As wireless operators enjoyed their holiday break from the Federal Communications Commission’s re-auction of 422 personal communications services licenses, a fair share of pre-auction predictions made by analysts were being discarded along with the holiday wrapping paper.
Some of those early forecasts included predictions of a tame auction with total bids in the lower end of the $10 billion-to-$18 billion range. The expected lack of activity was attributed to spectrum-swapping deals done by some of the major wireless operators prior to the auction.
Others expected little activity from some operators, including Verizon Wireless, thought to have plenty of spectrum in most markets, and very aggressive bidding from others, including Nextel Communications Inc., VoiceStream Wireless Services Inc. and Cingular Wireless, as they tried to build out their national footprints.
“This is not a national auction, so the bidding will be very fluid depending upon players that are bidding for a given region, the amount of spectrum the carrier desires and the probability of success the carrier perceives in achieving its desired capacity for the region in question,” said ING Barings L.L.C. in a pre-auction report.
While no one was looking for bids in the range seen last year in some of the European third-generation license auctions, the almost $12 billion bid through the first 23 rounds was well on its way to the higher end of what analysts had forecast. And with at least two more weeks of bidding expected after the holiday break, total bids could even bump up against the $20-billion mark most analysts did not feel would be reached.
“I could see it possibly hitting the $20-billion mark when it is all over,” said Larry Swasey, wireless analyst with Allied Business Intelligence. “Many thought it would not get out of the single-digit range, but spectrum is too valuable of a commodity. It is a better investment than real estate.”
Verizon an active bidder
The surprise leading bidder coming out of the holiday break was Verizon Wireless, through its Cellco Partnership, with total bids topping $5 billion. Verizon’s activity went against conventional wisdom that the nation’s largest wireless operator was spectrum rich prior to the auction. Verizon also picked up 20 PCS licenses covering 11 million potential customers from Alltel Corp. prior to the auction in a move seen as solidifying its spectrum base.
“The level of activity for Verizon has surprised me,” Frank Marsala, an analyst at ING Barings, told TheStreet.com.
Verizon is also the only national carrier that has kept its bidding eligibility in all markets up for grabs. This eligibility is retained by remaining an active bidder for a license. Verizon had the lead bids in most major markets, including New York, Los Angeles and Boston, at the end of round 23.
“Verizon is a very solid company,” Swasey added. “As a local telephone provider and a wireless operator they could definitely use additional spectrum for wireless local loop services as well as to expand their wireless offerings.”
Nextel praised for departure
Another surprise was the quick departure of Nextel Communications Inc. from the auction. Many analysts felt Nextel was the auction’s wild card due to its need for additional spectrum if it wanted to become a true national wireless operator, and the $6 billion cash balance the company had on hand.
But less than a week into the auction, with bids totaling $1.7 billion for licenses in New York City, Seattle, Cleveland, San Diego and Los Angeles, Nextel packed up shop and headed home for Christmas.
“From what our requirements are and what the prices are trending to, we didn’t see an opportunity based on our budget,” said John Brittain, chief financial officer of Nextel Communications.
The move was applauded by some analysts and investors who agreed with Nextel that the amount of money being bid would leave little room for a solid return. Nextel’s stock jumped $4 per share after the news, rising from $23 per share to as high as $27 per share.
“We think that Nextel Communications’ decision to drop out of the auction for spectrum licenses and retain its $6.4 billion cash hoard may prove to be a wise choice,” said Todd Bernier, an analyst with Morningstar.com, in a stock analyst note. “Nextel concluded that the inflated prices being paid by its competitors may not be economically justifiable.”
What Nextel plans following its withdrawal from the auction is somewhat suspect. While it still controls less than half the spectrum of other national carriers, some analysts feel Nextel is adequately positioned with its current capacity to support its existing business model.
“Nextel must feel that they have adequate spectrum for the services they are currently offering,” said Swasey. “They may also be looking toward future auctions to expand their spectrum base.”
Peter Friedland, wireless analyst at W.R. Hambrecht & Co., noted its Nextel model assumes substantially lower penetration than traditional wireless companies due to its focus on a niche business customer base. Nextel currently has a 3-percent penetration rate in its markets, compared with the 10 percent to 15 percent of the nationwide carriers, suggesting Nextel has “substantial wiggle room before it has material capacity issues.”
Friedland also pointed out that Nextel can expand its current 800 MHz specialized mobile radio spectrum position from an average of 16 megahertz per market to 20 megahertz per market by continuing to consolidate additional 800 MHz SMR spectrum.
In the past, Nextel management indicated intentions to become a national wireless operator, but openly disagreed with other carriers’ pricing plans, with Chief Executive Officer Tim Donahue suggesting Nextel’s subscriber growth was being pressured by the irrational and unprofitable pricing plans offered by some if its competitors.
Friedland explained that Nextel’s niche offerings would cushion the impact of competition on its business plan, noting that the company enjoyed a well above-average revenue per user of $75 and a low churn rate of 2 percent per month.
“We believe this is primarily because Nextel has targeted high-usage business customers willing to pay a premium for Nextel’s unique digital cellular/two-way radio service,” Friedland said.
Nextel was not alone in opting out of the auction, with Alltel and Alamosa PCS, a Sprint PCS affiliate, also choosing to withdraw before the holiday break.
The other carriers seen as needing to be aggressive in the auction, VoiceStream and Cingular, were both well placed at the break. Cingular, through its partnership with designated entity Salmon PCS L.L.C., had top bids in 62 markets totaling $1.5 billion. VoiceStream, which was bidding on its own and through a partnership with DE Cook Inlet, had top bids in 14 markets totaling more than $550 million.
Smaller players making a splash in the bidding include Black Crow Wireless, backed by Virginia venture capitalist Mark Kington and his Columbia Capital Fund, which has the top bid for 16 licenses totaling $421.8 million, and wireless operator Leap Wireless, which has the top bid on 12 licenses at $309.5 million.
