indicated that it doesn’t believe that deploying wireless connections to rooftop satellite TV antennas makes sense (both DirecTV and Verizon were skeptical after their previous joint trial), so it wouldn’t attribute much value to DISH’s rooftop sites. In any case, after buying Vodafone’s stake in Verizon Wireless, Verizon’s balance sheet would be unlikely to accommodate a near-term purchase of DISH.

So perhaps Ergen’s last option for a near-term deal is a partnership with Sprint, to facilitate a fixed wireless deployment and allow Masa Son to fulfill his promise of competing in fixed broadband if Sprint is allowed to purchase T-Mobile. Even for mobile users, Sprint certainly needs tens if not hundreds of thousands of new cellsites if it is going to deploy its 2.5GHz spectrum beyond urban cores, and DISH’s rooftops would be the best way to get that at reasonable cost.

If not, and Sprint bids for T-Mobile anyway, then DISH will have to go all out to block that deal. Of course, the most likely way to resolve the difference in expectations about the size of the break fee (Sprint has offered $1B, but DT wants nearer $3B) would be to offer T-Mobile some of Sprint’s 2.5GHz spectrum instead of more cash. However, that would provide DISH with an even bigger incentive to block Sprint’s bid, as giving DISH the opportunity to acquire some 2.5GHz spectrum is precisely what Ergen wanted Softbank to concede when they battled over Clearwire last year. If DISH does succeed in blocking a Sprint bid for T-Mobile, and T-Mobile is left with 20-40MHz of 2.5GHz spectrum, then there would be every reason for DISH to look at buying T-Mobile next year, as the only remaining way to make use of DISH’s spectrum assets.