4G Wireless Front-Runner Verizon Scooping Up $3.6b in AWS Spectrum

Cable Sellers Get a 57% Premium Over Purchase Price, Plus Agent Arrangement

You have to admit, Verizon Wireless is run by some pretty slick operators. The company is far and away the leader in terms of 4G deployment (while pioneer Clearwire flounders, more on that below) after spending billions in the 2008 auction for 700 MHz licenses. And today, even as rival AT&T struggles to keep its ill-advised T-Mobile acquisition alive, Verizon announced that it will acquire 122 Advanced Wireless Services (AWS) spectrum licenses from the cable consortium that laggard Sprint used to date.  It just goes to show you that not all giants have the same vision, despite their lofty vantage point.

First, the deal details. SpectrumCo, LLC, a joint venture between Comcast, Time Warner Cable and Bright House Networks, will sell its 122 AWS licenses covering 259m POPs to Verizon Wireless for $3.6b. That’s a nearly 57% premium over the $2.3b that SpectrumCo paid for the licenses at the FCC’s auction in 2006, a fact which should cheer the many ILECs nationwide that have owned AWS licenses since the auction.

The FCC’s web site is still using 2000 Census data for POPs, but in the press release announcing the deal SpectrumCo said that there are 259m POPs included. Back when the auction was held in 2006, the FCC said that the subject licenses covered about 253.6m POPs, which implies a 2.1% increase since the auction. Based on 259m POPs, the Verizon Wireless deal implies a weighted average value per MHz POP of $0.706—or 53.5% more than the $0.435/MHz POP that the cable consortium paid in 2006.

Notably, the price per MHz POP isn’t too far below the final average price/MHz POP paid in 2008 for 700 MHz spectrum at auction, which came out at about $0.81/MHz POP. That said, the implication is that spectrum assets are still increasing in value, due to the more attractive propagation characteristics of lower spectrum bands. The AWS licenses lie at 1.7 and 2.1 GHz, which implies that more cell sites are necessary for build out—Verizon is presumably looking to bulk up its capacity in urban markets, which makes sense given the rapid uptake of its 4G service.

As a reference, I've taken the auction price and POPs for each of the 122 markets included in the sale and shown what the implied value/MHz POP is based on my estimated 53.5% premium over Auction 66 prices--some readers who own nearby AWS licenses may be interested in the "comparables," although admittedly there may be few buyers out there willing to pay the kind of premium that Verizon has ponied up.

Beyond the spectrum value implications, this deal highlights the shifting landscape in the wireless—nay, communications—world. AT&T is buying spectrum from Qualcomm in order to increase capacity, but that deal seems like a consolation prize now that the FCC has signaled that it is unlikely to support AT&T’s attempt to acquire T-Mobile (which was also a big AWS spectrum buyer in the 2006 auction).

I think Verizon’s tactics have been far more clever than AT&T’s, and the latter is now wasting vast resources on legal efforts to make the T-Mobile deal happen while Verizon races ahead in terms of 4G coverage nationwide.

And then there’s Sprint, which has tried off and on to work with the major cable players for more than a decade, but been unable to gain traction. Come to think of it, Sprint hasn’t played nice with partner Clearwire either, despite its commitment yesterday to provide up to $1.6b in funding for the floundering WiMax system operator. I would have expected more from Dan Hesse…

The transaction also reiterates what cableco Cox Communications indicated over the past few months when it first abandoned its effort to build and run its own wireless operations and then later shut down its reseller arrangement with Sprint. Running a wireless business isn’t necessarily an easy add-on for other communications providers (ILECs included). But it IS necessary in a competitive sense.

Ironically, Comcast, Time Warner and Brighthouse are now effectively getting in bed with the enemy. (Take it from someone who gleefully cancelled Comcast service just one month ago and is now happily streaming Netflix and Hulu video content over a Verizon 4G connection.) But it’s a smart alliance.

