AT&T (T 1.27%) needs to spend money to keep up with its competitors, but it doesn't have money to spend.

The FCC's C-band spectrum auction is expected to draw lots of bidders for the low- and mid-band spectrum on the block. It could fill a weak point for AT&T in its spectrum portfolio compared to rival T-Mobile (TMUS 0.48%). And while Verizon (VZ -0.17%) is in an even worse position for mid- and low-band spectrum licenses, it has a balance sheet that'll allow it to come away with whatever it needs at the auction.

Cell towers as seen from below.

Image source: Getty Images.

AT&T is playing catch-up on 5G

For all its marketing about 5G coverage and speeds, AT&T's 5G network is practically useless in its current state. Its 5G network underperforms its LTE network in tests and it's very noticeable for users that find their signal switching to that 5G logo.

The problem is a combination of how AT&T built its 5G network and current 5G antenna technology. Instead of building out a network on unused spectrum, AT&T sliced off a piece of its LTE spectrum for 5G. While that allows it to provide a 5G signal in more places, the narrow band ends up reducing speeds compared to LTE.

Adding more sub-6 GHz spectrum would allow AT&T to resolve the issue and build out the 5G network the company really wants. All three major carriers seem to have settled on strategies that require multiple layers of spectrum at different wavelengths in order to deliver 5G performance.

Bidding will be fierce

Verizon has a huge gap in its spectrum holdings and the spectrum up for auction this month can go a long way toward filling it. Verizon sold $12 billion worth of bonds last month with proceeds earmarked for spectrum costs. Analysts estimate Verizon could spend up to $24 billion at the auction. That should account for the vast majority of spending and it will drive prices higher for anyone that wants to get in on the action.

T-Mobile has built a substantial lead in 5G by using its low-band spectrum holdings, which can cover more area. It's deploying mid-band and high-band spectrum acquired from Sprint in order to improve performance. It doesn't have a significant need for more spectrum, but it'll likely participate in the auction to round out its portfolio and strengthen its competitive position against AT&T and Verizon.

There are over 50 other participants, including cable providers that have entered the wireless market through mobile virtual network operator (MVNO) agreements. They'll be looking to build out their own networks in select areas to reduce operating costs long-term. If AT&T wants to improve its spectrum holdings, it'll have to pay up.

AT&T can't afford to have it all

Here's the problem for AT&T investors. After a couple blockbuster acquisitions over the past few years, the telecom stock's balance sheet is still extremely weak. It's highly leveraged, and taking on more debt to buy up spectrum isn't really an option. Management has dedicated itself to reducing debt and selling off non-core assets.

If AT&T does buy a significant amount of spectrum in the auction, its leverage ratio would move higher than anticipated. That could threaten its dividend, according to MoffettNathanson analyst Craig Moffett. "If they don't buy spectrum, then their largest and most important business would be just one more segment of the portfolio in decline," he added in a recent note.

That's a nasty Catch-22 for AT&T.

The company is trying to raise cash through the sale of a stake in its television business, which may give it the ability to buy up the spectrum it needs. If it can't get a deal done, however, something's got to give. Considering the importance of 5G to the future of the company and keeping its phone subscribers on its network, investors may have to live with a dividend cut.