Avoiding Pitfalls in the Spectrum Race

by Investing Daily
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Submitted by Investing Daily as part of our contributors program.

Federal regulators have approved Verizon Communications Inc’s (NYSE: VZ) $3.6 billion purchase of unused wireless spectrum.

The deal provides cable companies with valuable cash, particularly Comcast Corp (NSDQ: CMCSA), which gets roughly $2.3 billion. Verizon obtains much-needed spectrum for its nationally leading wireless network. Deutsche Telekom AG’s (Germany: DTE, OTC: DTEGF, ADR: DTEGY) T-Mobile USA unit, meanwhile, gets some Verizon spectrum.

Regulatory approval isn’t sitting well with everyone, as it’s seen as adding to the dominance of wireless leaders. And it still seems unlikely the Federal Communications Commission (FCC) or the US Dept of Justice will approve any meaningful industry mergers, though they should OK AT&T Inc’s (NYSE: T) purchase of bankrupt Nextwave Wireless Inc.

The spectrum race, however, won’t be won by how well companies navigate bureaucracy. Rather, the key is how much capital wireless companies can deploy effectively to meet demand for global connectivity.

And the leaders have continued to widen their lead over rivals this year.

Verizon, for example, spent $7.4 billion in the first half of 2012 on its network, while AT&T spent $8.7 billion. Number three wireless company Sprint, meanwhile, mustered only $1.7 billion, despite running up record red ink.

The plight of small wireline communications is worse still. Alaska Communications Systems Group Inc (NSDQ: ALSK), Cablevision Systems Corp (NYSE: CVC), Fairpoint Communications Inc (NYSE: FRP), Frontier Communications Corp (NYSE: FTR) and Otelco Inc (NYSE: OTT)–and even CenturyLink Inc (NYSE: CTL) and Telephone & Data Systems Inc (NYSE: TDS)–continue to hemorrhage revenue and, even worse, customers.

It’s hard to imagine any of them competing over the long term in an industry where scale is ever more essential.

These companies aren’t going to vanish immediately. That means there will likely be opportunities to trade them. A more accommodative FCC would probably allow game-saving mergers as well.

But serious long-term money belongs with the leaders in this industry, which for all its dangers is still exploding to the upside. That means high-yield stocks, AT&T and Verizon, are much better bets than the smaller names mentioned above.

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