Is Sprint Making A Mistake Bowing Out Of The 600 MHz Spectrum Auction?

Sprint (NYSE:S) announced that it will be sitting out of the FCC’s planned 600 MHz incentive auction that will be held in early 2016. While the carrier hasn’t participated in any major government auctions in recent years, its absence in the upcoming auction is particularly notable since this could be the last time in the foreseeable future that prized  low-band spectrum will be up for sale. Sprint’s rationale for bowing out is understandable – the company holds a sizable chunk of high-band spectrum that could be deployed to improve its network, and it also remains in a tight spot financially. However, the market didn’t take kindly to the news, sending Sprint’s shares down sharply earlier this week, and some analysts viewed the decision as being shortsighted on Sprint’s part. In this note, we take a look at the pros and cons of Sprint’s decision.

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The Case For Bowing Out Of The Auction

Expensive Spectrum, Long Payback Period: The FCC has raised record sums via recent spectrum auctions, amid the rising proliferation of Internet-enabled wireless devices and growing bandwidth needs. The AWS-3 spectrum auction that ended earlier this year brought in a record-breaking $45 billion, and it’s possible that pricing for 600 MHz spectrum blocks could be even higher. Considering Sprint’s precarious financial position – over $30 billion in debt, 7 straight years of annual losses, and already massive capital expenditure plans – it’s possible that the company won’t be able to afford the kind of outlays that this auction may call for. Additionally, it will take a few years following the close of the auction for the new spectrum to be fully available to carriers. Sprint has noted that investing in this spectrum would be unlikely to benefit its subscribers until 2020 at the earliest, meaning that the payback period for the spectrum is likely to be very long.

Deploying Its High-Band Spectrum Assets: Sprint holds a deep portfolio of high-band airwaves that it intends to use for its network densification efforts. The carrier’s current spectrum position includes an average of roughly 34 MHz of spectrum in the 1.9 GHz band, 14 MHz in the 800 MHz band and over 150 MHz in the 2.5 GHz band. ^[1] The carrier is looking to progressively upgrade of all of its existing sites to support all three of its spectrum bands while deploying new macro sites and tens of thousands of new small cells, in a move that could help to improve capacity as well as coverage. This could certainly be an expensive affair, but Sprint has noted that it will be “surgical and efficient” in how it deploys new sites, employing analytical tools to ensure that it is deploying them in the most effective spots. The carrier has also been looking to combine its smaller bands to get better speeds using carrier aggregation technology.

The Cons Of Opting Out

Low-Band Spectrum Is A Proven Route To A Strong Network: Low-band spectrum is prized by wireless operators, since it offers longer wavelengths that can propagate further and penetrate buildings better than higher-band spectrum. This also means that carriers can cover larger areas by using less wireless infrastructure. For example, covering a given area using 1900 MHz spectrum could require as many as 2-4x as many cell sites as lower-band 850 MHz. ^[2] While these propagation characteristics are less consequential in urban markets, due to higher population densities and capacity needs, they can be beneficial in suburban and rural areas. The big two players – AT&T and Verizon – have been able to build up a reputation for quality and coverage, thanks to their sizable low band holdings. While Sprint intends to address its network densification needs by deploying high-frequency spectrum via the technologies explained above, there are certainly some risks associated with that, and it will be difficult to match the capital efficiency that 600 MHz spectrum would offer.

Opting Out Gives T-Mobile An Edge: T-Mobile’s low-band spectrum position is relatively weak compared to the other major wireless carriers, which has been a big factor inhibiting its network quality. Accordingly, the upcoming auction is fairly crucial to T-Mobile’s growth plans. The FCC has set aside a reserve of 30 MHz of spectrum for participants such as Sprint and T-Mobile, who hold under 1 GHz of low-frequency airwaves, without having to bid against larger and better-capitalized rivals Verizon and AT&T. Now, Sprint’s decision to bow out will make T-Mobile the only nationwide carrier eligible to bid on this reserve spectrum, making it easier to win these airwaves and improve its network quality. While the reserve auction could see interest from smaller regional carriers and players outside the wireless business, T-Mobile is likely to have an edge. Given the intense competition between T-Mobile and Sprint for third place in the U.S. wireless market, this would not be good news for Sprint.

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1. Sprint dumps 600Mhz Plans, RC Wireless, September 2015 [↩]
2. Low Versus High Radio Spectrum, High Tech Forum [↩]