"While the AWS-3 auction was a success for the US Treasury, it was a disaster for American wireless consumers," according to T-Mobile (NASDAQ:TMUS) CEO John Legere. While T-Mobile wasn't a heavy participant in the recent spectrum auction, AT&T (NYSE:T) and Verizon (NYSE:VZ) showed a willingness to spend whatever's necessary to corner the market.
AT&T spent $18.2 billion on spectrum licenses in an auction that wasn't expected to fetch much more than that in total bids when bidding began. Verizon added $10.4 billion to the mix. The two carriers combined with DISH Network (NASDAQ:DISH) bought 94% of the available licenses at auction.
Legere hopes that the FCC will ensure that a similar situation won't unfold at next year's 600 MHz incentive auction. In a blog post, Mr. Legere outlined three things the government should do to promote fairness -- i.e. give T-Mobile a fair shake in the next auction: 1) don't delay; 2) reserve more spectrum for smaller carriers; 3) enforce rules about using the spectrum bought at auction.
No more delay tactics
The 600 MHz incentive auction has already been delayed twice. The longer it's delayed, the more favorable it is for AT&T and Verizon. T-Mobile, on the other hand, can't wait to get its hands on the low-band spectrum that provides a wider reach and better building penetration than its current portfolio.
Verizon and AT&T would prefer the FCC holds the auction later, so that they can get financing in order. Before the recent AWS-3 auction, both companies sold off several assets and raised debt in preparation. With prices going higher than expected, each company sold off additional assets after the auction, too. If the two had more time to get financing in order, they'd be able to spend more on spectrum.
Another reason the two dominant wireless carriers may want to delay the auction is the chance that a Republican will get elected in 2016, and the composition of the FCC could change. That would likely result in more favorable rules for the larger corporations.
Give the little guys a shot
Legere is also asking the FCC to reserve 40 MHz or at least half of the available spectrum for companies with less than 45 MHz of similar spectrum. Note that the amount of spectrum up for auction depends on how much television stations are willing to give up.
The FCC currently has proposed rules that will reserve 30 MHz of spectrum for smaller companies, but that number falls to 20 MHz if broadcasters give up just 60 MHz total, and just 10 MHz if the total is 50 MHz. Legere is asking for a significant bump in the case that relatively little spectrum goes up for auction.
It's important to note that AT&T and Verizon combined control 73% of low-band spectrum in the industry. Legere's proposal will decrease the concentration of the valuable spectrum licenses.
Use it or lose it
Finally, Legere is asking the government to impose rules on using the spectrum bought at auction. DISH Network has been quietly amassing loads of spectrum and hasn't done anything with it. Instead, it's sitting on its licenses, and just watching them increase in value. While there are usage requirements for some of Dish's licenses, that's not the case with all them.
Dish's participation in the AWS-3 auction is largely responsible for driving up the prices paid by AT&T and Verizon. The satellite TV provider had three designated entities in the auction, and often times bid against itself to increase prices. If Dish is unable to sit on its spectrum holdings, it's unlikely to bid as much in the upcoming auction. That would likely reduce the total paid by all of the wireless carriers at auction.
Will the FCC go for it?
It's hard to say whether the FCC will acquiesce to Mr. Legere's call for help. The FCC's job is to promote competition in order to provide consumers with adequate service at a reasonable price. To that end, it certainly ought to reserve a portion of the 600 MHz spectrum for carriers that currently don't have very much.
The current landscape is pretty lopsided. AT&T holds an average of 57 MHz of low-band spectrum in the top 100 markets. Verizon averages 47 MHz. T-Mobile doesn't own more than 20 MHz in any market, and it averages 6 MHz per market.
Even though AT&T and Verizon aren't in the best financial position to spend more money, T-Mobile hasn't exactly been able to raise significant cash recently with its negative cash flow. Even though management expects the company to turn cash flow positive in 2015, it's pretty clear that T-Mobile needs all the help it can get in the upcoming spectrum auction.