Having learned a lesson from the T-Mobile debacle last year, AT&T (NYSE:T) is targeting smaller acquisitions to meet its spectrum needs. The second largest U.S. wireless carrier announced recently that it has decided to acquire Nextwave Wireless, a small company that holds two bands of spectrum – one in AWS band and the other in WCS band. The total cost of the deal, which includes assumption of debt as well as $50 million in cash payments for the stake, is $600 million.  In addition to Nextwave, the carrier has also agreed to purchase WCS spectrum licenses from Comcast (NASDAQ:CMCSA) and Miami-based Horizon Wi-Com as well.
AT&T needs additional spectrum to augment 3G capacity as well as to build out a nationwide LTE network in order to catch up with Verizon (NYSE:VZ), which is currently well ahead in the LTE race. Verizon, which started deploying LTE much earlier than AT&T, has a LTE network available to about 230 million Americans in 337 markets across the U.S. By the year-end, Verizon expects to cover around 260 million people in more than 400 markets across the country. In comparison, AT&T’s LTE network covers about 80 million Americans presently and the carrier plans to add another 70 million people to its coverage by the year-end.
AT&T’s spectrum woes
But, in order to bridge the gap and build a LTE network robust enough to compete with Verizon, it will need all the spectrum it can get its hands on. At the same time, rising smartphone penetration and the burgeoning data needs of subscribers using mobile devices such as the iPhone is putting a lot of strain on its 3G network that needs additional spectrum for strengthening. As a result, AT&T has been throttling data usage of the top 5% of its unlimited data users in a bid to ease the load on its network and avoid widespread discontent with its data services.
The recent Congressional approval for wireless spectrum auctions is a welcome relief for the carrier. But it is subject to the FCC’s judgement of how much TV spectrum AT&T will be allowed to bid for to avoid anti-competitive concerns. (see Wireless Industry Cheers as Spectrum Auctions Seem Likely) Moreover, the biggest showstopper could be the TV broadcasters’ reluctance to part with their spectrum, so AT&T cannot rely solely on the auctions either. Even if the two obstacles are somehow overcome, the auctions may not happen for another year or two. Meanwhile, it seems increasingly likely that its primary competitor, Verizon, will get its hands on a huge swathe of AWS spectrum from the cable companies before the end of 2012.
How small acquisitions make sense
In order to meet its near-term spectrum needs, AT&T is planning to transition the remaining 2G users to 3G quickly and re-farm the 2G spectrum for 4G purposes. (see AT&T Looks to Address Spectrum Crunch by Re-Farming 2G Network) But then it risks losing the customers completely if they choose to jump to another carrier. Intense competition in a highly saturated U.S. wireless industry, where penetration exceeded 100% in 2011, has made every subscriber critical.
In such a scenario, stitching together multiple spectrum deals can provide near-term solutions for AT&T, especially after the FCC has made it clear that any big-scale consolidation will be met with stiff opposition. Nextwave or Comcast or Horizon’s spectrum holdings alone may not be big enough to satiate all of AT&T’s needs but it would definitely make it easier for AT&T to overcome regulatory hurdles. Having a wider net of deals will help it get at least a few of them approved, if the FCC sees AT&T exerting too much control with all of them together.
Nextwave’s AWS spectrum license will most likely be used to meet AT&T’s near-term needs since it complements its existing spectrum resources in the same band, some of which it had to part with as break-up fee for not being able to close the T-Mobile deal last year. The WCS spectrum is, on the other hand, more of a long-term plan since the resource cannot be used for wireless service currently due to interference concerns with adjacent satellite radio bands. However, AT&T and Sirius XM have jointly filed a proposal with the FCC that seeks to resolve the issue. If approved, AT&T expects to be able to use the spectrum for LTE in three years. With the industry facing a looming spectrum crunch, we believe the FCC will sign off on the Nextwave deal as well as the WCS proposal soon.Notes: