Telecoms groups on the hook for $81bn in 5G spectrum auction

A record 5G spectrum auction yielded $81bn for the US taxpayer last month over 97 rounds of bidding, leaving some Trump administration officials celebrating and the winners nursing huge debts.

Hailed by the former Federal Communications Commission chairman Ajit Pai as a “record-breaking success”, the question now is whether the huge bet will pay off.

Spectrum is considered the lifeblood of the wireless industry. Bidders that miscalculate their strategy during licence auctions risk being stranded with inadequate resources, leading to poor network coverage.

“Carriers were apparently willing to spend whatever it took to acquire spectrum in this auction because the alternative was worse — becoming an also-ran in the race to 5G,” said Sasha Javid, chief operating officer of data network BitPath and a former chief data officer at the FCC.

The auctioned “C-band” spectrum — a mid-band frequency used by satellite companies — adds the capacity needed for the huge amounts of data that the new 5G wireless technology is expected to generate. It is also more effective at transmitting data services over a wider area than higher frequencies.

The January auction marked a staggering increase on the previous record sale of US airwaves at $45bn set six years ago. It was more than twice analysts’ forecasts and contrasts with a 5G auction held by Sweden the following week that generated a modest SKr2.3bn ($278m).

Moffett Nathanson, the research company, said there was the prospect of a “winner’s curse” for those that had secured the spectrum. “The issue isn’t so much whether this particular band of spectrum is or isn’t being valued appropriately. Instead, it is the sheer quantum of money being spent for an asset that is best thought of as simply maintaining the status quo,” analyst Craig Moffett wrote in a note.

The telecoms industry’s bill will end up being closer to $95bn once payments to satellite companies for them to stop using the frequencies are included.

Although the bidding is complete, details of the auction will not be revealed for about a month as the assignment stages are completed. Companies that bid are not allowed to comment on what they have bought, or what it cost, although analysts have factored in hefty bills for a sector already laden with debt.

T-Mobile’s recent takeover of Sprint, which bolstered the German-owned company’s spectrum holdings in the mid-band, has put pressure on larger rivals Verizon and AT&T to react. David Barden, an analyst with Bank of America, said: “If either does not win ample spectrum, their competitive position in the wireless industry for the next decade is at risk.”

A clash of the telecoms titans is likely to have driven prices higher. Mr Barden said it was also possible that T-Mobile played “spoiler” with bids designed to force its rivals to pay more, while Dish, the spectrum-hungry satellite company, is also seen as a potential dark horse. Cable players such as Comcast and Charter, which have acquired spectrum in recent auctions, may have also pushed up prices according to analysts.

John Hodulik, an analyst with UBS, estimates that Verizon spent as much as $45bn in the auction to shore up its 5G spectrum position and to buy blocks that should be cleared by the end of this year for commercial use. AT&T is forecast to have spent as much as $20bn while T-Mobile, despite needing it least, may have spent up to $15bn to press home its advantage according to UBS.

T-Mobile, which had total debt of $69bn at the end of the third quarter, has announced plans to raise $3bn to finance spectrum purchases. Verizon, which already has $129bn of total debt and is set to pay $3bn in cash to acquire America Movil’s TracFone Wireless, will have to issue more debt to pay for its new 5G spectrum, say analysts.

Meanwhile, AT&T, which has been cutting costs and exploring disposals after its $80bn takeover of Time Warner, is already one of the most indebted companies in the world with borrowings of almost $160bn. It is at risk of a downgrade by rating agency S&P Global if it spends more than $20bn on spectrum and its earnings are flat this year. The company said this week it had entered into a $14.7bn term loan credit agreement with Bank of America to help fund its spectrum purchases.

Those debt positions could leave the industry hamstrung if 5G growth undershoots expectations. European companies overpaid for 3G licences two decades ago and struggled to recover. Recent spectrum auctions in Italy and Germany also yielded high levels of proceeds but this has given rise to fears that struggling operators could slow the rollout of 5G network upgrades as they grapple with strained balance sheets.

Two advantages the large US groups enjoy over their European rivals are higher margins and average revenue per user, or ARPU, meaning they can better absorb the hit.

Paul Klemperer, an economist who designed the UK 3G auction, said the C-band sale showed the industry had put a higher price on an asset it needed. “The reason we auction things is precisely because we don’t know how much they are worth to people,” he said.

For Moffett Nathanson, however, the huge spend will require the companies that laid out the most to generate billions more in incremental revenue and pre-tax profit. “Does anyone think that Verizon’s ARPU prospects are now $3 per month better than they were before the auction started? Of course not.” Financial Times