700MHz surprises may still be in store

It was easy to predict the technology and business paths that would be taken by several winners of the US 700MHz auction, but silence from some means that major surprises may yet be in store. Auction 73 wrapped up on March 18 grossing $19.1 billion and garnering winning bids from 101 bidders.

April 9, 2008

7 Min Read
700MHz surprises may still be in store

By Tammy Parker

It was easy to predict the technology and business paths that would be taken by several winners of the US 700MHz auction, but silence from some means that major surprises may yet be in store.

Auction 73 wrapped up on March 18 grossing $19.1 billion and garnering winning bids from 101 bidders.

Late on April 3, the Federal Communications Commission’s anti-collusion gag rule on the auction’s winners was lifted, meaning they could discuss plans for their newly won spectrum for the first time. The 700MHz spectrum is slated to be cleared of analog TV transmissions during February 2009 when broadcasters are mandated to shift to digital, thus enabling the winning 700MHz bidders to start deploying and activating their networks.

Though numerous 700MHz license winners announced plans for the spectrum they won in Auction 73 as soon as they legally could, notably keeping mum about its 700MHz intentions is Dish Network. The company, the second-largest US satellite TV provider behind DirecTV, was the auction’s third-highest bidder via its affiliate Frontier Wireless. Frontier offered $711 million for a nearly nationwide footprint of unpaired E-block licenses. It did not win a handful of E-block licenses that Qualcomm acquired in order to boost in MediaFLO mobile TV service in top metro areas.

Qualcomm, the auction’s fourth-highest bidder, bid $554.6 million for eight unpaired, 6 MHz E-block licenses that will be used to enhance its MediaFLO TV service in Boston, Los Angeles, New York City, Philadelphia and San Francisco. The company also bid $3.5 million to acquire three B-block licenses for 12 MHz of paired 700MHz spectrum near key Qualcomm offices, which will use the spectrum for R&D purposes.

Unlike Qualcomm, Dish did not announce its 700MHz plans on April 3, leading to lots of speculation about its motives for winning the spectrum. “The two most likely Dish uses are (1) for improved internal operations for existing services, for example as a return path or to increase capability for high-definition local-into-local video service or (2) to provide a new mobile video service, a la Qualcomm’s MediaFLO operating out of the adjacent D-Block spectrum, which could be bundled with its at-home service,” said financial analysts at Stifel Nicolaus.

Dish was formerly part of EchoStar Communications before that company split into two publicly traded companies in January, The other half of the former EchoStar, still using the EchoStar moniker, runs a satellite equipment business. It owns SlingMedia, maker of the Slingbox place-shifting set-top box. It also recently invested $150 million in satellite Internet startup TerreStar, which was formerly called Motient. TerreStar is developing a hybrid satellite/terrestrial wireless network, leading to suggestions that Dish and EchoStar may be planning to develop a mobile TV service, perhaps incorporating satellite technology such as DVB-SH. If so, they would not be the first to enter that arena in the US. At the CTIA Wireless 2008 trade show in Las Vegas in early April, Craig McCaw’s ICO Global Communications satellite company announced plans for a DVB-SH network using equipment from Alcatel-Lucent.

If Dish opts to offer a mobile TV service, it might do so in conjunction with AT&T Mobility, which is slated to offer mobile TV services via Qualcomm’s MediaFLO network starting in May. However, rumors have circulated about AT&T’s interest in running its own mobile TV service, and it has strong ties to Dish. Most recently, AT&T announced that it would sell Dish’s satellite TV service through an exclusive partnership covering nine southeastern states.

AT&T and Dish have been rumored to be in merger talks for months. Though some analysts say Dish’s winning bids in the 700MHz auction decrease the chance of a takeover by AT&T, there may still be a possibility of merger talks given that overall M&A activity could pick up before year’s end. “The urgency in the markets to consummate another round of consolidation by December is motivated by an overall fear that merger approvals will come to a grinding halt if a Democrat wins [the US presidency] in November. We think the regulatory environment may not be as dire as industry stakeholders suggest, but it will certainly be more rigorous,” said a note from Medley Global Advisors.

