- Following day three of the spectrum auction, AT&T and Verizon remain concentrated in the low spectrum band.
- T-Mobile has a fairly diverse spectrum portfolio, but does little to exhibit strength at any of the bands.
- Sprint was absent, but there’s mounting evidence that it’s strategy is still viable over the long run.
The major spectrum auction happened in the past week, and for the most part, the pricing in terms of Mhz/Population were in-line with analyst estimates. Day 1 spectrum auction grossed $8.04 billion, Day 2 $9.21 billion, and Day 3 $10.1 billion, according to UBS analysis.
Pricing/demand increased as we progressed towards the later parts of the spectrum auction, and it seems the higher density markets are going for a much higher premium in comparison to the lower density regions.
Details on pricing/holdings for the major telecoms
Round 1, 3 and 5 pricing in the upper-tier markets like New York, Los Angeles, Chicago, San Francisco consistently priced above $.50/MHzPopulation, which isn’t surprising, but some of the lower tier markets like Cincinnati and Pittsburgh had pricing below $.30/MHzPopulation.
The telecoms who were able to sustain the highest concentration of low band spectrum were, of course, AT&T and Verizon, as the spectrum holdings by AT&T and Verizon at the 700MHz band were 31 and 22, respectively. It’s not yet clear what the pricing is on the 600Mhz band, but it’s likely to be higher than the 700MHz spectrum band.
That being the case, T-Mobile was able to improve its spectrum holding in the low-band 700MHz with 10 holdings, which is respectable as the budget carrier is substantially smaller than Verizon and AT&T in total post/pre-paid telecom subscribers. Furthermore, Sprint didn’t bid on any of the low band spectrum, hence it has zero holding in the 700MHz band whereas Dish was able to bring its 700MHz spectrum holdings to four, which implies Dish isn't actively competing in the telecom space, but its satellite television may pick-up better reception.
Sprint didn’t participate in the low-band spectrum, but they have a concentrated holding in the 1.9 GHz PCs band, BRS/EBS 2.5 GHz band, which amount to spectrum holdings of 36 and 155, respectively. Sprint has committed to the higher spectrum bands, as its base station deployment strategy is different from both AT&T and Verizon. At the higher spectrum bands, the usage of next-generation network technologies like 5G tend to be more effective as next-generation modems are better at packet processing through the higher frequency bands, thus translating into reasonable data throughput assuming Sprint is able to deploy enough base stations with the accompanying network backhaul.
Sprint’s strategy hasn’t translated into cutting edge data speeds, as the lower-spectrum bands require less of a base station footprint to maintain given mini-cell site technology. However, Sprint’s absence at the spectrum auction is perhaps due to its overwhelming portfolio in the higher bands, as the development of orthogonal frequency division multiplexing (OFDM) helps to balance the need for low-band spectrum, as the major mobile carriers use a technology referred to as “carrier aggregation” to allow mobile handset to receive data by utilizing all of the available spectrum between the major mobile carriers. It just so happens that 4G LTE is best suited for the low band spectrum, whereas 5G is anticipated to utilize higher frequency bands with much higher efficiency.
Furthermore, the telecoms tend to own various chunks of spectrum with concentration of holdings differing between the major four. While Sprint doesn’t own any of the 700/600MHz spectrum licenses it owns 14 licenses at the Cellular/SMR 800-900 MHz band and owns a near monopoly at the 1.9GHz and 2.5GHz band.
So what’s the investor takeaway?
The directive of the telecom oligopoly has been to divide and conquer. As you can tell in the above graphic (courtesy of the UBS analyst team), the telecoms have very different concentrations in spectrum holdings across the various bands.
I believe Verizon and AT&T are best positioned with their spectrum holdings to sustain high levels of bandwidth for mobile subscribers in the transition from 4G to 5G, but Sprint’s overwhelming position in the 2.5/1.9 GHz band gives them a near monopoly on the higher bands, which is a feature needed for high data throughput on 5G.
On the other hand, T-Mobile has a small sample cup of spectrum bands between the 700MHz to 1.9 GHz band. This implies that T-Mobile will sustain reasonable data speeds, and is heavily reliant on carrier aggregation upon 5G implementation. Verizon and AT&T are in a very good position competitively, but I anticipate that their overwhelming advantage in network speeds will diminish once there’s a full transition to 5G among the major mobile carriers.
That being the case, I don’t blame investors for their overwhelming preference towards the major two stalwarts (T, VZ) in the space given healthy dividend yields, reasonable valuation, and sustained competitive advantage.
However, Sprint isn’t too bad either, as their spectrum holdings seem best positioned for the 5G transition. The only challenge Sprint faces is its lack of profitability, and overwhelming dependence on low-pricing to sustain subscriber growth. It’s retention metrics will likely improve once they’re able to provide the unlimited data tier at reasonable data speeds, but leveraging economies of scale is more reliant on new base station technologies as opposed to its current base station/spectrum footprint.
It’s also worth noting that Sprint has sustained cost reductions in the past couple of quarters, and is starting to make substantial improvements in its P&L to start warranting speculation over a value recovery thesis for the struggling telecom. In the past quarter, Sprint reported a net loss of $302 million (Q1’17), compared to its prior quarter (Q4’16) net loss of $554 million. The company was able to reduce its net loss by 45.48% quarter-on-quarter, and it’s likely that further cost reduction initiatives will result in break-even over the next twelve months.
Sprint is addressing the downside risks, and should reassert value-recovery among the investor base given enough time. So, while I like AT&T and Verizon, there’s substantial potential for investors to outperform in the telecom space by remaining invested in Sprint stock.
Furthermore, the recent spectrum auction showcased that the telecoms aren’t out to compete aggressively across the various bands. While AT&T and Verizon remain heavily committed to the 700 MHz band, the competitive advantage derived from the low bands will diminish upon the introduction of new base station/modem technologies.
As such, I’m still reiterating my buy recommendation on Sprint, and may re-rate to high conviction buy over the next twelve months. Both Verizon and AT&T are high quality, and I reiterate my buy recommendations. T-Mobile remains a hold given the diminishing likelihood of being a take-out candidate and is also lacking a clear-directive in spectrum purchases.