Leap Wireless and Verizon Wireless Announce Spectrum Deals

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. 

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.

U.S. Cellular and Verizon Swapping Spectrum Licenses

U.S. Cellular Taking Action on 4G Plans – But Will it be Soon Enough? 

Though most of the recent news related to 4G deployments pertains to the announcements and activities of Verizon Wireless (NYSE:VZ), Lightsquared and AT&T/T-Mobile (NYSE:T), second-tier carrier United States Cellular (NYSE:USM) is moving steadily toward its own level of preparedness for deployment of LTE technology in 2012. 

In its fourth quarter 2010 conference call, new ceo/president Mary Dillon said “The evolution of 4G is top of mind and we understand it will become table stakes from both a competitive and operational standpoint. Our priority for 2011 is to be in a position before the end of the year to be ready to roll LTE out at whatever pace we determine necessary and appropriate. In order to achieve this level of readiness, we need to successfully complete our technical trials, select a vendor, and begin preparatory infrastructure work.” 

That work toward “preparedness” was seen last week in a new spectrum license exchange application filed with the FCC—U.S. Cellular is swapping out two 10 MHz C-block PCS licenses to Verizon Wireless in exchange for 18 new 700 MHz licenses covering nearly 3m POPs across 8 states, including Indiana, Illinois, Oklahoma, Nebraska, Kansas, Oregon, Washington and Idaho.

As the map below shows, in addition to adding to existing spectrum ownership, the swap extends U.S. Cellular’s potential coverage into northern Idaho, southeastern Washington and western Nebraska. (The blue area in the map shows where U.S. Cellular already owns licenses, not just built/launched markets.) U.S. Cellular forfeits the only spectrum it (or affiliates) owned covering the Indianapolis metro area in the deal.

Five of the 700 MHz licenses came to Verizon via its Alltel buy, which in turn picked them up back when Alltel acquired First Cellular of Southern Illinois.  First Cellular paid just $278,000 for the five Illinois licenses in auction #44 back in 2002.  But for the remaining 13 licenses, Verizon shelled out $19.7m back in auction #73 in 2008, or about $0.88/MHz POP.  If you assume that price per MHz POP for the five First Cellular licenses, the implied total value of the 700 MHz spectrum in the deal is about $30m.

In return, Verizon Wireless receives two 10 MHz PCS licenses, in Indianapolis (BTA 204) and LaSalle-Peru-Ottowa, Illinois (BTA 243).  The markets cover about 17m MHz POPs (I’m using 2000 POPs in the calculations for consistency with auction values).  Based on the auction-based price I estimated for the 700 MHz licenses above, the implied value then for the PCS spectrum is $1.76/MHz POP.  Of course, if you believe that 700 MHz spectrum has appreciated since 2008, then both the 700 MHz and PCS values per MHz POP could be relatively higher. I tend to think the relative values have since risen, but not dramatically.

Verizon already had spectrum covering the entire states of Illinois and Indiana; for it, the deal is clearly about improving capacity.  Because of its extensive license portfolio, trading away the 18 700 MHz licenses does not leave it with any coverage holes, although it’s now 12 MHz lighter in those markets.

It looks like a smart move for U.S. Cellular, but the larger question in my mind is whether the company is being overly cautious in the timing of its 4G deployment.  As I and my colleagues have written extensively, the market share war in wireless has become fierce, with AT&T and Verizon winning the lion's share of new customers--and they're taking them from the smaller carriers in many cases.  U.S. Cellular lost 21k subscribers in the fourth quarter of 2010 and coming slowly to market with 4G, more than a year after Verizon and others, won't make it any easier for U.S. Cellular to grab share.

Clearwire to Sell 2.5 GHz Spectrum

WiMax Service Provider Looking to Raise Up to $5B in Spectrum Auction

According to reports by Bloomberg, The Wall Street Journal and others, 4G wireless service provider Clearwire (Nasdaq:CLWR) is presently in the second round of an auction which will divest up to 40 MHz of its BRS/EBS (2.5-2.6 GHz) spectrum, in an effort to raise several billion dollars.  CLWR, which is majority-owned by Sprint Nextel (NYSE:S, “Sprint”), also counts Google (Nasdaq:GOOG), Time Warner Cable (NYSE:TWC), Comcast (Nasdaq:CMCSA), Bright House Networks and Intel (Nasdaq:INTC) among its investors. 

