You can’t see it, hear it, touch it, taste it or smell it — but it might be the scarcest, most valuable commodity of the 21st century. It’s a bundle of radio frequencies — known in the telecommunications industry as spectrum — and the companies that gain control of this finite resource could rule the lucrative world of next-generation wireless communications.
Telecom giants AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint (NYSE:S) are scrambling to gain control of the prime frequency bands they need to build out their next-generation 4G Long Term Evolution (LTE) mobile broadband networks. Boosting the capacity of these networks is essential if wireless providers are to meet skyrocketing mobile data and video demand.
These new 4G LTE networks are also about speed. Although carriers boast that they are 10 times faster than 3G, wireless guru Steve Kovach claims he’s seen download speeds that rival a cable modem. That’s blazingly fast when you’re streaming a movie on your Apple (NASDAQ:AAPL) iPad.
But as with all valuable, finite resources, acquiring the necessary spectrum is far easier said than done. Radio frequency spectrum is a little like real estate: it’s all about location, location, location. Certain frequency bands are better suited to mobile broadband services like data and video because they enable better indoor and outdoor coverage and are comparatively cost effective for carriers to build and operate networks. Some of the most sought-after frequencies are in the 800 MHz, 1.8 GHz and 2.6 GHz spectrum bands.
Keeping pace with smartphone and tablet adoption
4G LTE is being driven by the proliferation of mobile broadband devices and includes bandwidth-hungry tablets like the new iPad 3. Smartphones, such as Apple’s iPhone 4s, Nokia’s (NYSE:NOK) Windows phone, and models based on Google’s (NASDAQ:GOOG) Android standard such as Motorola Mobility (NYSE:MMI), are driving the need for 4G LTE, as are e-readers like Amazon’s (NASDAQ:AMZN) Kindle Fire.
The number of mobile broadband devices is expected to more than double, from 158 million today to more than 350 million by 2015, according to an IHS iSuppli study. The majority of those devices will be based on the 4G LTE standard.
The quest for advanced wireless spectrum was the primary motivation behind AT&T’s failed $39 billion bid to acquire Deutche Telekom’s (PINK:DTEGY) T-Mobile last year. Had the deal been approved by regulators, AT&T would have been able to use the T-Mobile frequencies to jumpstart its 4G LTE network.
After the Justice Department and FCC rejected the AT&T/T-Mobile deal, Verizon won a big victory in the spectrum wars. Not only did the government deal a staggering blow to its biggest competitor, but Verizon further enhanced its position by inking a $3.6 billion deal to buy frequencies and cross-sell services with cable consortium SpectrumCo., which includes Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), and Bright House Networks.
But that deal is now under federal scrutiny too, with opponents charging that its approval would put too big a share of the nation’s most valuable spectrum into the hands of a single company. Verizon has told the government that if the deal is approved, it will allow customers to watch cable TV over their mobile devices by the end of the year.
Sprint’s flagging fortunes
Sprint is arguably in the worst position of the three mobile broadband competitors: it’s still losing money, it needs to find spectrum, and there are few remaining sources. Although the FCC plans to auction off more spectrum, it first will have to move existing government users like the Defense Department from those frequencies. That could take years.
Earlier this month, Sprint had to cancel a 4G LTE contract with LightSquared, a venture led by billionaire Phil Falcone’s investment firm, Harbinger Capital Partners. LightSquared had planned to work with Sprint to provide advanced wireless service via a network of 40,000 high-power, earth-based transmitters, when regulators ruled that the system interfered with GPS signals and posed a danger to commercial aviation.
Now, Sprint is faced with increasingly limited options for launching its 4G LTE network. Last year, Sprint and its partner Clearwire (NASDAQ:CLWR) launched a mobile broadband service using WiMAX technology. Unfortunately, other major players embraced LTE, leaving Sprint’s technology in the same fix as a beta VCR in a VHS world.
It could have bought its way into LTE by acquiring MetroPCS (NYSE:PCS) last month. But its board rejected the $8 billion merger. It could have inked a network-sharing deal with T-Mobile, but that fizzled. Sprint’s best – and perhaps only — remaining near-term opportunity could be a partnership with pay-TV provider (and Blockbuster owner) Dish Network (NASDAQ:DISH).
Earlier this month, the FCC ruled favorably on DISH’s plan to use its satellite frequencies in the 2 GHz band to build a ground-based 4G LTE network. Because DISH’s spectrum is farther away from the GPS frequencies, it is not expected to cause the kind of interference that sunk LightSquared’s plan.
Trading Ideas: Verizon currently is in the best position to take full advantage of the 4G LTE revolution — with 200 million LTE users in 195 markets, it has a huge lead over the competition. Now could be a good time to establish a long position in VZ. The biggest worry is if regulators quash the SpectrumCo. deal, but the mobile cable TV offer might just be sweet enough to charm regulators into okaying the deal.
AT&T is in better shape than Sprint, certainly, but it needs a little time to regroup from the T-Mobile debacle (which ended up costing it a break-up fee of about $6 billion). If you’re in it, Hold, but unless T makes a successful move on DISH’s spectrum, I don’t like it enough now to commit.
Sprint needs a lot of help — and not just in acquiring spectrum. The high-profile fumbles with WiMAX, LightSquared, and the MetroPCS deal feel a lot like management issues to me, raising the question of whether CEO Dan Hesse is lost in the tall weeds. I’d pass on Sprint for now.
DISH is in the catbird seat — it has the spectrum that Sprint and AT&T need and an initial favorable ruling on the LTE network idea (although it will have to go through a formal rulemaking process before the company can receive a waiver).
It also is fast becoming a video content king with Blockbuster and expanded agreements with Time Warner’s HBO. DISH is trading around $33 now, and hit a new 52-week high a week ago. I think it has a lot of altitude left.
As of this writing, Susan J. Aluise did not have a position in any of the aforementioned stocks.