T-Mobile U.S. (NASDAQ:TMUS) emerged the biggest winner of the FCC’s 600 MHz incentive auction that shifted airwaves from TV broadcasters to the cellular industry, agreeing to pay close to $8 billion for about 45% of the spectrum sold at the auction. While the spectrum should help T-Mobile significantly improve its coverage, allowing it to compete more directly with Verizon and AT&T in suburban and rural areas, there are some caveats as well. Below we take a look at what the deal could mean for T-Mobile.
We have a $64 price estimate for T-Mobile, which is in line with the current market price.
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600 MHz Win Will Improve T-Mobile’s Coverage
T-Mobile won about 31 MHz of the spectrum on average nationwide, effectively allowing the carrier to quadruple its low-band spectrum position. Low-band spectrum, which has traditionally been a weak spot for T-Mobile, is important to carriers from a coverage perspective, as it has better propagation characteristics and penetrates obstacles such as walls. The new spectrum should help T-Mobile improve its performance, particularly in rural areas and inside buildings, where it has typically lagged rivals. Moreover, low-band spectrum requires a smaller number of towers to cover a certain area, bringing down the infrastructure costs needed to deploy the spectrum. T-Mobile will have significantly more low-band spectrum per customer than any other major provider, potentially allowing it compete head-on with larger rivals such as AT&T and Verizon, who have typically used coverage as a key factor to justify their premium pricing.
Low-Band Spectrum Could Become Less Relevant As Data Dominates Airwaves
However, there is some skepticism regarding the long-term viability of making large investments in low-band spectrum. Low-band spectrum offers less capacity compared to mid- and high-band spectrum, and its relevance may decline as mobile data usage continues to ramp up. For instance, the two biggest U.S. carriers – AT&T and Verizon – have been increasingly setting their sights on millimeter-wave spectrum, in the 28 GHz and 39 GHz millimeter-wave bands, which have been approved by the FCC to carry 5G wireless services. AT&T recently announced that it would buy Straight Path communications, a firm that holds significant millimeter-wave spectrum, and there are reports that Verizon is considering topping AT&T’s bid. This may explain why the other nationwide carriers were largely indifferent to the auction. AT&T spent less than $1 billion on the 600 MHz auction, while Verizon did not buy any spectrum. Sprint, which has sizable holdings in the 2.5 GHz band, decided to sit out of the auction altogether.
While T-Mobile expects to begin deploying some of the new spectrum (~10 MHz out of its 31 MHz average nationwide win) this year, the remaining airwaves are still being used by TV broadcasters, with the full transfer expected to be completed by 2020. While the company is working with Ericsson and Nokia to deploy network equipment that supports 600 MHz airwaves, smartphones don’t yet support the band. However, Qualcomm, the largest provider of smartphone modems, is getting ready to launch new chips that support it. Overall, it’s safe to assume that it could take a few more years before T-Mobile’s subscribers see the benefits of the new spectrum, and there is a possibility that the next generation technologies could begin to see a roll-out by then.
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