As stated in the press release, “The agreement comes at a time when consumer demand for wireless services and bandwidth is increasing rapidly...[this] is an important step toward ensuring that the needs and desires of consumers for additional mobile services will not be thwarted by the current spectrum shortage. While government action to free more spectrum is expected, this transaction ensures that the spectrum which is already available for mobile services is used effectively to serve customers.”

It’s interesting that the cable companies are the ones to say this now, considering that they were the target of accusations (not untrue) last spring that they were ‘warehousing’ spectrum, in particular, AWS spectrum. NAB head Gordon Smith railed against the cablecos at that time as he resisted efforts on the part of the government to make broadcasters relinquish additional spectrum.

And sure enough, five years after acquiring the licenses, the cablecos are not only making a handsome return on their original investment, but they’ve also leveraged the licenses into a deal with the most powerful wireless operator in the country. The SpectrumCo transaction includes agreements which will allow both the cablecos and Verizon to become agents for the other and the companies have also agreed to form “an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.” And that, my friends, is the wave of the future.

Cricket Communications Acquires Denali Spectrum, LLC

Leap Sub Takes Control with Purchase of Remaining 17.5% Stake

Leap Wireless International (Nasdaq:LEAP) announced on September 23, 2010 that its wholly-owned operating subsidiary, Cricket Communications, has entered into an agreement to acquire all remaining interests in Denali Spectrum, LLC and provide Cricket with ownership and control of Denali’s greater Chicago and southern Wisconsin markets. Cricket currently owns an 82.5% non-controlling membership interest in Denali. Under the purchase agreement, Cricket will acquire the remaining 17.5% controlling membership interest currently held by Denali Spectrum Manager, LLC (DSM). 

Cricket also announced that Denali has entered into an agreement to contribute its non-operating wireless licenses and spectrum leases to Savary Island Wireless, LLC (Savary Island), in exchange for an 85% non-controlling membership interest. Ring Island Wireless, LLC (Ring Island), will contribute cash to the venture in exchange for a 15% controlling membership interest. Savary Island is a newly-formed limited liability company that will apply to obtain its licenses as a “very small business” designated entity under applicable FCC rules. 

In connection with the contribution of Denali’s non-operating assets, Savary Island and its subsidiaries will assume approximately $211.6m of the outstanding senior secured debt owed by Denali to Cricket. The closing of the transactions under the contribution agreement will occur immediately prior to the closing of Cricket’s purchase of DSM’s membership interest in Denali. 

The transactions under the purchase agreement and the contribution agreement are subject to customary closing conditions, including the approval of the FCC. At the closing under the contribution agreement, Savary Island also will enter into a management services agreement with Cricket, pursuant to which Cricket will provide management and administrative services to Savary Island and its subsidiaries. Following the closings of these transactions, DSM will cease to own any direct or indirect equity interests in Denali or Savary Island, and DSM will have no further management of either enterprise. 

“We are extremely pleased to have reached an agreement to acquire complete ownership of the Chicago and southern Wisconsin operating markets,” said Doug Hutcheson, Leap’s president and ceo. “We are also looking forward to working with our new partner, Ring Island Wireless, to realize value from the wireless licenses to be contributed to the Savary Island venture.” 

JSICA Observations:  Leap-backed Denali acquired the AWS license for the Great Lakes region (REA #3) in 2006 for a net price of $274m, or $0.47 per MHz POP.  Since then, Denali, working with Cricket, has built out certain areas of the license, most notably Chicago.  In its latest 10-K, Leap noted that “Some of the licenses we and Denali License Sub hold include large regional areas covering both rural and metropolitan communities. We believe that a significant portion of the POPs included within these licenses may not be well suited for Cricket service. Therefore, among other things, we and/or Denali may seek to partner with others, sell some of this spectrum or pursue alternative products or services to utilize or benefit from the spectrum not otherwise used for Cricket service.” 

Enter Savory Island, which will be headed up by Scott Anderson and Scot Jarvis (who also own Toba Inlet Wireless, LLC and Von Donop Inlet PCS, LLC).  The new company will be a Very Small Business designated entity, so that it can assume the licenses without paying an unjust enrichment penalty to the FCC. (Denali received a 25% DE discount in the 2006 auction.) 

