The New Wireless Wars

Uncle Sam's spectrum auction opens the door for small fry like Craig McCaw's Clearwire, reversing a trend to consolidation

On May 11, 2006, a low-profile company called Clearwire Corp., headed by wireless pioneer Craig O. McCaw, filed with the Securities & Exchange Commission to go public. The initial public offering is expected to raise $400 million, and, in its filing, the company says it will use the proceeds to expand its network for offering wireless broadband services.

In particular, Clearwire says it will use the money to acquire radio spectrum, which suggests it could be one of the major bidders in a U. S. government auction of wireless spectrum this summer. "We intend to deploy our advanced wireless broadband network broadly both in terms of geography and categories of subscribers," the company said in its SEC filing. That's a big promise, but as Clearwire's SEC filing notes, giant chipmaker Intel (INTC) spent $20 million in 2004 for a stake in the company.

McCaw's Clearwire and Intel are just a couple of the players jockeying for position in the derby that's been labeled Auction 66. Scheduled to kick off on June 29, it's shaping up to be much more than just another sale of the airwaves by the Federal Communications Commission. It involves the biggest chunk of wireless spectrum ever to come up for auction in the U.S., worth an estimated $8 billion to $15 billion.

Other possible participants include Microsoft (MSFT), TimeWarner (TWX), and News Corp (NEWS). "It's likely to be the most exciting auction we've ever seen," says Richard Doherty, director of consultancy the Envisioneering Group.


  What's grabbing the attention of such big players is that the spectrum is considered particularly valuable. Chris Hardy, vice-president and general manager of the consulting firm Comsearch, which is working with several of the bidders, says the winners could build three or more new nationwide wireless networks, offering voice service, broadband Internet access, or mobile TV services. "This spectrum is wide open to applications," says Hardy. "Virtually any wireless [technology] can be put in."

What this means is that the communications industry, after a five-year shakeout, is headed for more turmoil. Just as the wireless industry has consolidated down to three major players, the survivors could face a new crop of competitors who could kick off pricing wars and change the industry's dynamics like never before. Companies that want to participate in the auction had to express their interest to the FCC this month, but those names won't be made public until mid-June. Bidding in Auction 66 is expected to run one to two months.

Within four to five years, this auction's winners could have these wireless networks up and running, competing directly with entrenched carriers like Cingular, Verizon Wireless, Sprint Nextel (S) and T-Mobile, also expected to participate in Auction 66 (see BW Online, 05/08/06 "At Sprint, Full Speed Ahead").


  In effect, this auction could wipe out two years of wireless industry consolidation, when Cingular swallowed AT&T Wireless, and Sprint acquired Nextel, cutting the number of nationwide cellular service providers from six to four. Thanks to Auction 66, the number of national wireless networks in the U.S. could potentially balloon from four to seven or more within a few years, says Hardy.

New wireless players could come from a range of industries and backgrounds. Clearwire, which wouldn't comment on the auction or its network plans, is just one of the likely bidders. Its chairman and co-CEO, McCaw, achieved fame for cobbling together cellular spectrum in the 1980s to build McCaw Cellular, which he sold in 1994 to the old AT&T for $11.5 billion. In the process, he became one of AT&T's largest shareholders. Auction 66 could mark the hatching of a similar spectrum plan, this time involving Clearwire.

Another potential bidder is small service provider Leap Wireless. On May 9, Leap announced a $250 million sale of its common stock specifically to finance participation in Auction 66. Other potential bidders could include ventures backed by Microsoft Chairman Bill Gates and Microsoft co-founder Paul Allen, says Doherty. "It's a billionaires' high-stakes poker game," he says.


  While portals Yahoo (YHOO) and Google (GOOG), at the top of analysts' list of potential bidders, won't participate in the auction directly, they could play a role through partners. Both portals tell BusinessWeek Online they have not applied to take part in the auction. Still, Google is expected to participate in the auction through EarthLink, an Internet Service Provider (ISP) with which the search company has partnered to build out a wireless network in San Francisco. EarthLink would not comment on whether it has applied to take part in the auction.

Bidders are likely to include several major cable companies. On May 10, a newly formed joint venture between Time Warner Cable, Sprint-Nextel, Comcast (CMCSK), Cox, and Advance/Newhouse Communications had filed an application. The five companies partnered up last year to bundle wireless services with broadband, voice, and video services (pilots of that offering are slated for later this year).

