Is a Spectrum License Land Grab in the Offing?

Last week Verizon Wireless and the cable consortium known as SpectrumCo announced a $3.6b deal for AWS licenses covering 259m POPs; that deal implied a more than 50% increase in the value of the subject licenses since the 2006 FCC auction. This week, Verizon is back at the table, acquiring $360m worth of PCS and AWS licenses from Leap Wireless and Leap affiliate Savary Island. In exchange, Verizon is selling 12 MHz of 700 MHz spectrum covering nearly 11m POPs in Chicago to Leap, for $204m.

Both deals indicate a healthy increase in spectrum values—which doesn’t come as a surprise given the growing popularity of mobile broadband services and the carriers’ race to deploy 4G LTE service. I also see AT&T’s March announcement that it would (attempt to) acquire T-Mobile as well as AT&T’s December 2010 deal for $1.2b in Qualcomm spectrum as catalysts that prompted Verizon to start shopping more seriously.

It’s potentially the beginning of a real land grab for spectrum licenses; those who 'have' will benefit from the major projected increase in mobile broadband use, and those who ‘have not’ could well be left behind. Those who 'have and sell' might earn a nice return today, but that leaves open the question of how to participate in the coming hockey stick growth pattern. The good news is that it seems much of the long dormant AWS spectrum is going to emerge from its cocoon, providing options for ILEC license holders.

In the $204m deal for Chicago, Leap is paying nearly 34% more than Verizon spent at auction in 2008, or $1.58/MHz POP. Verizon paid $152.5m for that license.

Leap said in its Public Interest Statement filed with the FCC that the additional 12 MHz “is needed to supplement the 10 MHz of spectrum on which Cricket currently operates in the Chicago area. The additional spectrum will enable Cricket to deploy LTE technology and thereby expand its service offerings, strengthen its presence, and improve the quality of services available to consumers in Chicago.” It continues, “With carriers worldwide upgrading to faster and more efficient LTE technology, Cricket’s deployment of this technology is critical to its ability to deliver competitive services to customers in the coming years. The associated sale of PCS and AWS spectrum to Verizon Wireless also enables Cricket to substantially finance the purchase of spectrum in Chicago. This transfer will thus enhance competition by enabling Cricket to provide more consumers with access to a wider array of high quality wireless communications services.” 

In the second transaction, Leap will sell nearly 340m MHz POPs comprised of both PCS and AWS spectrum licenses, for $188m, or $0.55/MHz POP, to Verizon. The licenses cover a total of 20.6m POPs and are scattered across the country.

Also in the Public Interest statement filed with the FCC, Verizon Wireless said that it “seeks to acquire spectrum to augment its existing capacity in order to respond to the projected increase in customers’ use of its network, particularly the rapidly growing customer demand for high speed wireless data services. Consumer demand for such services is exploding. Smartphone adoption continues to surge: 59 percent of mobile handsets sold in the United States in the third quarter of 2011 were smartphones, and currently 43 percent of all U.S. mobile phone subscribers own a smartphone. As consumers experience higher speeds through the use of smartphones, they tend to consume more data. Today, smartphones use 24 times more spectrum capacity than traditional phones. According to public estimates, the average smartphone will generate 1.3 GB of traffic per month in 2015 (a 16-fold increase over the 2010 average) and aggregate smartphone traffic in 2015 will be 47 times greater than it is today. Similarly, the rapid adoption of tablets places another substantial drain on spectrum. Tablets use approximately 120 times the capacity of traditional phones. In 2015, it is projected that mobile-connected tablets will generate as much traffic as the entire global mobile network in 2010."

Whoa Nellie! Smartphone traffic nearly 50x greater than it is today by 2015? And tablets will use as much traffic as the entire global network does today? Sounds to me like a serious demand for spectrum is brewing, which means values should continue to increase.

Finally, majority-owned (non-controlled) Leap Wireless affiliates Savary Island License A, LLC and Savary Island License B, LLC are selling an aggregate of 10 MHz of AWS spectrum covering 27.3m POPs to Verizon, for $172m or $0.63/MHz POP.

The receipts will be used to repay debt owed to Leap, which will in turn use the money to help pay for its Chicago 700 MHz buy and continue its LTE deployment. 

There's no doubt in my mind that we will continue to see the larger wireless carriers scoop up spectrum assets as the reality of the changing market sinks in. Verizon has been running its LTE network for a year now--clearly it's seeing a rapid increase in usage and as noted above, the tablet boom is only in its infancy. The question for you readers becomes how best to capitalize upon the opportunity. 

Letter to Ceo Stanton Highlights Clearwire’s Missteps--But Imminent Spectrum Sale Seems Unlikely

Private investment firm Pardus Capital issued a press release last week disclosing the content of a letter sent to Clearwire (Nasdaq:CLWR) interim ceo and chairman of the board John Stanton wherein Pardus president/ ceo Karim Samii outlined in detail Pardus’ concerns that Clearwire is increasingly up against the ropes when it comes to its efforts to raise funding for its business plan, as well as in regards to its negotiating leverage with 54% owner Sprint (NYSE:S).

The letter raises numerous valid points, but the most pertinent one in my mind is the question of who has the upper hand between Sprint and Clearwire today.  Clearly Sprint believes that it does—and it may be right, for now anyway, although I’m not fully convinced. And despite Pardus' many arguments for a "small spectrum sale" now, I don't see it happening in the near-term.

