Auction 110, which involves the FCC selling 10 10-megahertz blocks in the 3.45 GHz band, got underway today with $609 million in bids after Round 1. This is the third installment in a series of important mid-band spectrum auctions that should serve as the foundation for 5G wireless communications networks in the United States. Although the 3.45 GHz band auction is unlikely to generate anywhere near the magnitude of proceeds that the $81-billion C-band auction did earlier this year, it should still be a significant auction with industry analysts predicting around $25 billion in gross proceeds. My prediction to Bloomberg was $22.5 billion, but given that my C-band prediction was way off, I clearly have no special insights. On the other hand, given the amount of red on the map above, perhaps my prediction may not be too conservative.
Because information on spectrum auctions can be esoteric at times, I like to make analogies in my analysis. However, I think my football analogies are little played out, so I thought I would try politics… Just kidding… How about professional wrestling circa 1987? That was about the last time that I watched this “sport,” but many people say that the 1980s were golden age of professional wrestling, so I hope most folks will be able to follow.
If the C-band auction were WrestleMania for the wireless carriers, then this auction would be SummerSlam. Those carriers that did not win what they wanted in the C-band auction are going to be given another opportunity to win some spectrum in the 3.45 GHz band. Unfortunately, this spectrum has some limitations that make it somewhat less appealing. First, only 100 megahertz will be made available (rather than 280 megahertz in the C-band auction), and no one carrier can win more than 40 megahertz. This 40-megahertz cap, in particular, could suppress auction revenue, because carriers generally prefer larger, contiguous blocks for their 5G services. It is also unclear whether all the big name carriers will show up for SummerSlam, as we discuss further in what follows.
On the flip side, the FCC established a significant reserve price of $14.77 billion, based on NTIA estimates of the cost to clear the band of incumbent federal entities. This reserve price should establish a floor for auction proceeds, because having this auction fail would be catastrophic for at least one or two of the expected participants. If this auction does fail because of the reserve price, it would be the most shocking upset since The Iron Sheik won the WWF Title from Bob Backlund in 1983.
Second, the FCC and the Department of Defense have imposed some coordination requirements on the winners of certain licenses in this band. This is because licensees are expected to share the band with critical military radar operations that cannot vacate the band. Before a licensee commences operations in a Cooperative Planning Area (CPA) or Periodic Use Area (PUA), it must first successfully coordinate with the federal incumbent(s) associated with that area. The image below illustrates the geographic boundaries for each of the coordination areas.
Because FCC clock auctions require that blocks within the same category be as interchangeable as possible, the FCC came up with two categories of licenses: Category 1 and Category 2 licenses. In general, if all 10 blocks in a PEA are Category 1 licenses, they are subject to the same coordination requirements. In those markets where there are both Category 1 and Category 2 licenses, it is because the PEAs intersect with one of the special cases (e.g., Little Rock CPA, Fort Bragg CPA and PUA, Syracuse, Rochester and Watertown) and therefore have different rules depending on the block. In addition, because each license overlaps with CPAs and PUAs at varying percentages of their populations, the coordination requirements are not equal even within a particular category of licenses.
Therefore, as I explain on my website, I have developed a new classification scheme to help bidders better understand these restrictions on each product, based on the percentage of the PEA’s population that requires coordination at the close of the auction (Year 0) and after one year (Year 1). By my estimates, roughly 18 percent of the MHz-POPs will be subject to coordination at the close of the auction (albeit using very conservative 100-meter tower height assumptions). It will be interesting to see if there is any effect on spectrum prices for these so-called impaired blocks as the auction progresses, especially those in my Category A block, which will have significant coordination requirements even after the first year.