Then, recently, they formed a second joint venture, designed to specifically look at the possibility of participating in Auction 66, BusinessWeek Online has learned. "The filing of this application does not obligate Time Warner Cable or other companies to bid in the auction, but it provides us the flexibility to take part should we decide it makes business sense to do so," according to a Time Warner statement. Analysts believe smaller cable operators may have filed applications as well.


  Finally, News Corp. (NWS) could bid for spectrum to enrich its DirecTV satellite TV offering by bundling in a wireless service, or to launch a wireless service around its newly acquired MySpace online social network, says Doherty (see BW Online, 05/12/2006, "No Space for MySpace?").

MySpace's traffic is on a tear, with the site ranking as the world's No. 6 site most-visited by, placing MySpace ahead of auction powerhouse eBay (EBAY) and shopping giant (AMZN). That's a sweet spot from which to launch a wireless service. Recently, MySpace jumped into mobile phones with the rollout of wireless service Helio. But that partnership likely doesn't preclude MySpace from launching its own mobile effort. Neither MySpace nor News Corp. answered requests for comment for this story.

The spectrum could be used to launch an array of data services, including wireless high-speed Internet access and mobile TV services. Spending on wireless data services is expected to increase from $8.8 billion in 2005 to $27.7 billion in 2009, according to consultancy IDC. "The data market is still quite young. There's a lot of growth ahead," says Craig Mathias, an analyst with wireless consultancy Farpoint Group.


  And business users are expected to be the technology's first adopters. That's the market that might be targeted by EarthLink, which recently snapped up New Edge Networks, a provider of secure network products for corporate customers, notes Doherty.

Meanwhile, cable companies might want to provide wireless service as part of their bundle of TV, voice, and data services, to better compete with telecom giants. In recent years, Verizon (VZ) and AT&T (T) have been pushing to offer video services. "A year from now, who says there won't be a Comcast Wireless?" says Doherty. Potentially, partners in the second Sprint-cable joint venture could elect to deliver the service via a different, emerging wireless network technology, such as WiMax, allowing for super-fast download and upload speeds.

WiMax is a technology that's being aggressively promoted by chip giant Intel is being used by Clearwire to sell Internet access. The chipmaker needs the net of WiMax networks to expand rapidly to encourage manufacturers of laptops and phones to use its WiMax chips, he says. An Intel spokesperson says the company won't participate directly in the auction. Still, it will have an indirect stake through the participation of Clearwire.


  Whoever turns up for the auction, some would-be wireless service providers might elect not to operate networks themselves with their new spectrum. The auction's bidders might, instead, contract with existing wireless service providers to operate their airwaves, says Comsearch's Hardy.

An existing carrier might add some antennas to its towers, and, with relatively little expense, the new spectrum could used for additional services. An equipment industry insider believes the auction might boost gear sales by 10% to 15%, possibly benefiting Ericsson (ERICY), Alcatel (ALA), Nortel (NT), Motorola (MOT), and other telecom equipment makers.

Indeed, for would-be carriers, buying their own spectrum makes a lot of sense. The spectrum holders will enjoy more control over how their service is presented and operates. Today, most U.S. wireless carriers limit their users' bandwidth. This makes it difficult for subscribers to view movies wirelessly in real time or to give media-heavy wireless presentations.


  A new spectrum holder could do away with such limitations. Having the spectrum could potentially allow for higher quality of data services. More important, "with spectrum dedicated to their use, [these service providers] don't have to worry about someone shutting their [communications] pipe," says Hardy.

The spectrum holders would have more bargaining power and would not have to deal with the restrictions imposed in a so-called mobile virtual network operator (MVNO) relationship, in which a company provides wireless service using a carrier's network and spectrum. Carriers such as Sprint Nextel can prohibit their MVNO partners from pursuing certain market segments or offering certain types of services that compete with their offerings directly. But a spectrum holder will have to put up with fewer restrictions, or perhaps none at all. The end result: Auction 66 could lead to greater price competition for voice services and wireless data offerings. For example, data service providers can offer easy and cheap Web-based voice calling.

In a sense, the government's new auction of wireless spectrum will be a leap back to the future. After a period of consolidation, a new crop of competitors is likely to enter the field. "We had a relatively healthy six-player wireless industry not too long ago," says Jonathan Atkin, an analyst with RBC Capital Markets. "And pricing was not overly disruptive. Plus, [the new carriers] may be targeting different niches." Eventually, the newcomers may spark a new round of mergers and acquisitions. "This may lead to additional consolidation in wireless," says Doherty. And so the cycle goes.

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