As in the preceding Denali/Cricket arrangement, Cricket will provide Savory Island with management services.  Under the Management Services Agreement, Cricket agrees to provide certain administrative, accounting, billing, credit, collection insurance, purchasing, clerical and such other general services, as well as assistance in the preparation of regulatory filings and in the negotiation of transactions with respect to the licenses held by Savary Island.  Cricket is also obligated, upon Savary Island’s request, to undertake the build-out, management and operation of Savary Island’s wireless systems. 

Finally, the existing spectrum lease between Denali License Sub and Cricket will be assigned and transferred by Denali License Sub to Savary License at the closing pursuant to the Savary Island Contribution Agreement. Cricket currently leases spectrum from Denali License Sub in the Basic Economic Areas Milwaukee-Racine, WI (BEA063) and Cincinnati-Hamilton OH-KY-IN (BEA049) and in Montgomery County, IL. The Spectrum Lease was amended on September 21, 2010 to add certain counties in Pittsburgh, PA-WV (BEA053) and Dayton-Springfield, OH (BEA050) to the scope of the lease, effective October 19, 2010 and March 1, 2011, respectively. 

The total annual lease payments payable by Cricket to Savary License under the Spectrum Lease will be approximately $4.2m.

OTHER DEALS: D-Block 700 MHz Spectrum

FCC Prepares to Auction Licenses in First Half of 2011

When the FCC raised more than $19b during its 700 MHz license auction in 2008, 10 MHz of spectrum—the nationwide D-Block license—was left on the table.  Qualcomm’s (Nasdaq:QCOM) minimum initial bid of $472m failed to meet the Commission’s $1.3b reserve price, as commercial providers avoided the band due to public safety requirements associated with it. 

Now the Commission is once again making plans to offer the spectrum at auction.  According to Reuters, Jamie Barnett, chief of the FCC Public Safety & Homeland Security Bureau, indicated last month that the FCC could issue a notice of inquiry "early summer," although a final decision has not been made, and the auction could take place in the first or second quarter of 2011. 

As part of the National Broadband Plan, numerous recommendations regarding the commercial use and sale of the D-block 700 MHz spectrum, along with a handful of other license bands, were included. 

Specifically, the NBP suggests that “The FCC should make 500 megahertz newly available for broadband use within the next 10 years, of which 300 megahertz between 225 MHz and 3.7 GHz should be made newly available for mobile use within five years.”  The recommended composition and timing of the initial 300 MHz to be made available includes WCS, AWS, Mobile Satellite Services and Broadcast TV licenses, in addition to the 700 MHz band. 

With regard to the 700 MHz spectrum, the following recommendations were outlined in the NBP: 

“The FCC should auction the Upper 700 MHz D Block for commercial use with limited technical requirements that would ensure technical compatibility between the D Block and the adjacent public safety broadband spectrum block and would enable, but not obligate, the licensee to enter into a spectrum-sharing partnership with the neighboring Public Safety Broadband Licensee (PSBL). Due to its favorable propagation characteristics and the emergence of a 4G technology ecosystem in the 700 MHz band, the D Block is likely to have high value for the delivery of commercial mobile broadband services. Our recommendation is intended to unlock this value while supporting the simultaneous development of public safety broadband capability through equipment development, roaming and priority access.” 

The NBP also outlines specific rules that should be developed for the D Block: 

“The D Block licensee(s) must use a nationally standardized air interface. The emerging consensus in the public safety community is that the LTE family of standards is most appropriate.  A standardized air interface will ensure that the D block will be technically capable of supporting roaming and priority access by public safety users of the neighboring public safety broadband block. 

“The FCC should initiate a proceeding to enable authorized state, local and federal public safety users to have rights to roaming and priority access for broadband service on commercial networks subject to compensation. Before the D Block is auctioned, it must be clear that D Block licensee(s) are required to provide such roaming and priority access to public safety users. 

“D Block licensee(s) must develop and offer devices that operate both on the D Block and the neighboring public safety broadband block, with a path toward scale production of components and devices that can utilize both blocks, in order to stimulate the public safety broadband equipment “ecosystem.” 