Third, and most importantly, we have quite different industry dynamics heading into this auction compared with the C-band auction. In my experience, these industry dynamics have the largest effect on the success of an auction, because they will drive the level of competition. So let’s review some of the expected auction participants:
Hulk Hogan: This has to be Verizon. Verizon is widely regarded as having the best network since its acquisition of 700 MHz spectrum enabled them to build the first nationwide 4G network. Recently, however, Verizon started to look more like Hollywood Hulk Hogan from the 1990s. Although I did not watch wrestling much during that era, my understanding is that Hollywood Hulk was all show but no substance — like Verizon’s mmW 5G offerings? But having just won on average 160 MHz across the country in the C-band auction, Hulkamania could be poised to run wild again. Because of this, and contrary to some other analysts, I suspect that Verizon’s participation in this auction will be limited, if they enter the ring at all. As I noted in a prior blog post, Verizon potentially spent $3.5 billion more than they really wanted or needed in the C-band auction.
Andre the Giant: AT&T. Like Andre of the 1980s, AT&T got a little bloated over the past several years with their entertainment property acquisitions. Nevertheless, AT&T remains a force to be reckoned with. AT&T has recently lost some of its excess baggage and refocused on its core business. AT&T badly needs spectrum in this 3.45 GHz band to remain relevant, because it only acquired an average of 80 megahertz in the C-band auction and remains at a significant mid-band spectrum deficit to Verizon and T-Mobile. The 40-megahertz cap that the FCC imposed in this auction is probably quite annoying to AT&T, because it could use more. On the other hand, it certainly makes it harder for a competitor to body-slam AT&T by completely shutting it out of this band, as Hulk Hogan did to Andre the Giant in WrestleMania III. (Side note: The famous scoop slam from that event was the first time I realized that wrestling was probably fake.)
Randy “Macho Man” Savage: T-Mo. Like the Macho Man of the mid-1980s, T-Mobile has been on a run. With its successful purchase of Sprint and its 2.5 GHz spectrum, T-Mo still has the largest amount of mid-band spectrum, even after the C-band auction. This spectrum advantage has translated to quarter-after-quarter of customer growth to the point that it has Hulk Hogan in its sights. I do believe that T-Mobile will bid in this auction, if for no other reason than to deny competitors (i.e., AT&T) the ability to obtain spectrum too cheaply. In addition, as Macho Man states, the “Cream Rises to the Top!” so T-Mobile will want make sure it remains the crème de la crème of 5G offerings. (Side Note 2: You must click on the link to watch this video. This might be the best promo video of all time. I am still not sure where the Macho Man was pulling those packets of cream from?!?)
Rowdy Roddy Piper: Dish. Like Piper, Dish is determined to stir the pot by getting into the wireless business. Some consider Piper the greatest heel (or villain) that professional wrestling ever had. Certainly, T-Mobile may feel that Dish is a heel after its recent dust-up about T-Mobile’s planned shutdown of its CDMA network. Anyway, Dish was in for over $3 billion after Round 25 of the C-band auction before getting out — presumably because they found spectrum prices too expensive. Assuming spectrum prices do not get out of hand, I think we we see Dish spend at least this amount to boost their mid-band spectrum holdings.
The Killer Bees: Comcast + Charter. (Though I admit it would be better if it was the Killer C’s). This duo teamed up in the C-band auction, but then did not even enter the ring and place a bid. This time neither tag team member even entered the arena. Both failed to file an application to bid in this auction. Enough said.
Other Potential Heels and Heroes: In addition to U.S. Cellular, the usual PE bidders are back: Columbia Capital, Grain, Charles Townsend, Jennifer Fritzsche/Ed Moise. Each or all of these players could act as heels or heroes in this auction, helping push proceeds above the $14 billion reserve price, should others not participate.
As the chart below comparing excess demand to prior auctions shows, Auction 110 (the yellow dot) has come in at the low end. That means we may have fewer rounds in SummerSlam than we previously expected. If you want to keep track of how this auction progress, you can sign up for daily emails from my website. You will also find interactive maps and analysis of the auction.
P.S. Some may ask: Who is the Ultimate Warrior in this auction? The answer to that question is simple: No one. No carrier has deployed that much 5G gear, to date.
Sasha Javid is chief operating officer at BitPath. Visit www.sashajavid.com