T-Mobile USA dominates first round of AWS auction

WASHINGTON—T-Mobile USA Inc. led the first round of bidding in the Federal Communications Commission’s auction of advanced wireless services spectrum, placing bids for spectrum that would substantially expand its national footprint. The carrier bid for 20 megahertz of spectrum in each of six regions across the country, as well as additional spectrum in markets such as San Francisco, Chicago, Dallas-Ft. Worth and many other markets. T-Mobile USA placed seven of the top 10 highest bids and bid highest for the Great Lakes, Northeast and Western regional licenses. The nation’s fourth-largest carrier also made more than half of the 40 highest bids so far.

A pair of closely-watched players made just two bids each in the first round: Sprint Nextel Corp. and its four cable company partners made the 10th largest bid for 10 MHz of spectrum in the Northeast region and also bid for a 10 MHz block in the Western region. Meanwhile, a satellite company consortium—which made the largest upfront payment before the start of the auction—bid for 10 MHz of spectrum in the country’s central region, and another 10 MHz in the Mississippi Valley region. Winning those licenses would give the consortium spectrum in the vast majority of the country’s midsection.

Verizon Wireless made no bids in the first round. Cingular Wireless L.L.C. placed two bids for relatively small blocks of spectrum: one in New York City and another in the Chicago area. Regional carrier MetroPCS Inc. made one of the top 10 largest bids, vying for a 10 MHz spectrum block in the Great Lakes area.

Bidders placed 731 bids in the first round, worth a total of about $769 million. Of the available licenses, 653 received no bids. The first round of bidding ended at about noon Eastern Time, with another round scheduled for this afternoon.

The auction is expected to last several months. A total of 168 entities are participating in the auction as qualified bidders, with about 100 of those being designated entities—generally small businesses that have received bidding discounts.

Estimates for how much the auction could raise for the federal government have ranged from around $13 billion to almost $30 billion. The auction must raise a minimum of about $2 billion to meet a pre-determined reserve price plus the cost of relocating federal entities currently using the spectrum.

The largest upfront payment, made before the start of the auction, was nearly $1 billion and came from Wireless DBS L.L.C., which is backed by EchoStar (provider of Dish Network satellite television), DirecTV and Rupert Murdoch’s Newscorp. Sprint Nextel’s joint venture with four cable companies ponied up the second-largest amount at about $640 million. T-Mobile USA forked over the third-largest upfront payment, followed by Cingular, Verizon Wireless, Leap Wireless International Inc. and MetroPCS.

Sprint Nextel announced yesterday that it had chosen WiMAX technology for its 4G network and would begin deployment in late 2007, using its substantial spectrum holdings in the 2.5 GHz bands. Analyst Iain Gillott of IGR opined that the timing of the announcement—the day before the spectrum auction began—was meant to send a message to Sprint Nextel’s cable partners. That message could be read something like this, Gillott said: “‘We are serious in this. We’re going to build this thing … don’t go spending a whole lot for spectrum, you’ve got access to this already. We’ll have the network ready for you.’

“If the cable guys go and bid aggressively and buy spectrum even now, that means they don’t trust Sprint—they don’t trust Sprint to build the network or sell it at a reasonable price,” Gillott added. On the other hand, if the cable JV doesn’t bid aggressively, it reflects that “they’re truly in bed with Sprint and they’ve got a solid foundation.”

Several analysts noted with surprise how interested the satellite and cable companies appear to be about bidding on a wide swath of spectrum.

As it stands, satellite companies offer service that is often part of a bundle of voice, Internet access and video—but they have to share revenue with the telecom companies such as AT&T Inc. and Qwest Communications International Inc., noted Jimmy Schaeffler, senior analyst for the Carmel Group. The satellite companies essentially are piggy-backing on telecom service when they’d rather be controlling the bundle, Schaeffler added.

“Their fates and fortunes right now are controlled by their telephone partners,” Schaeffler said. “They have to get into that marketplace. The thought is, the way they do that best right now is by adding to their infrastructure—and the first step toward doing that is getting spectrum.”

Schaeffler went on to say that “ultimately, what they want to be able to offer people is telephone service that they control, a two-way Internet broadband service that they control and a video service that they control.”

Adam Zawel, moderator of INMobile, an online discussion forum for wireless executives, theorized that the additional spectrum could be used to provide a backlink that would make satellite TV more interactive. Satellite service has limited two-way capabilities, and a wireless backlink would provide future services such as allowing customers to click on an advertisement and order the associated product or service.

Meanwhile, Zawel said, cable companies are more likely to be focused on expanding their data services into wireless so that a customer could access the Internet around town as well as in the home.

T-Mobile USA, which has a relatively thin spectrum portfolio compared to its rival nationwide carriers, put up the largest upfront payment among traditional wireless operators at $584 million and is expected to be an active player. T-Mobile USA has run some small trials of 3G services and has said that it is aiming for a commercial rollout of advanced services in the latter part of this year and early 2007.

Zawel also noted that wireless companies that offer higher-minute plans or unlimited voice plans, such as T-Mobile USA and smaller carriers MetroPCS and Leap, will need additional network capacity to support the healthy calling habits of their subscribers. MetroPCS placed four bids in the first round of bidding; its highest bid was for spectrum in the Great Lakes region, followed by bids for spectrum in the coastal Southeast, the central U.S. and the Mississippi Valley region.

Leap executives were circumspect about auction plans during a conference call with analysts recently. However, Doug Hutcheson, Leap’s president and chief executive officer, did note in a company statement that the company believes “that the spectrum available in the auction presents interesting prospects for expansion into markets that offer the potential for good returns for the business and our stockholders.”

Leap bid a total of $23 million in the first round.

Bear Stearns telecommunications analyst Phil Cusick backs those claims noting that MetroPCS and Leap are likely to use the auction to support “major expansions of their footprints.”

In addition to its own bids, Leap is backing DE bidder Denali Spectrum License L.L.C.

Cingular is also expected to be a bidder to watch, with an upfront payment of $500 million. Verizon Wireless is hanging on with the fifth-largest upfront payment, Cusick noted in a research report that “Verizon’s role appears to be an opportunistic player, not to let spectrum go cheaply.”

Zawel pointed out that with mobile virtual network operators increasingly being seen as posing little menace to traditional wireless carriers, cable and satellite providers are one of the few potential competitive threats to those companies.

Among those in the wireless industry, “there is some fear of the unknown, and depending on your position, some hope that it can help” in encouraging wireless companies to look with more interest at convergence, Zawel said. “The wireless guys are telling their parent [companies], `Leave me alone, leave me alone,”‘ Zawel added. “But that might not be the same tune forever-and not just because they get tired of saying it, but because at some point, convergence might make sense.”