C-Band Auction Shows More Demand in Small Markets & Top-3 Industry Implications

The FCC’s largest-ever auction of wireless spectrum ended on Friday with 280 MHz of C-Band spectrum fetching a record-setting $80,916,832,754.

Demand in Smaller Markets Suggest New Entrants

Bidding for the Partial Economic Area (PEA) sized geographies displayed the same trend we noted in other recent auctions (link to CBRS note) of increased interest outside the country’s most populated areas. The top markets in the auction make up a smaller portion of total auction proceeds than in previous auctions.

Source: FCC, Summit Ridge Group analysis

The lower share of auction proceeds from larger markets suggests a continuation of the developing interest in spectrum outside traditional wireless (e.g., industrial use, fixed wireless). Last year’s CBRS auction saw a large uptick in interest from industrial bidders seeking to utilize the spectrum in various applications, including asset monitoring and control. Eleven electric utilities acquired CBRS PAL licenses, with Southern California Edison spending $119 million alone.[1] C-Band spectrum auctioned this week in frequencies from 3.7 to 3.98 GHz may be employed on a single antenna along with CBRS in frequencies 3.55-3.70 GHz, making it complementary to industrial users’ CBRS positions. The trend toward a more significant proportion of revenue is coming from smaller markets occurring even at higher mid-band frequencies, even more striking. The shorter ranges of the mid-band frequencies, according to conventional wisdom, makes them better suited to more densely populated areas.

Source: FCC and Summit Ridge Group analysis
Source: Capital IQ, Summit Ridge Group analysis

Fifty-seven bidders qualified to participate in the C-Band auction, including large and small wireless carriers, cable companies, wireless internet service providers, and even the hospitality company Starwood. Notably absent from the bidding were Altice, FiberLight, and Viasat, each of which submitted applications but failed to qualify.[2] The Commission won’t release the winning bidders’ identities until the assignment phase of the auction is complete, perhaps a month from now. However, the qualified bidders’ recent debt issuance does provide a clue to who the largest winners are. AT&T is reportedly in early talks with banks to borrow $14 billion, and T-Mobile announced on January 11th that it is seeking to raise $2 billion.[3] Verizon raised $12 billion near the start of the auction in November, in part to fund C-Band acquisitions.[4] U.S. Cellular raised $500 million on December 1st[5] , and DISH sold $2 billion of convertible debt on December 17th.[6]

Top-Three Industry Implications

Total auction proceeds far exceeded expectations and may have several implications for the industry. Here are our top-three:

  • Lower future carrier capital expenditures:

Some of the spectrum acquired may help meet rural broadband deployment commitments made in the Connect America and Rural Development Opportunity Fund auctions. However, the spectrum will not be available until the satellite operators currently using clear the band over the next three years.  Even once available, innovative near-term monetization opportunities for this spectrum is not clear. Competitive pressures to ensure high quality of service and deploy new 5G service exist in specific geographies. However, the carriers may seek to slow the spending required to deploy this spectrum more widely as they control ongoing capex and absorb their new debt.

An environment of subdued capital spending would be harmful to the tower companies, American Tower, SBA Communications, Crown Castle, wireless E&C companies such as Dycom, and telecom equipment manufacturers such as Cisco and Qualcomm.

  • Industry capital adequacy:

Higher leverage may also forestall announced and future share repurchases. Lower free cash flow dividend coverage may lower the stock trading multiples of dividend payers and result in higher yields. The pressure to sell non-core assets (DirecTV, U.S. Cellular’s tower portfolio) may shake loose a few deals.

C-Band Spectrum Acquisitions May Strain Balance Sheets and Endanger Dividends

Source: Capital IQ

  • Competition:

If bidding is led by Verizon and AT&T, as many suspect, T-Mobile may be in a position to outcompete, having preserved its capital and already armed with a swath of 2.5 GHz mid-band spectrum that it is actively deploying. (T-Mobile has been seen adding to its existing sizable position in mid-band with new acquisitions and long-term leases for 2.5 GHz EBS spectrum on a cheaper basis relative to C-Band prices.)

A natural strategy for T-Mobile and sub-scale carriers such as DISH and the cable companies is to lead with value offerings to gain market share. A newly indebted AT&T or Verizon may not be in a position to invest in price and lower profitability to match new competitive value offerings, electing to protect the profitability of its base and cede subscribers instead. The C-Band auction may usher in a new level of competition in Wireless.

[1] See our analysis of the CBRS auction: https://summitridgegroup.com/fccs-cbrs-bidders-reveal-indicates-broad-interest-from-new-entrants-and-incumbents/

[2] https://www.telecompetitor.com/final-c-band-bidders-list-includes-large-and-small-mobile-cable-but-no-viasat/

[3] https://investor.t-mobile.com/news-and-events/t-mobile-us-press-releases/press-release-details/2021/T-Mobile-Announces-Proposed-Public-Offering-of-Senior-Notes/default.aspx

[4] https://www.nasdaq.com/articles/verizon-adds-debt-to-fund-ma-and-spectrum-auction-2020-11-13

[5] https://investors.uscellular.com/news/news-details/2020/UScellular-Announces-Pricing-of-500-Million-of-5.500-Senior-Notes-due-2070/default.aspx

[6] https://ir.dish.com/news-releases/news-release-details/dish-network-places-offering-2-billion-convertible-notes