Verizon Lands a Wireless Spectrum Gold Mine

by Susan J. Aluise | December 6, 2011 2:20 pm

Back in 2002, Verizon (NYSE:VZ[1]) launched an ad touting the performance of its wireless service with the now-famous tagline: “Can you hear me now?” In the wake of last week’s deal to acquire $3.6 billion in spectrum from a consortium of cable companies, the world can hear the company very well – and that roar of thunder represents a paradigm shift in the wireless communications sector.

The deal with SpectrumCo – a joint venture of Time Warner Cable (NYSE:TWC[2]), Comcast (Nasdaq:CMCSA[3]) and privately held Advance Publications’  Bright House Networks — will give Verizon Wireless (a joint venture of Verizon and U.K.-based Vodafone (Nasdaq:VOD[4]), all 122 of the consortium’s advanced wireless service (AWS) spectrum licenses.  With the new spectrum, the nation’s largest wireless carrier will have more of the building blocks it needs to expand and upgrade its network to support lucrative 4G Long-Term Evolution standard-based products and services.

Verizon’s retail stores also will sell the cable companies’ services and vice-versa.  These reseller arrangements are likely to open the door for “quadruple-play” bundling — giving consumers access to a single package of landline telephone, wireless, subscription TV and high-speed Internet services.

In a separate deal announced on Monday, Leap Wireless (Nasdaq:LEAP[5]) essentially swapped a block of AWS spectrum for 700 MHz band licenses that Verizon bought at auction several years ago. In addition a Leap unit also sold its AWS spectrum to Verizon for $172 million, according to Reuters.

If the Federal Communications Commission approves the sales (which is likely), only three companies besides Verizon will hold large blocks of the valuable AWS spectrum: Deutsche Telekom’s T-Mobile unit, Pay-TV provider Dish Network (Nasdaq:DISH[6]) and wireless Internet provider Clearwire (Nasdaq:CLWR[7]).

Here’s where it gets interesting, though: the spectrum was the central part of the value proposition in AT&T’s (NYSE:T[8]) pursuit of T-Mobile, which as Jeff Reeves noted[9], is now doubtful.  Clearwire, which soon could receive an equity investment from Sprint Nextel (NYSE:S[10]), hopes to raise up to $345 million in a new stock offering to fund its LTE network, according to [11]PCWorld.

If No. 3 wireless provider Sprint can leverage its advanced wireless services off Clearwire’s spectrum — and if Dish Network pumps up the value of its Blockbuster acquisition by moving aggressively into mobile broadband delivery of movies and other high-bandwidth content – AT&T, for now the No. 2 wireless provider, could quickly find itself a step behind in the burgeoning battle for next-generation wireless.

The world now runs on real-time access to ubiquitous to mountains of broadband data and video.  That means this limited natural resource of spectrum is now as essential as oil — or as precious as gold.

Because higher frequencies (like those in the AWS band) can travel over very long distances and pass through objects, broadcasters, wireless providers, public safety users and a wide range of other groups covet these frequencies.   But spectrum is a finite resource – when it’s all used up, you’re out of luck.

To balance competing interests, the government has auctioned off spectrum bands to various entities over the years. The spectrum Verizon just bought was part of an FCC auction in 2008.  Since you can’t make more spectrum, you’ll have a lot of trouble competing in this market if you don’t have it and can’t get it.  That’s why last week’s deal was such a setback for AT&T and such a win for Verizon Wireless, which could revive the venture’s long-awaited IPO as early as next year.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here. 


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