Telecom groups on hook for $ 81 billion in 5G spectrum auctions

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A record-breaking 5G spectrum auction grossed the U.S. taxpayer $ 81 billion last month out of 97 auction rounds, leaving some Trump administration officials celebrating and the winners incurring huge debts.

Hailed by former Federal Communications Commission chairman Ajit Pai as a “record success”, the question now is whether the huge gamble will bear fruit.

Spectrum is considered the lifeblood of the wireless industry. Bidders who miscalculate their strategy during license auctions risk being stuck with insufficient resources, resulting in poor network coverage.

“The operators were apparently willing to spend whatever it took to acquire spectrum in this auction, because the alternative was worse: to become a player in the 5G race as well,” said Sasha Javid, director of operating the BitPath data network and former FCC data officer.

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

The January auction marked a meteoric increase from the previous record-breaking sale of US waves at $ 45 billion set six years ago. This is more than double the forecast and analysts’ contrasts with a 5G auction hosted by Sweden the following week that generated a modest SKr 2.3 billion ($ 278 million).

Moffett Nathanson, the research firm, said there was the prospect of a “winner’s curse” for those who got the specter. “The issue is not so much whether or not that particular band of spectrum is being assessed appropriately. Instead, it’s the sheer amount of money spent on an asset that is best viewed as simply maintaining the status quo, ”wrote analyst Craig Moffett in a note.

The telecommunications industry bill will end up being closer to $ 95 billion once payments to satellite companies to stop using the frequencies are included.

While the auction is over, auction details will not be revealed for about a month, as the award steps are complete. Firms bidding are not allowed to comment on what they bought or what it cost, although analysts have factored in heavy bills for an already indebted industry.

T-Mobile’s recent takeover of Sprint, which bolstered the German company’s spectrum holdings in the middle of the gang, pressured big rivals Verizon and AT&T to react. David Barden, analyst at Bank of America, said: “If either does not gain enough spectrum, their competitive position in the wireless industry for the next decade is at risk.”

Ajit Pai, former chairman of the Federal Communications Commission, describes the goal of selling a huge amount of spectrum as “ absurdly ambitious ” © Alex Wong / Getty

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

UBS analyst John Hodulik estimates Verizon has spent up to $ 45 billion in auctions to consolidate its position in 5G spectrum and buy blocks that are expected to be cleared by the end of this year for commercial purposes . AT&T is expected to have spent up to $ 20 billion, while T-Mobile, even if it needs it the least, may have spent as much as $ 15 billion to maintain its advantage according to UBS.

Whatever the final breakdown, it will leave sector reports stretched.

T-Mobile, which had total debt of $ 69 billion at the end of the third quarter, announced plans to raise $ 3 billion to finance spectrum purchases. Verizon, which already has $ 129 billion in total debt and is expected to pay $ 3 billion in cash to acquire TracFone Wireless from America Movil, will need to issue more debt to pay for its new 5G spectrum, analysts say.

Meanwhile, AT&T, which cut costs and explored divestitures after its $ 80 billion takeover of Time Warner, is already one of the most indebted companies in the world with loans of nearly $ 160 billion. It risks being downgraded by rating agency S&P Global if it spends more than $ 20 billion on spectrum and its profits are stable this year. The company said this week that it has entered into a $ 14.7 billion term credit agreement with Bank of America to help fund its spectrum purchases.

These debt positions could leave the industry paralyzed if 5G growth exceeds expectations. European companies overpaid for 3G licenses two decades ago and struggled to recover. Recent spectrum auctions in Italy and Germany have also generated high revenues, but this has raised fears that struggling operators are slowing the rollout of 5G network upgrades as they grapple with strained balance sheets.

Telecom companies seek spectrum supremacy, frequency price per person ($)

Two advantages that large US groups enjoy over their European competitors are higher margins and average revenue per user, or ARPU, which means they can absorb the blow better.

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

For Moffett Nathanson, however, the huge spending will force the companies that have invested the most to generate billions of dollars in additional revenue and pre-tax profits. “Does anyone think Verizon’s ARPU outlook is now $ 3 per month higher than it was before the auction started?” Of course not.”

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