Improving a carrier's wireless network requires spectrum, and only a certain amount of spectrum exists.
That's why the upcoming wireless spectrum auction looms large over the ongoing fates of Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S), and T-Mobile (NASDAQ:TMUS). All of those companies could use more spectrum to improve their networks, but not all of them will be participating in the approaching event, which the Federal Communications Commission is administering.
In this case, market leaders AT&T and Verizon are in, as is T-Mobile, but Sprint, which has said it won't be bidding, doesn't appear to be, according to a list from the FCC. It's not always clear which companies will be participating because the agency allows affiliates and subsidiaries not obviously tied to the parent company to bid.
In addition to the three wireless carriers, Comcast (NASDAQ:CMCSA) has also registered to bid, as have a number of regional players in cable and wireless. How much spectrum will be available is not yet known because the auction is actually in two parts. First, the FCC will conduct a reverse auction to buy back spectrum from television broadcasters who no longer need it because their signals are transmitted digitally, and then it will conduct an auction of whatever it's been able to buy.
What exactly is happening?
Essentially, the FCC is letting local broadcast networks sell spectrum they own but don't need, so it can transfer spectrum to companies with wireless networks that badly need it. The agency explained its reasoning on a website for the auction, where it noted that there are more connected devices than there are people living in the United States, and about 70% of Americans use smartphones:
"This increasing demand poses a major challenge to ensure that America's wireless networks have the capacity to support the critical economic, public safety, healthcare, and other activities that rely on them. To meet this challenge, the FCC has worked to free up spectrum for wireless broadband use, removed regulatory and other barriers to the use of spectrum, and enabled more efficient use of spectrum in numerous innovative ways."
The reverse auction starts March 29 and it's a fairly complicated process whereby the FCC must first determine how much spectrum it can acquire at what price. The two separate auctions are what the agency called "interdependent," because "the reverse auction requires information about how much bidders are willing to pay for spectrum licenses in the forward auction; and the forward auction requires information regarding what spectrum rights were tendered in the reverse auction, and at what price."
It's the job of the FCC to make sure not only that it can make a profit on anything that it buys, but also that it can buy (or sort of shift around) spectrum for sale in useful blocks.
What's at stake?
Wireless companies need spectrum to expand their services and offer better connectivity in more places. That has become increasingly important as data usage has gone up. Think of spectrum like a highway for data. Even if you have very wide roads with lots of lanes, at some point the traffic will pile up. In this case, consumers are using more data, which could push the existing highways (spectrum/wireless networks) to the breaking point.
In this case, it's hard to know how much the various players will spend, because it remains unknown how much spectrum will be available. In the last spectrum auction, however, a total of $45 billion was spent. DISH Network (NASDAQ:DISH) put up the second most -- about $10 billion after discounts, some of which were later not allowed -- and AT&T led the way with just over $18 billion in spectrum purchased, CNET reported.
DISH, like Comcast, doesn't even have a wireless network, but it could be looking to create one or merely to have an attractive asset for a partnership or merger/acquisition. In Comcast's case, the company could very well be considering its own wireless offering -- perhaps a Wi-Fi-based phone offering enhanced by a wireless network created from purchased spectrum.
In every case we're talking huge money, with a need for the companies involved -- at least three wireless carriers -- to keep pace to remain viable companies. That makes Sprint's sitting the auction out especially curious, and it should make investors question the company's long-term viability as a standalone entity.
For Verizon and AT&T the stakes are high, but T-Mobile may be the company that benefits most with a win. Yes, the money invested will be huge. But if the company can show the public it can acquire the spectrum needed to improve its network, that may be the last piece it needs to start really cutting into Verizon and AT&T's significant lead in total customers.
Daniel Kline has no position in any stocks mentioned. His fantasy football league was the auction kind, which made drafts take a very long time. 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.