Having learned a lesson from the T-Mobile debacle last year, AT&T (NYSE:T) is targeting smaller deals/acquisitions to meet its spectrum needs. The second largest U.S. wireless carrier recently filed applications with the FCC, requesting approval to swap wireless spectrum with T-Mobile in 55 markets across 17 states.  The spectrum swap will help AT&T augment its PCS spectrum holdings, which it currently uses for 2G but plans to re-farm for LTE purposes in the coming years. In addition, AT&T plans to buy three 700MHz licenses in the lower B block from Peregrine Spectrum LLC to meet its near-term LTE needs. 
This comes on the back of a host of spectrum deals AT&T announced in recent months, including decisions to acquire Nextwave Wireless and purchase spectrum licenses in the 700MHz and AWS bands from Cox Communications, CenturyTel, Comcast (NASDAQ:CMCSA) and others. These multiple small spectrum deals give AT&T the best chance to build a spectrum war-chest big enough to combat a looming spectrum crunch while not raising the FCC’s hackles like it did with one big acquisition proposal last year.
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AT&T’s spectrum woes
AT&T needs the additional spectrum it is buying to augment 3G capacity as well as to build out a nationwide LTE network in order to catch up with Verizon, 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 more than 230 million Americans in 371 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.
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, Verizon has bolstered its spectrum position by securing all the approvals it needed to acquire a swathe of AWS spectrum from the cable companies.
How small acquisitions make sense
To meet its long-term spectrum needs, AT&T is planning to transition the remaining 2G users to 3G gradually 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 customers 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. T-Mobile or Peregrine or Nextwave’s spectrum holdings alone may not be big enough to satiate all of AT&T’s needs but it will 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.
The AWS and 700MHz spectrum licenses AT&T seeks will most likely be used to meet its near-term needs since it complements its existing spectrum resources in the same band, some of which it had to part with as a 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 – a plan that reportedly has the FCC Chairman Julius Genachowski’s blessing. (see AT&T LTE Prospects Bolstered By FCC Chairman’s Support) If approved by the rest of the FCC board, 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 a few, if not all, of the AT&T deals as well as the WCS proposal soon.Notes: