Players throughout the wireless industry are waiting for the Federal Communication Commission to determine the fate of the current spectrum-cap rules.
If the caps are kept in place-an idea favored by most of the small wireless operators-the wireless industry landscape is expected to remain the same with multiple carriers in each market vying for subscribers.
If the cap is lifted-a route favored by the large operators and the Cellular Telecommunications & Internet Association-the wireless landscape could change dramatically.
“Today, America faces a severe spectrum shortage for wireless service,” said Tom Wheeler, president and chief executive officer of CTIA, in the association’s reply to the FCC on lifting the spectrum cap. “The spectrum cap is a legacy of spectrum abundance, not shortages; the inefficiencies it perpetuates cannot be allowed to continue.”
The CTIA filing also cited Drs. Marius Schwartz and John Gale, who wrote an analysis entitled, “Are Spectrum Limits Still Needed to Protect Competition?,” which noted “the overhanging per se prohibition of the spectrum cap cannot be justified.”
Current spectrum-cap rules prohibit wireless operators from controlling more than 45 megahertz of spectrum in urban markets and 55 megahertz in rural markets. This has fostered intense competition in most markets, with up to six carriers competing for customers in large cities. The result is good for customers looking for inexpensive wireless service, but not so good for carriers that are forced to compete for those customers.
Without a limit to the amount of spectrum a carrier can control, many expect the result to be consolidation within the wireless industry. Instead of six to eight national carriers mixed with small rural players, the wireless industry could contract to a few supercarriers, with smaller ones trying to make a living on the fringe.
“There is potential for some of the larger players to decide to join forces, especially with the fervor surrounding 3G spectrum,” said Elliot Hamilton, senior vice president and director of global wireless for the Strategis Group. “If caps are lifted, that would be a likely outcome.”
Hamilton noted the potential for the larger carriers to merge is there and would likely follow along technology platform or target-market lines. Of the eight largest U.S. carriers, Verizon Wireless, Sprint PCS and Alltel use CDMA technology; Cingular Wireless uses GSM and TDMA technologies; AT&T Wireless is overlaying its TDMA network with GSM; VoiceStream Wireless uses GSM; U.S. Cellular Corp. uses TDMA and CDMA; and Nextel Communications uses iDEN, a derivative of TDMA, and may overlay a CDMA network.
Another possible merger scenario may follow the current VoiceStream Wireless/Deutsche Telekom deal, with a foreign carrier picking up one of the larger GSM carriers in an attempt to penetrate the U.S. market.
Helping to flame the merger fire are underperforming stock prices that have left some carriers worth less than the value of their spectrum holdings. If a company could convince its shareholders the additional costs involved in buying another carrier are justified, prime spectrum holdings could be scooped up for below market value.
“Sometimes it is better to be the first to make a move if consolidation is the answer since you could have first choice of who to pick,” Hamilton said.
In addition to blockbuster merger agreements between large carriers, smaller carriers could also be the target of takeover attempts. While affiliates would be the most logical start, small rural carriers would be appealing due to their loyal customer base and spectrum holdings.
“Footprint would be a deciding factor for the smaller operators,” Hamilton said. “Even though some are national, they have stronger presence in smaller markets.”
If offering prices are high enough, small carriers may have to ask themselves if it’s worth the trouble to compete with the national carriers or if they should instead just cash out while they can.
Dan Pegg, senior vice president of public affairs for Leap Wireless International Inc., said in the past the spectrum cap served as a bit of a poison pill preventing big carriers from gobbling up the small guys. Leap has said it is in favor of maintaining the current spectrum cap.
“We are now more concerned with the handling of spectrum and the efficient use of the spectrum,” Pegg said.
Pegg noted he was not concerned about a larger carrier looking at purchasing Leap so much as carriers grabbing the spectrum that Leap and other small carriers need to exist.
“If someone wanted to acquire us, the spectrum cap would not stop them,” Pegg said.
A spokesman for one of the large PCS carriers said he was sympathetic toward the small carriers, noting the company had originally supported the spectrum cap, but there was enough competition now to justify lifting the regulations.
While consolidation is one potential result of lifting caps, others in the industry are not so convinced carriers would look for big mergers if they could fill their plates with spectrum.
“I don’t see much consolidation happening among the big carriers,” said Larry Swasey, senior vice president of communications research for Allied Business Intelligence Inc. “Why pick up more of a money-losing proposition like voice?”
Swasey said he sees carriers using any additional spectrum to introduce enhanced services that bring in additional revenues and keep customers on carriers’ network longer.
While there are plenty of scenarios for what a non-restricted spectrum cap industry may look like, most agree the impact will be felt throughout the wireless industry.
