All the while when we were trapped in the Title II News Blizzard that made any other topic seem small and irrelevant, the FCC has been conducting an auction of wireless spectrum. This wasn’t supposed to be the big auction – that honor was reserved for the incentive auction, in which broadcasters would sell spectrum they hadn’t deployed since the digital TV transition consolidated things. This was just an auction for “AWS-3” spectrum, Advanced Wireless Service frequencies in a high band that wasn’t expected to pique much carrier interest. The FCC had set a reserve price of $10.6 billion.
The auction has netted more than $43 billion and counting. Or, as the House Energy and Commerce leadership put it, “BOOM!”
The success of the AWS-3 auction has amazed the press and pundits alike. In fact, FCC Chairman Tom Wheeler has observed that “The AWS-3 auction is at these incredible levels … despite the fact that I’ve been talking about Title II all along.” While I don’t want to debate the FCC Chairman, it would seem a stretch to claim that the huge dollars being bid for AWS-3 spectrum are because the carriers embrace a particular regulatory framework. To the contrary, it appears the cold, hard reality of needing a key input for the business is driving the eye-popping bids. The auction seems to be exceeding everyone’s expectations in spite of the threats of extending Title II to wireless data (Title II currently applies to wireless voice, not data as some have alleged). The holiday season is a time of hope and clearly, the companies bidding in this AWS-3 auction are hoping that government regulation of wireless won’t render their investment null and void.
From a business perspective, the top reasons AWS-3 is blowing away its progeny are:
- The AWS-3 band is used everywhere on earth. It’s the only band out of more than 50 that can make that claim. If you’re a carrier with customers that travel the world, and you want your customers to enjoy 4G LTE, this is the band to have. Without AWS-3 spectrum, carriers have to resort to guesswork to determine which three or four bands will be sufficient for their customers to have global coverage.
- According to Mike Rollins at Citi Research, the 10×10 MHz J-block is trading at a 15% valuation premium compared to the average of the 5×5 MHz blocks. The valuation validates the engineers, industry analysts like me and international auction designers who have been saying that wider channelization and mid to high band spectrum combines to create the new beachfront spectrum. One can only hope that Auction 97 puts to rest the erroneous notion that lower band spectrum is somehow more valuable than higher band spectrum. The Mhz/pop values in Auction 97 are significantly higher than that in Auction 66, even adjusted for inflation. In a world where we have 99% 4G LTE coverage, the propagation advantages of lower band spectrum are being nullified by the need for smaller cells to provide more capacity. In an urban area, a 700 MHz network looks no different than 2500 MHz network – and a lot more people live in urban areas than in rural areas.
- Operators are scared by the delay in the ultra-complicated, one-shot-only incentive auction. That delay is a decidedly mixed blessing, because when reading the tea leaves, it quickly becomes apparent that at this point in the process, there aren’t enough broadcasters willing to part with their licenses to make this auction a success. The NAB’s lawsuit delays the auction and gives FCC the opportunity to make the auction more attractive and provides more time to convince more broadcasters that it is actually in their best interest to put up their licenses for auction.
- Historically low interest rates make the assumption of debt a viable means to pay for spectrum acquisitions. Just like home buyers can afford to spend more money on their new home due to lower mortgage rates, operators can afford to spend more on spectrum when they can borrow money to do so and do it cheaply.
- Spectrum is a finite, essential resource that drives the business. This means that as long as there is an ongoing and increasing in demand for it, spectrum increases in value over time.
- Auction 97 is here, it’s happening, and the frequencies are for real. The prospect of more spectrum in the foreseeable future is rather slim. The promised 500 MHz of spectrum for wireless is increasingly looking like a mirage in the desert. Contrary to what some people think, the bidding in Auction 97 seems to reflect the evaporated trust in the ability of the government to provide access to more spectrum in the future. They’re reflective of a flight into quality spectrum assets today, not a sign of trust in what the future will bring.
What is most exciting about the auction is yet to come – the build-out of the spectrum and expansion of existing networks. That will be the truly best outcome for American consumers and validation of the fact that spectrum auctions are the most efficient tool for allocating a scarce resource.