For all the noise T-Mobile (NASDAQ:TMUS) CEO John Legere has made asking the FCC to increase its reserves for small carriers in the upcoming spectrum incentive auction, his company will have plenty to spend. At a recent Deutsche Bank conference, CFO Braxton Carter told analysts that the company can spend up to $10 billion on the auction without harming its credit rating.
Fortunately, he believes $1 billion or $1.5 billion will get the job done while AT&T (NYSE:T) and Verizon (NYSE:VZ) spend big money on the non-reserved spectrum. The FCC is setting aside 30 MHz of spectrum in each region for carriers with little to no low-band spectrum licenses, and Carter believes that will create an interesting dynamic in the auction, with potential tech and pay-TV companies like Dish Network (NASDAQ:DISH) bidding.
What does T-Mobile hope to accomplish in next year's auction?
Over the last couple of years, T-Mobile has bought a handful of spectrum licenses in the 700 MHz band. The bulk of those licenses came from a deal with Verizon, where T-Mobile sent some of its high band spectrum licenses and $2.4 billion in exchange for 12 MHz of more valuable 700 MHz licenses. The company plans to deploy all of its 700 MHz spectrum by the end of the year, but it will still only cover about half of the country.
The other half is supported by dense networks of spectrum in the 1900 MHz and 2100 MHz bands. Those frequencies don't travel as far and do a poor job penetrating buildings. T-Mobile's primary objective will be to bolster those regions still on the higher frequency networks with low-band spectrum.
But it won't need all of the FCC's 30 MHz reserve to accomplish that. As mentioned, it only has 12 MHz of spectrum for its current 700 MHz network. While Carter noted that the company may look to add to its holdings in those regions, it's certainly proven that it's enough to build a reasonably good network capable of competing with Verizon and AT&T.
T-Mobile won't have very much competition for the 30 MHz reserved for smaller carriers. Regional carriers will certainly be bidding, but none have the financial resources to stop T-Mobile from getting what it needs. With the average starting price expected to be $1.25 per MHz-POP, many smaller carriers will be priced out from the start of bidding. Sprint has already announced that it won't be bidding in the auction.
T-Mobile's biggest competition will likely be Dish Network, but even the satellite company's level of participation is in question after the FCC denied it $3.5 billion in small business discounts from the AWS-3 spectrum auction. Dish seems most interested in acquiring spectrum at value prices, or in areas where Verizon and AT&T are weakest. As a result, T-Mobile may be able to skip through and snatch up a good chunk of licenses without a lot of competing bids.
But Carter believes that 30 MHz reserve coupled with the increasing value of spectrum in the last few years could cause some non-traditional bidders to throw their hats into the ring. Big tech companies closely related to the smartphone business or other pay-TV companies could be interested in spectrum, and many have the deep pockets to buy up whatever they want. That could cause prices to climb significantly higher than what the CFO currently expects to pay, so it's a good thing the company is capable of spending a lot more than planned.
It will still be a couple of years until T-Mobile will be able to completely deploy any spectrum it buys in next year's auction. It's done an excellent job attracting phone customers from AT&T and Verizon, even with an inferior network. Building out its network will only make it more competitive.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.