Sprint’s Network Vision plan to reconfigure its network over the next several years will decommission its Nextel/iDEN network and repurpose the spectrum and network assets for CDMA service; presumably there is also a path-to-LTE element in the planning which would reduce Sprint’s reliance upon the Clearwire WiMax network. But the project is expected to last for three to five years and that’s an eternity in the wireless marketplace.  Without Clearwire and pre-Network Vision completion, Sprint doesn’t HAVE a 4G strategy.  Meanwhile, Verizon (NYSE:VZ) introduced a handset for its LTE 4G network in mid-March and reported 250k sales of the device in just two weeks before the quarter ended. 

Customers—the high-value ones anyway—want 4G services.  AT&T (NYSE:T) doesn’t have it, MetroPCS (NYSE:PCS) has it in just a few markets and others, most notably Leap Wireless (Nasdaq:LEAP), are looking to LightSquared to provide it.  At this point, however, I see LightSquared as a red herring.  Not only because the pure wholesale business model has never succeeded before, but because it now says it might lean on AT&T for early LTE capacity, because the interference issues it has with global positioning services (GPS) have not been resolved, because its capacity will be limited as a result of that interference and because, “Service will be available in the second half of this year,” is the most detail I’ve seen on the actual buildout…LightSquared is reportedly now in talks with Sprint too…it’s all getting very incestuous but the fact is, for now anyway, the only up and running 4G networks with measurable coverage are Clearwire’s and Verizon’s.

Which brings me to subscriber growth.  Sprint has turned its sub growth around admirably compared with the serious losses it was experiencing a few years back.  But if you look at the detail of Sprint’s most recent quarter, of the 1.1m in net adds, they were ALL either prepaid subs (not likely to be heavy spenders or data users) or they were added by Sprint’s wholesale partners and affiliates.  On the postpaid, retail side of the business, Sprint lost 114k customers.  Obviously the Verizon iPhone and AT&T’s competitive response had an impact on its ability to retain high-value postpaid customers.

Now take a look at Clearwire’s results in the same quarter.  The company added 1.6m new wholesale subscribers—those are essentially all Sprint customers.  My interpretation of these data points would be that Clearwire’s 1.6m new wholesale customers are 1.6m customers who would have moved from Sprint to Verizon if the 4G product that Sprint offers—over Clearwire’s network—wasn’t available.  Had that happened, Sprint would have been reporting a loss of half a million subscribers, even with the prepaid growth. Yes, this is probably an oversimplification, but the point is, I think Sprint needs that 4G network, for its marketing and for its status as a carrier and to ensure that its entire subscriber base isn’t comprised of $28/month prepaid subscribers in a few years.

Clearwire on the other hand, has a different set of woes.  First, it’s gone out and invested billions in a next-generation wireless data network that runs on a technology that increasingly appears to be the Betamax of 4G wireless data technology. 

Now it’s nearly run out of money, has had to suspend its retail strategy and is scrambling to cover costs, while Daddy (Sprint) has refused to up its allowance.  In fact, it cut the allowance if you buy into Pardus’ argument that the new wholesale agreement came in 30% low:

“The market also took as a negative the ultimate resolution of the Sprint pricing dispute.  We expected the deal would yield around a penny per megahertz for Clearwire. It appears to have come in closer to $0.007/MHz. Another way to look at it: instead of yielding $7.60 per in-market subscribers in more mature markets, Clearwire should be making $10.00 per sub. The market took this as a “sweetheart” deal for Sprint.”

Clearwire’s failure to sell excess spectrum last fall, before T-Mobile was taken out of the picture as a potential buyer, means that it has an even smaller potential buyer pool today, which translates generally to lower values, despite the widely espoused view that the country is heading for a major spectrum crunch.  And herein lies Clearwire’s biggest problem with regards to an immediate spectrum sale.

As Pardus Capital points out in its letter to Stanton, Clearwire’s current equity value implies a value per MHz POP of less than $0.20.  Assuming that some value should be assigned to the subscriber base and network assets (admittedly fairly low), the implied public spectrum value falls even further.

Clearwire’s spectrum is comprised of 2.5 GHz BRS/EBS licenses, which does not have the attractive propagation characteristics of lower band spectrum like 700 MHz.  But it has  a LOT of it; the company’s 10-K reports 46 billion MHz POPs and more than 150 MHz in top markets.  Its deployed network covers 70 markets nationwide, or about 130m POPs.

Of interest regarding BRS/EBS spectrum is a recent FCC release where the Commission asks for comments on proposed changes to the out-of-band emission limits for BRS/EBS service.  Proponents, including Clearwire, have suggested that the change would allow WiMax-based networks to use channel bandwidths of 20 MHz rather than the 10 MHz used today, and Clearwire suggests that it would then be able to deliver data speeds of 90 Mbps, which it cannot do today. Satellite concern Globalstar has opposed the proposal saying that it would result in interference with its service, but other engineering studies refute that claim.  The FCC is taking comments on the matter but it seems clear to me that should the out-of-band emission limits be raised, the relative value of Clearwire’s spectrum holdings would rise--yet another possible reason to wait for a sale. 

At the end of the day, Clearwire remains challenged in many respects, but so too does Sprint.  And the spectrum assets Clearwire holds, assuming it can keep its head above the water, could, in my opinion, be worth a little more than Wall Street is acknowledging.  That’s Pardus Capital’s opinion too, though the investment firm is clearly losing patience.

But John Stanton didn’t become a wireless billionaire simply by virtue of being in the right place at the right time.  As he pointed out on the company’s last earnings call, “Every time a kid downloads a video onto his phone or a company arranges for a video conference call via their iPads, you're in effect seeing the value of spectrum rise. And I think that it would be prudent for us to be in a position to hold that spectrum, all the spectrum, even that which is beyond what we immediately need.”  I tend to agree. As long as Sprint continues to load the Clearwire network with customers, the company should have enough cash flow to survive this year and on into a period where its excess spectrum assets may be more highly coveted.