“The D Block license should be subject to commercially reasonable buildout requirements. The Commission should also consider the use of incentives to promote additional deployment by the D Block licensee(s) for the benefit of rural citizens and for public safety agencies.” 

The recommendations made by the NBP may or may not be followed exactly by the FCC as it prepares to auction the 700 MHz spectrum, but it’s likely that the ultimate rules will incorporate many of these suggestions.

FIXED WIRELESS DEALS: Clearwire WiMAX Network

T-Mobile Confirms Talks for 4G Network Agreement

T-Mobile USA, the U.S. wireless division of Germany’s Deutsche Telekom (DT), has been the subject of much speculation over the past six months, as the number four carrier has fallen further behind its larger rivals, due at least in part to its network capacity—or lack thereof.  Rumors that DT was kicking Sprint’s tires have since been downplayed, and talk of a spinout via an IPO of T-Mobile USA appears to have been unfounded. 

More recent speculation involving an arrangement with Clearwire Corporation   (Nasdaq:CLWR), however, was confirmed by T-Mobile USA ceo Robert Dotson last month.  The executive said that the company is looking “at JV opportunities for additional spectrum” and has talked with both cable companies and also with Clearwire, which is located right down the road from T-Mobile’s Bellevue, Wash.-area headquarters.

T-Mobile has suffered market share losses in recent quarters as Verizon Wireless and AT&T Mobility, with their virtually nationwide 3G coverage, have garnered a substantial percentage of subscriber growth.  T-Mobile has been deploying 3G capacity using Advanced Wireless Services (AWS) spectrum, and said in its recent 10-K filing with the SEC that its 3G network covered 205m POPs as of year-end 2009, compared with 107m POPs at the end of 2008. 

Clearwire, which is 51% owned by Sprint and also counts Intel, Google, Time Warner Cable, Comcast, and Bright House Networks among its backers, was the first mobile broadband service provider to launch service in the United States based on the 802.16e standard, otherwise known as mobile WiMAX.  The company was operating its 4G network in 27 markets as of December, 2009, covering an estimated population of 34.5m people, and had approximately 392,000 retail subscribers and 46,000 wholesale subscribers in those markets.  Launched 4G markets include Atlanta, Baltimore, Charlotte, Chicago, Dallas, Honolulu, Las Vegas, Philadelphia, Portland, Sanand Seattle.   The company expects to upgrade its remaining commercial markets (which presently use a predecessor technology) to 4G this year. 

At the Cellular Telephone Industry Association meeting in Las Vegas last month, Clearwire named several new markets where it will be launching 4G service this year, including New York City, Houston, Boston, Washington, D.C., Kansas City, Denver, Minneapolis, the San Francisco Bay Area, Los Angeles, Miami, St. Louis, Cincinnati, Cleveland, Pittsburgh, and Salt Lake City. The company also commented on its 4G experience to date and its wholesale strategy: 

"Across our 4G markets today, we're experiencing data usage levels that could shake the rest of the wireless industry to its core," said Bill Morrow, ceo of Clearwire. "On average, our mobile 4G customers are using more than 7 GB of data per month, and we're very pleased about the implications. Those who want to have a misguided debate about competing 4G radio technologies are missing the bigger picture. To deliver true mobile broadband requires deep spectrum resources and an all-IP network, and Clearwire remains unrivaled on both fronts." 

"In fact, the efficiency of our IP-network and scale of our spectrum holdings have not only enabled us to launch our own successful CLEAR(TM) service, but they have enabled us to become the 4G 'Network of Networks,'" Morrow said. "Whether customers sign up for 4G service through us, Sprint, Comcast, or Time Warner Cable, it is our network and our spectrum making it all possible.” 

The company also noted that its CLEAR service delivers speeds comparable to DSL connections, with average mobile download speeds of 3 to 6 mbps and bursts over 10 mbps. 

After years in development, Clearwire appears to finally be gaining some traction—and it may be just what the doctor ordered for T-Mobile’s ailing network.