The FCC has ensured there is plenty of supply for itshistoric 600 MHz incentive auction. But there is no way to ensure demand.
With less than a month to go before the forward-auctionportion of the auction, 62 bidders made qualifying down payments, but only a handful of thosehave the deep pockets required to spend big on spectrum.
"It's the usual suspects. None of the dark horses haveshown up," Recon Analytics Analyst Roger Entner said in an interview.
The list of qualified bidders includes , ,T-Mobile US Inc.,Comcast Corp. andDISH Network Corp. Notablyabsent from the list is venture capital fund Social Capital Rama SpectrumHoldings LLC, led by Silicon Valley veteran Chamath Palihapitiya. ThoughPalihapitiya had been quotedin late 2015 as saying his company would bid as much as $4 billion to $10billion in the auction to start a new U.S. wireless carrier, Social CapitalRama is now listed among those entities that did not qualify to bid in theforward auction.
Some reportsalso had suggested Amazon.comInc. or Google Inc.might participate, which would have increased both the demand for spectrum andthe number of potential bidders who could afford to spend $5 billion or $10billion.
As it stands now, however, only four or five qualifiedbidders have that kind of financial wherewithal, and as SNL Kagan analystSharon Armbrust recently noted,that would mean Verizon, AT&T and T-Mobile would each need to spend $15billion or more for the forward auction to have a chance of meeting the $86.42billion clearing cost from the reverse auction. For the incentiveauction to close successfully, the forward-auction bid prices must meet orexceed the clearing cost — or the amount needed to buy stations' spectrum inthe earlier reverse auction — including the $1.75 billion in repacking expensesthe FCC has budgeted.
Neither Armbrust nor Entner are particularly optimistic thiswill happen. Rather, Entner sees it as more likely that the FCC will have toreduce the clearing target — or the amount of wireless licenses it is offering— moving the auction into a new stage of bidding.
"I think we will have several goes on thismerry-go-round," Entner said.
For Stage 1, the FCC set a clearing target of 126 MHz forthe reverse auction, translating to 100 MHz or 10 x 10 MHz blocks available tosell to the wireless industry in the vast majority of the country.
If a second stage becomes necessary, the FCC will reduce itsclearing target to 114 MHz, yielding 90 MHz of wireless spectrum for theforward-auction. If a third stage is needed, the clearing target drops to 108MHz, yielding 80 MHz of spectrum for wireless use.
While the relatively low number of big bidders in theforward auction might at first seem disappointing, Coleago Consulting CEOStefan Zehle said it should have been expected.
"Spectrum is an investment and you wouldn't invest unlessyou can achieve a return," Zehle said in an interview, noting that onlylarge players with established networks have any chance of successfullygenerating a return.
"We are really at the maturity stage of the industrylifecycle so you'll not get a new market entry," he said. "I think[the auction] is something really for the 500-pound gorillas."
Or, as BTIG LLC analyst Walter Piecyk noted in a March blogpost, "The spectrum available in this auction is not enough to supporta new entrant to the market."
Additionally, some of the more established entrants havedownplayed their interest. Verizon, for instance, has instead focused on itspurchase ofXO Holdings Inc.'sfiber-optic network business for about $1.8 billion. The includes leasingavailable XO 28 GHz spectrum with an option to buy the entity that holds thatspectrum by year-end 2018.
In tandem with that, the company is devoting resources todensifying its existing network. "We are doing a lot of small cells, a lotof in-building, a lot of antenna systems," Verizon CFO Fran Shammosaid during aninvestor conference in June.
Shammo noted that densification was an importantprerequisite for being able to launch 5G in the future. "5G is a line ofsight technology … so you have to have a densified network in order to havethat line of sight," he said. "So when you think about small cells,the more small cells you have, the better 5G you will be able to create."
Piecyk noted that Verizon's comments have made someinvestors increasingly pessimistic about how much forward auction biddersoverall can and will spend.
But Armbrust said in an interview that Verizon — while notlikely to spend anywhere near $15 billion — is still definitely in the marketto acquire more spectrum. "No question that carriers can use theirexisting spectrum more efficiently and are in the process," she said. "Butthe volume of video over mobile will require them to do that plus have newspectrum."
Most estimates peg Verizon spending between $6 billion and$10 billion on the auction.
By contrast, T-Mobile has not tried to hide its enthusiasmfor the auction. While it is much smaller than Verizon in terms of subscribernumbers and revenues, the company has been shoring up its balance sheet inanticipation of the incentive auction.
In late May, T-Mobile CFO J. Braxton Carter II that the company had put$5 billion on the balance sheet and also executed a bridge loan with DeutscheTelekom for an additional $4 billion.
"We're fully prepared to enter this auction,"Carter said. "We're very excited for the start of it."