Nextel Communications Inc.’s spectrum realignment plans were headed for resolution early this year, with reports indicating the government was set to award the carrier 10 megahertz of spectrum in the lower 1.9 GHz spectrum bands.
But those plans were derailed-at least for now-when Verizon Wireless last month complained that the Federal Communications Commission could not legally proceed with the swap without first putting the spectrum up for auction. Further, Verizon said it was prepared to bid at least $5 billion for the nationwide 1.9 GHz license. Verizon Wireless’ declaration was followed by a compromise proposal from the Cellular Telecommunications & Internet Association that called for Nextel to receive 10 megahertz of replacement spectrum in the 2.1 GHz spectrum bands, which were part of the carrier’s original Consensus Plan filing in late 2001, and to increase Nextel’s financial commitment from $850 million to $3 billion.
Nextel scoffed at the compromise proposal, reiterating earlier this month its stance that it must receive 1.9 GHz spectrum in exchange for its 800 MHz holdings instead of the 2.1 GHz spectrum, noting the higher spectrum would not return equal value to its shareholders.
“My responsibility to Nextel’s shareholders requires that Nextel obtain comparable value in any retuning transaction,” Nextel President and Chief Executive Officer Tim Donahue said. “2.1 GHz does not meet the test. Nextel cannot and will not accept that result.”
What’s wrong with 2.1 GHz spectrum? Industry analysts tend to draw the same conclusions as Donahue, noting the 2.1 GHz spectrum likely would end up costing Nextel more money than the 1.9 GHz spectrum, citing both additional infrastructure costs related to base-station deployments and a lack of available handsets designed for the 2.1 GHz spectrum bands.
“The 2.1 GHz spectrum is relatively undesirable to Nextel compared to 1.9 GHz because it will result in higher-cost phones and equipment stemming from the much lower volume of products designed for that frequency,” said Albert Lin, telecommunications analyst for American Technology Research.
Industry analyst Andy Seybold noted in a research paper that European operators deploying UMTS networks in their “3G” spectrum at 2.1 GHz would need to build out five times the number of cell sites they presently have for their 900 MHz-based services to provide equal coverage. While the difference would be less between 1.9 GHz and 2.1 GHz, Nextel would still need to invest in more base stations to provide equal coverage.
“There is not a big difference in propagation between the two bands,” said David Murashige, vice president of strategic marketing for Nortel Networks Ltd., which has worked with North American operators using the 1.9 GHz spectrum bands and European carriers beginning to deploy UMTS services in the 2.1 GHz spectrum bands. “From the testing we have seen, the difference is between 10 and 15 percent depending on the environment.”
Depending on the technology Nextel decides to deploy if it receives the 1.9 GHz spectrum, SG Cowen industry analyst Tom Watts projected capital expenditures to fund a nationwide deployment would cost between $5 and $10 per potential customer covered, which would total between $1.2 billion and $2.4 billion based on Nextel’s current network coverage.
In addition to the possibility of additional base stations required by the 2.1 GHz spectrum compared with the 1.9 GHz spectrum, Nextel could run into problems of getting handsets designed for the 2.1 GHz spectrum.
Many industry analysts predict Nextel would install a CDMA-based system in the contiguous spectrum it would get as part of the spectrum swap. Since handset manufacturers are already producing CDMA handsets for PCS carriers, there would be little additional expense in re-tooling those devices for the lower 1.9 GHz bands. Fewer options are available for the 2.1 GHz bands because the only handsets being developed for that spectrum are UMTS handsets for Europe, which would force Nextel to either alter its next-generation strategy or lose economies of scale as the only carrier requiring 2.1 GHz CDMA handsets.
“This spectrum is considered particularly valuable as it is directly adjacent to the 1.9 GHz PCS band used by the five other national carriers,” noted Watts. He said based on recent spectrum sales, the 1.9 GHz spectrum is valued in the $3 billion range, which is similar to what CTIA is asking the FCC to charge Nextel for the 2.1 GHz spectrum.
In addition to the economies of scale of deploying a network at 1.9 GHz, Nextel would align itself with the spectrum position of its competitors, which could ease network consolidation.
“With the re-banding, we believe Nextel could be the most attractive acquisition candidate in the industry from the viewpoint of offering unbuilt spectrum adjacent to current bands,” Watts explained.
Nextel does not seem completely against deploying services in higher spectrum bands. It has been testing the viability of next-generation services with its 2.5 GHz spectrum holdings in North Carolina using Flarion Technologies’ Flash-OFDM data solution, but those tests only involve data services running over PC cards and modems. The carrier controls approximately two-thirds of the nationwide spectrum in the 2.5 GHz band, and according to Cowen, could use that spectrum in conjunction with either the 1.9 GHz or 2.1 GHz spectrum for next-generation services.
Financial analysts have expressed concern that the pending spectrum issues could hang over Nextel’s stock and cause investors to back away from the company until the situation is resolved. Nextel’s stock has dropped from its 52-week high of $29.37 per share in early January to as low as $22.62 last week.
