Significance: In the US battle to keep up with mobile broadband demand, old and new operators are looking to spectrum bands which were once considered almost worthless. New LTE techniques are making them more usable, but the patchwork of frequencies building up at firms like AT&T indicates the desperation of the US providers to narrow the gap with Verizon in spectrum and LTE coverage terms ‘ especially if the latter succeeds in its purchase of significant spectrum holdings from four cablecos. AT&T has been making a series of smaller deals in 700MHz and now, via NextWave, in the awkward WCS band, while Dish is still determined to use its mobile satellite licences for 4G, and may even complicate its life further with alliances with Clearwire or others.
In the US battle to increase spectrum capacity, and therefore achieve goals for universal broadband and healthy competition, some obscure and underused bands have come into play. Mobile satellite frequencies have been highlighted by the LightSquared fiasco, but there is still the likelihood that Dish Network will be able to roll out LTE in its S-band spectrum, while satellite frequencies are also being tested as a global solution for supplementing 4G downlink capacity. And last week saw AT&T buying NextWave Wireless for its spectrum holdings, many of which are in the awkward WCS band around 2.3GHz, but may now become an important element in the increasingly diverse patchwork of AT&T’s spectrum holdings, after the failure of its T-Mobile acquisition bid.
So, finally the twisted saga that has been the story of NextWave Wireless is coming to an end, with the AT&T deal. NextWave has been trying to offload its licences, in the AWS, 2.5GHz and WCS bands, for four years, since an ambitious plan to build an equipment-to-spectrum business around WiMAX foundered. Now, as AT&T and Verizon engage in an escalating battle to secure 4G capacity, the former is to pay $25m for the company, as well as an additional contingent fee of $25m and the assumption of debt, making the total cost $600m.
NextWave came close to a second stint in Chapter XI bankruptcy protection last year as it struggled to sell the licences, its only remaining major assets. It had previously bought firms like PacketVideo, GO Networks and IPWireless to support its mobile broadband vision, but was forced to sell them on again as it overstretched itself.
That was only the latest of its adventures under maverick CEO Allen Salmasi. NextWave is remembered by many for being spun out of Qualcomm and then buying $4.7bn worth of PCS licenses in 1996, failing to pay more than the $500m down payment, and haggling with the FCC for years from within Chapter XI. Although the regulator reclaimed the licences, NextWave secured a court order to reclaim them, and sold most of its PCS assets itself, largely to Verizon. However, it retained extensive holdings in 2.5GHz and 2.3GHz and also acquired more in the AWS auctions.
Most of these assets will now go to AT&T, which has also been snapping up 700MHz licences from rural cellcos and possibly from Verizon after the failure of its masterplan to acquire T-Mobile USA last year. However, the company is ending up with a motley patchwork of frequencies. Its initial LTE roll-out is in 700MHz A and B Block, with the added twist of using supplemental downlink techniques to add the TDD 700MHz spectrum acquired from Qualcomm.
It will eventually refarm PCS, but also has some holdings in AWS. Just to make the picture more complicated, AT&T is also the major holder of WCS frequencies, the main band expanded by the NextWave agreement. This has generally been considered sub-optimal spectrum for cellcos as the band is split down the middle by the satellite radio holdings of Sirius XM, causing interference concerns. However, AT&T and Sirius XM recently filed a joint proposal with the FCC to rearrange the airwaves, in effect establishing guard bands to protect the radio services. The main player to be disadvantaged by that plan would have been NextWave, much of whose WCS spectrum sits in those designated guard areas. In fact, AT&T is buying spectrum it cannot, under its own proposals, use for 4G, but in doing so is turning its own worthless WCS frequencies into gold. The Nextwave acquisition still needs to be approved by regulators, and AT&T believes it will closed by the end of the year.
Although AT&T and NextWave are the largest WCS holders, Sprint also has some assets, which UBS analyst John Hodulik thinks it could now sell to AT&T, for an estimated $130m. AT&T has also filed to buy smaller WCS chunks owned by Comcast and Horizon Wi-Com. “The main holder of the remaining A & B WCS licences is Sprint Nextel, with an average of 1MHz of coverage in the top 100 markets (2MHz nationwide),” wrote Hodulik in a client note. “Using a valuation of $0.22 MHz/POP estimate for the NextWave deal, we estimate Sprint could garner $130m in proceeds were it to sell its WCS licenses.”
A series of regulatory filings reveals that AT&T has continued to add to its substantial 700MHz holdings too, with a string of deals with minor carriers. It intends to buy licences from McBride Spectrum Partners (a lower 700MHz B Block licence in Pennsylvania), Farmers Telephone Company (a lower 700MHz C Block licence in Colorado), Com South Cellular (two lower 700MHz C Block licences in Georgia) and David L Miller (13 lower 700MHz B Block licences covering Florida, Georgia, Pennsylvania, Tennessee and Texas).
