After sitting on the sideline for the FCC's AWS-3 spectrum auction, Sprint (NYSE:S) says it won't participate in next year's spectrum auction either. Sprint CEO Marcelo Claure says the company is happy with its current spectrum portfolio, which consists largely of 2.5 GHz spectrum it acquired in the acquisition of Clearwire in 2012.
But the upcoming spectrum auction will consist of spectrum in a much lower band, 600 MHz, which is able to reach farther and penetrate buildings much better. This makes it much more valuable for wireless carriers since coverage is better and it costs less to deploy per capita.
Sprint's decision to bow out bodes well for competitors T-Mobile (NASDAQ:TMUS), AT&T (NYSE:T), and Verizon (NYSE:VZ), as well as satellite company Dish Network (NASDAQ:DISH), which is expected to play a significant role in the auction.
Why Sprint isn't participating
Sprint's claim that its spectrum portfolio is already in good shape is a flimsy excuse for its lack of participation. The biggest problem is that Sprint is financially constrained.
The company hasn't turned a profit since 2007, and it's bleeding cash in efforts to attract new customers and retain existing ones. Last quarter, the company burned through $2.2 billion in cash, but it ultimately fell behind T-Mobile to become the smallest carrier among the top-tier providers.
Not all of that money was spent on customer promotions, however, as Sprint has ramped up its spending to deploy its existing spectrum and improve its network. RootMetrics saw a significant jump in Sprint's network reliability in its most recent report.
But Sprint simply doesn't have enough money to buy up what's sure to be the most expensive wireless spectrum licenses ever sold and build out its network with existing spectrum. What's more, its ability to tap the debt markets is hindered by a recent downgrade from Moody's to B3 -- two notches below its previous rating.
As a result, Sprint is forced to focus on the short term. The spectrum licenses acquired in next year's auction likely won't be deployed until 2020. Sprint can't afford to spend money now on something that won't realize any returns for five years. It needs to improve its network now, or risk falling further behind the competition.
A big win for T-Mobile
T-Mobile stands to gain the most from Sprint's decision not to participate. The FCC has reserved 30 MHz of spectrum in each geographic region for smaller carriers. While companies like U.S. Cellular and C Spire Wireless will be able to bid, neither can seriously compete with T-Mobile.
T-Mobile's biggest competition will likely be Dish Network, which has been accumulating spectrum licenses since 2008. At this year's AWS-3 auction, the company bid more than $13 billion on various licenses, outspending T-Mobile by more than $10 billion. To be fair, T-Mobile already has plenty of spectrum licenses in the same range as the AWS-3 spectrum. It's also worth noting the FCC has rules in place to prevent any single company from acquiring all 30 MHz of reserved spectrum.
T-Mobile has long had its sights set on acquiring a good chunk of the 600 MHz spectrum coming available next year. Investors should expect heavy participation from T-Mobile, but with juggernauts AT&T and Verizon bidding on the unreserved spectrum, T-Mobile may have to settle for less in order to preserve capital.
With one less bidder, AT&T and Verizon may be able to pay less than initially anticipated for the 600 MHz spectrum. That's key after the two largest carriers spent much more than expected in the AWS-3 auction. They'll have until the end of March to reload their war chests to compete with T-Mobile and Dish.