Another big 700MHz winner was cable TV operator Cox Communications, which bid $304 million for 700MHz spectrum in the southwest and southeast US. The company might use the spectrum to enter the wireless broadband technology in markets where it already provides cable TV service.

Winning bids from TV-based interests are reminiscent of 2006’s Advanced Wireless Services auction, in which SpectrumCo, a cable TV joint venture dominated by Comcast, took a significant share of 1.7-2.1GHz licenses. Sprint Nextel was a member of that group but subsequently dropped out. The cable JV was the third-largest bidder in the AWS auction, spending nearly $2.4 billion on 137 licenses that cover some 270 million potential customers. While the recently auctioned 700MHz spectrum has stringent buildout rules, the AWS spectrum did not, meaning SpectrumCo can basically sit on its spectrum holdings as long as it wants without launching any services over it.

Meanwhile, another top 700MHz player, CenturyTel, announced that its winning bid of $148.9 million for 69 A- and B-block licenses is aimed at a wireless broadband play. “It provides CenturyTel the opportunity to deliver wireless voice and broadband data to a significant percentage of our current customer base, making CenturyTel the only on-net provider of both fixed and wireless broadband in many of our markets,” said the company.

CenturyTel noted that its new spectrum licenses will provide a wireless overlap to about 53 per cent of its local exchange areas and “creates a highly contiguous footprint that closely overlaps CenturyTel’s existing local exchange and long-haul fiber networks.” The company expects to provide additional information in late 2008 and early 2009 about its 700MHz deployment plans.

The 700MHz auction’s top two bidders also released their plans, and to no one’s great surprise, both Verizon Wireless and AT&T Mobility intend to deploy Long-Term Evolution (LTE) technology at 700MHz. The two companies accounted for 84 per cent of the 700MHz auction’s winning bids, providing a strong base for the introduction of LTE in the US.

Verizon is reportedly already in lab trials with pre-standard LTE technology. The operator is aiming to initiate an LTE field trial during 1Q09, reportedly using non-700MHz spectrum, and launch LTE services, using 700MHz spectrum, reportedly by late 2009, with a wider rollout planned for 2010.

Verizon Wireless, which bid the most in the auction, paid $9.36 billion for 25 A-block licenses, 75 B- block licenses as well as C-block licenses that cover the entire US save for Alaska. The operator said its 700MHz spectrum gain will increase its average spectrum holdings per market to 82MHz from 52MHz.

However, Verizon’s C-block licenses are encumbered by tricky open-access conditions. Though the mobile operator has voluntarily put into motion a strategy to expose its cellular network to more devices and apps via its Open Development Initiative, the company will be required by mandated open-access provisions to open its C-block network to all compatible applications and devices. That will put Verizon under intense regulatory scrutiny, particularly if open-access advocates such as Google-which pushed for the application of open-access conditions on the C-block but did not itself win any spectrum-find fault with Verizon’s conduct in allowing third-party access to its C-block network.

Verizon has defended its C-block win. Combining its national, contiguous, same-frequency C-Block footprint with its planned transition from CDMA to LTE “will make Verizon the preferred partner for developers of a new wave of consumer electronics and applications using this next generation technology,” said Lowell McAdam, Verizon Wireless president and CEO.

AT&T, the largest US mobile operator, was the second-highest bidder in Auction 73, pledging $6.6 billion for 227 B-block licenses. AT&T is adding its new licenses to the existing cache of 700MHz licenses that it bought in 2007 for $2.5 billion from Aloha Partners. AT&T earlier paid $1.3 billion for Advanced Wireless Services licenses in the 2006 auction. AT&T says its broad holdings in the AWS and 700MHz bands cover 95 per cent of the US population. “In the future, AT&T’s 700MHz spectrum holdings will provide the foundation for deployment of next-generation wireless broadband platforms such as HSPA+ and LTE,” the operator said in a statement.

AT&T, which has long contended that its ongoing rollout of HSPA will satisfy end-users for years to come, indicated it might not deploy LTE till 2012-2013. “AT&T will use the 700MHz spectrum, as well as the AWS spectrum we acquired in the 2006 auction, for our 4G LTE transition,” said AT&T CTO John Donovan.

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