All these transactions will boost AT&T’s LTE position, but this will not rival that of Verizon Wireless, if the latter manages to acquire AWS licences from four cablecos and Leap. If that deal is approved, it will make Verizon the largest AWS owner, though it will also undergo a spectrum swap with TMo in the band, enhancing the latter’s position too (TMo also gained significant AWS holdings as part of its break-up fee after the failure of the AT&T takeover).
According to Jonathan Chaplin of Credit Suisse, the NextWave deal ‘improves AT&T’s shortfall relative to Verizon, but it does not close the gap entirely.” He wrote in a research note: “AT&T will have the following available for LTE: 20MHz of 700MHz nationwide; 20MHz of WCS nationwide; a few AWS licenses (5MHz on average). With SpectrumCo, Verizon will have 20MHz of 700MHz nationwide; 20MHz of AWS nationwide; another 10MHz of AWS in 60% of the country (13MHz on average). In addition, Verizon’s spectrum is usable immediately, while AT&T’s WCS will take 3-5 years to deploy.”
Meanwhile, LightSquared is still fighting to be able to use its mobile satellite L-band spectrum ‘ vetoed because of GPS interference concerns ‘ or to be given a substitute, but that legal argument could take longer than the start-up can finance itself. By contrast, Dish’s satellite frequencies lie at a safe distance from GPS, Dish itself has deeper pockets, and although the FCC is insisting on a lengthy consultation this time before allowing any build-out or trials, there is confidence that the firm will gain permission this year.
Indeed, Dish’s chairman Charlie Ergen said his firm will develop handsets that support both satellite and terrestrial links regardless of the rules the FCC eventually decides upon. Speaking on the second quarter earnings call, he admitted that dual-mode services are not idea because of the device cost and battery life, but would be a fallback option if the FCC refuses to grant Dish a waiver to run terrestrial-only systems in satellite bands (a waiver previously granted, on a temporary basis, to Dish but withdrawn because of GPS opposition). Dish has teamed with Qualcomm on a chipset that can operate in both terrestrial and satellite modes in the 2GHz/AWS-4 bands.
Ergen remains upbeat though, saying: “It’s an industry that we think is in need of some creativity and new entrants’, even though the regulatory process “has been frustratingly slow”. He concluded: “I like the odds on us being successful’, but said the eventual rules, and the speed with which the FCC makes up its mind, will determine whether Dish will build a network on its own, partner up, or sell off the spectrum. Clearwire is an obvious possibility if partnership is the chosen route, and Ergen was asked on the call whether a $396m strategic investment, revealed in the company’s Q2 10-Q regulatory filing, was for the purpose of purchasing some Clearwire debt. The filing said it was for a “single issuer that has indicated that it will need substantial additional capital to meet its business and financial obligations beyond the next 12 months’ ‘ certainly something that applies to Clearwire, which is migrating from WiMAX to TD-LTE and then LTE-Advanced in its 2.5GHz spectrum. Dish has also been linked with possible purchase of some LightSquared debt, possibly with a view to getting that firm’s troublesome spectrum cheaply, taking the gamble that GPS issues will eventually be ironed out.
Clearwire’s main investor and customer is Sprint, but it has lost its other major MVNOs, three cablecos (Comcast, Time Warner and BrightHouse) to Verizon Wireless, even though the trio retain stakes in the 4G venture (DirecTV has asked the FCC to force them to divest these holdings, as a condition of their proposed sale of AWS spectrum to Verizon). Although Sprint is building out its own LTE network and has stopped launching new devices for its Clearwire-based WiMAX service, CEO Dan Hesse insists the venture remains ‘essential’ to its 4G strategy. He said recently that his firm needed Clearwire for excess LTE capacity since it “would run out of capacity in roughly a couple of years’, despite using both its 800MHz iDEN spectrum and 1.9GHz PCS band for LTE.
AT&T will turn off all GSM by 2017:
The race for capacity for mobile broadband will drive operators to switch off their legacy networks more quickly than they did in past migrations. Korea Telecom has already turned off 2G and AT&T says will close all its GSM systems by 2017 at the latest.
In a filing with the SEC, the operator said that at the end of June 2012, just 12% of its postpaid customers were using 2G handsets. It did not give details for prepaid users, but these account for only 11% of its total base anyway.
AT&T has already started to refarm certain GSM sites and encourage users to shift to 3G. Like other US carriers, it wants to harness its PCS spectrum for additional LTE capacity as quickly as possible. Its rivals are going through similar processes ‘ Sprint is decommissioning its iDEN network more quickly than expected to make way for LTE, while T-Mobile is doing a double switch, moving HSPA out of the AWS band into the 2G frequencies, then using AWS spectrum for 4G.
AT&T said in its filing that it was facing significant spectrum and capacity constraints in certain markets and that these will worsen, as well as affecting more markets, in the coming years. Therefore, it needs to institute its multiyear refarming process.
It pledged to ‘work proactively with customers’ to manage the process of moving to 3G and 4G devices, to help minimize churn. It does not expect this transition to have a material impact on operating results, but said it would continue to evaluate the financial impact of transitioning customers from 2G devices.