Downstream Implications of AWS-3 Auction

While there has been extensive discussion about the AWS-3 auctions, there has been less discussion about the long-term industry impacts of the auctions:

1)    Upcoming 600 MHz Auction Prices – Higher transaction prices from the AWS-3 auction could imply higher prices for the 600 MHz auction. However:

  • With the telecom industry spending ~$45B on the AWS-3 auction, the industry may need to replenish its financial reserves before incurring similar amounts or more on the 600 MHz auction. For comparison, the CTIA reports that 2013 CAPEX totaled only $33B and has averaged $26B annually over the past 10 years.
  • The two carriers with the deepest pockets, AT&T and Verizon, already possess deep spectrum holdings below 1 GHz. Therefore, substantial bidding by them would likely be based on a desire to foreclose future entrants as opposed to based on their auction use needs.

2)    Industry Returns –The US wireless industry is unlikely to earn an acceptable return on its AWS-3 investment.

  • The auction alone represents an investment of approximately $140 for every US subscriber connection! Furthermore, this expenditure excludes any build out necessary to actually use the spectrum.
  • The industry is unlikely to increase prices by the few dollars per month it would take to justify the spectrum purchases and associated buildout. Even before the auction, industry pricing and returns have been falling as the market reaches saturation, so the necessary pricing increase is unlikely

3)    DISH Dynamics – A widely touted reason for the high AWS-3 auction prices is involvement by DISH Network-backed entities in order to increase market comparables for their AWS-4 spectrum. However:

  • DISH may actually want to buy AWS-3 spectrum, perhaps the adjacent J-block spectrum, to increase its capacity and to force T-Mobile or Verizon to the table for a future alliance.
  • DISH is facing a 40% build out requirement (by population) by 2017 and 70% by 2021. If it misses the first requirement deadline, the second requirement deadline will also advance a year 2020.  Given the enormous engineering challenges involved, time is running out for DISH. DISH is not likely to enter the wireless market by itself as a new entrant nor has it has not been successful in finding a partner. Buying spectrum that T-Mobile and Verizon need, even if at inflated prices, may force them to the table and help DISH monetize its AWS-4 spectrum.

Ultimately, the reasons for the inflated AWS-3 auction prices while near-concurrent non-auction spectrum transactions at much lower prices, remain unclear. We expect release of auction results next month to shed additional light.