CLWR was the first to launch 4G services in the U.S., using WiMAX technology, and at the end of the second quarter was serving 55.7m POPs with 4G in markets including Atlanta, Baltimore, Charlotte, Chicago, Dallas, Honolulu, Houston, Kansas City, Las Vegas, Philadelphia, Portland, Oregon, Salt Lake City, San Antonio, Seattle, St. Louis and Washington D.C.  Of its 1.7m subscribers as of June 30, 940k were retail subs and 742k were wholesale subscribers acquired primarily by Sprint, TWC, and CMCSA.  In the second quarter, nearly 600k of 722k net adds were wholesale customers.  When it reported 2Q results, CLWR raised its guidance for year-end subscribers from 2m to 3m. 

Recently, company executives have confirmed that it will also be testing the Long Term Evolution, or LTE, standard that Verizon Wireless (NYSE:VZ, “VzW”), AT&T Mobility (NYSE:T, “AT&T”) and most other U.S. wireless providers have embraced.  Its plans to add LTE technology, along with the need to continue to rapidly deploy WiMAX—CLWR intends to increase its 4G coverage to 120m POPs by year-end—means that it needs additional capital heading into 2011, perhaps as much as $2b. 

The company confirmed recently that it has had talks with Deutsche Telekom’s T-Mobile USA unit, and that a wholesale deal with the rival carrier was possible.  In its latest 10-Q, CLWR said, “Based on our current projections we believe that we will be required to raise additional capital in the near term in order to maintain our current business plans, or we will be required to materially revise our plans for such period. Our need for additional capital is primarily due to additional capital expenditures we expect to make in the near term to increase the capacity of our network in certain markets.”  Sale of spectrum assets was mentioned as one possibility for raising the needed capital. 

CLWR says it has an impressive 46 billion MHz POPs worth of spectrum, or an average of 120 MHz per market—well more than most of its rivals.  Its fat spectrum position means that it is able to deliver higher data speeds in practice than its more spectrum-challenged competitors, although the higher spectrum position is less effective at in-building penetration than the lower 700 MHz spectrum position most major carriers will be using for 4G.  Ceo Bill Morrow said during the company’s second quarter conference call that he expects in LTE tests to get speeds between 20 to 70 mbps vs. the 5 to 12 mbps reported by others. 

The spectrum slices are expected to go for between $0.20 - $0.40 per MHz POP, although analysts are divided over the wisdom of CLWR selling its valuable airwaves.  But, with both Sprint and CMCSA on the record saying they aren’t interested in upping their investment in CLWR at this time, it may not have a choice.  Analyst Monica Paolini said, “Even if the company is wildly successful, it has more spectrum than it will ever need…They have a huge advantage, but they have to be realistic. They have to have the money to continue their plans. They probably looked at the other options, and from a network perspective they can afford to sell spectrum and still have enough for what they plan to do.” 

MOBILE WIRELESS DEALS: Centennial Communications Markets

AT&T Sells Six Louisiana/Mississippi Cellular Markets to Verizon Wireless

On August 23, 2010, AT&T (NYSE:T, “AT&T”) completed the sale of certain wireless assets acquired as part of its purchase of Centennial Communications Corp. to Verizon Wireless (NYSE:VZ, “VzW”).  AT&T completed its acquisition of Centennial in November 2009. 

Under terms of the agreement, VzW acquired former Centennial wireless properties, including licenses, network assets and more than 117,000 subscribers, in six service areas in Louisiana and Mississippi.  The service areas are Lafayette, La., LA-5 (Beauregard), LA-6 (Iberville), LA-7 (West Feliciana), MS-8 (Claiborne) and MS-9 (Copiah).   The price was $235m. 

AT&T previously divested former Centennial properties in Alexandra, La. and LA-3 (DeSoto) to MTPCS.  With the completion of the sale to VzW, AT&T has satisfied the divestiture requirements of the Centennial acquisition. 

JSICA Observations:  Eight months later than expected, at a lower price and including an extra market…AT&T finally sells the divestiture markets promised to VzW last spring as it worked its way through the approval process for its Centennial Communications buy.  AT&T closed on Centennial last November, but this deal, originally priced at $240m, was held up—perhaps in part because VzW noticed that subscriber counts were slipping. 

When the deal was announced (The Deal Advisor, 5/09, p.15), the companies reported 120k subscribers in five markets—MS-9 and its 124k POPs weren’t included.  So where we commented on the double-digit penetration at the time, in the end it looks more like less than 9% penetration—and falling. 

Of course, the markets have probably been in management limbo for a year and a half now, and with VzW making impressive market share gains each quarter that growth could now start to move in the right direction once again.