Verizon's Wireless Airwaves Binge
Verizon Wireless (VZ) wants access to airwaves. Lots of them. That's why the No. 2 U.S. mobile-phone company has emerged as one of the biggest bidders in Auction 66, the largest U.S. government sale of airwaves for sending wireless calls and data.
It wasn't supposed to be that way. Verizon Wireless would be a spoiler, or so went the conventional wisdom. When the Federal Communications Commission began auctioning this chunk of airwaves on Aug. 9, Verizon Wireless would show up for a few rounds. If nothing else, it would jack up prices for rivals like Cingular Wireless, owned by merger partners AT&T (T) and BellSouth (BLS). But since Verizon Wireless already has access to plenty of airwaves, it probably wouldn't hang in there to the end.
STAYING IN THE GAME.
Or would it? Verizon Wireless, bidding under the name Cellco Partnership, is among the biggest bidders in an auction that's expected to fetch about $14 billion, the most ever in a single U.S. government airwaves auction (see BusinessWeek.com, 8/25/06, "Who Needs Radio Frequency?"). Cellco's bids are worth $2.8 billion. If successful, the provider could walk away with enough licenses to build a new nationwide wireless network—say, one that's devoted exclusively to mobile TV, or some form of high-speed wireless Internet access, says Chris Hardy, vice-president and general manager at spectrum consultancy Comsearch.
Verizon Wireless, owned by Verizon (VZ) and Vodafone (VOD), isn't alone in placing big bets in Auction 66. Cingular, the No. 1 wireless carrier, wants $1.31 billion worth of spectrum. Sure, Cingular could use more airwaves in rural markets, where it has to pay high roaming fees to the likes of Alltel (AT), but its appetite for licenses also smacks of overkill.
So what's keeping the industry's top players at the table? For one, there's a lot on offer, and it's going for cheap. In this auction, the price is just over 50 cents, per megahertz, per pop-industry speak for the amount of airwaves needed to cover a certain area, says Sharon Armbrust, an analyst with JupiterResearch. That compares with more than 90 cents in Auction 58, held more than a year ago. Bidders "are getting somewhat of a bargain," says Hardy.
There's more to it than a good sale, though. While they may not have urgent coverage gaps now, the biggest carriers will need a stockpile as they battle a phalanx of smaller competitors. Take the No. 3 bidder, Sprint Nextel (S) and a consortium of cable companies, which wants $2.36 billion worth of spectrum. Deutsche Telekom's (DT) T-Mobile is the fourth-biggest U.S. mobile-phone company but it's the most aggressive of all in this auction, placing $4.16 billion in bids.
Then there's a gaggle of smaller, leaner foes. Leap Wireless International (LEAP), bidding under the names of Cricket Licensee and Denali Spectrum License, has committed more than $1 billion to this auction. MetroPCS has bid some $1.4 billion. Today these are tiny carriers, operating in specific cities or regions. But they offer flexible all-you-can-eat pricing plans that bigger operators don't have—and should they walk away successful from Auction 66, they'll expand and eventually pose a larger challenge to the top four.
Newcomers like these could grab as much as 20% of a new market—say, a metropolitan area—in as little as 18 months, says Andrei Jezierski, a founder at venture-capital consultancy i2 Partners in New York. MetroPCS, in operation since 2002, has managed to gain 15% of the handful of markets where it operates, he says. Rising competition will put pressure on prices.
To cope, Verizon Wireless and its peers will need to cut prices, differentiate products, and do a better job bundling various packages of services, including voice, data and, increasingly, wireless broadband. That means more airwaves.
COMPETING MOBILE-TV NETWORKS?
Access to additional frequencies also will help carriers provide multimedia services. Social networking and video viewing could become as popular on handheld wireless devices as they are on computers and other electronics, says Andrew Cole, president of consultancy CSMG Adventis (see BusinessWeek.com, 5/31/06, "Social Networking Goes Mobile"). News Corp.'s (NWS) social-networking site MySpace lets users blog and view profiles through a new wireless service called Helio. Some MySpace features are also available through Cingular. Meanwhile, in May the online video site YouTube began letting users post short videos shot with their camera phones.
An area where added airwaves could really make a difference is in mobile TV. For now, Verizon Wireless plans to provide TV over cell phones through a partnership with Qualcomm's (QCOM) MediaFLO mobile-TV broadcast network. But that's "an interim solution," says Armbrust. Eventually, all U.S. carriers might want to build and operate their own mobile-TV networks. After all, standalone networks like MediaFLO and others such as Hiwire can only offer one-way communication and don't allow for on-demand programming (see BusinessWeek.com, 8/30/06, "Hiwire's High-Wire Act").
To be sure, Verizon Wireless and Cingular might not embark on a huge network expansion right away. Airwaves bought in Auction 66 will have to be freed from current users, which include government agencies. And the FCC doesn't require a build-out to be completed by a certain date, although winners have 10 years to prove they are using their spoils to provide service. That said, with everyone from Sprint Nextel to MetroPCS expected to make swift use of any winnings, Verizon Wireless and Cingular are ill-advised to sit on any airwave hoard for long.