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How the Feds Want to Put Heat on AT&T and Verizon

By Evan Niu, CFA - Apr 15, 2013 at 7:00PM

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The Department of Justice wants the Federal Communication Commission to give Sprint and T-Mobile a leg up against AT&T and Verizon in an upcoming spectrum auction.

Putting heat on the big players is simply the name of the regulatory game -- at least if you're the Department of Justice's Antitrust Division. In a filing with the Federal Communications Commission last week, the DOJ makes it clear that it would like to put additional heat on dominant wireless carriers AT&T ( T 1.78% ) and Verizon ( VZ 1.36% ) Wireless.

The FCC has a spectrum auction coming up for low-frequency bands. Frequencies under 1 GHz have greater propagation characteristics that allow signals to provide better coverage in rural areas and penetrate buildings more effectively. Because of this, low-frequency bands are an important part of any carrier's spectrum portfolio. Unfortunately for competition, the "two leading carriers have the vast majority of low-frequency spectrum, whereas the two other nationwide carriers have virtually none."

That's why the DOJ is advocating for the FCC to set up rules favoring Sprint ( S ) and T-Mobile in the upcoming auction, since otherwise their costs to build out networks in rural areas using high-frequency spectrum would be much higher. The FCC's policies could boost competition in the industry "by preventing the leading carriers from foreclosing their rivals from access to low-frequency spectrum."

AT&T and Verizon have much deeper pockets than Sprint and T-Mobile. One of the big drawbacks to the current FCC auction system that's been in place for nearly two decades is that bigger players enjoy structural advantages since the chunks of the airwaves go to the highest bidder. Smaller competitors are put at a distinct monetary disadvantage in this way. The flip side is that the process is much faster than the previous system of allocating through extensive hearings, lotteries, and awards, which could last years while the spectrum sits unused. Raising money for the government doesn't hurt, either.

Ma Bell pointed out that blocking it and Big Red from the auction would translate into less money going to the Treasury (a not-so-subtle reminder of how deep its pockets are).

The DOJ also warns about taking carriers' statements at face value when it comes to their competitive prospects. When AT&T and T-Mobile were trying to make their case to the DOJ and FCC several years ago, both companies argued that the deal was necessary due to spectrum shortages that were limiting their ability to expand their networks. After the deal was blocked, both carriers "have announced plans to deploy LTE more extensively than they had earlier suggested would be possible." They did this primarily by repurposing spectrum previously deployed to older technologies.

The news today that DISH Network ( DISH 0.13% ) is making a $25.5 billion bid for Sprint, rivaling the previous $20.1 billion offer from SoftBank for a 70% stake, promises to further complicate things. DISH has been busy beefing up its own spectrum holdings over the years for an inevitable push into the wireless industry.

Regulators are going to have their hands full.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$51.42 (1.36%) $0.69
Sprint Corporation Stock Quote
Sprint Corporation
S
AT&T Inc. Stock Quote
AT&T Inc.
T
$23.46 (1.78%) $0.41
DISH Network Corporation Stock Quote
DISH Network Corporation
DISH
$31.23 (0.13%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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