AT&T sets the market for 700 MHz spectrum

We’re still three-and-half months away from the official start of the 700 MHz auction, but AT&T unofficially made the opening bid by agreeing to pay $2.5 billion for 700 MHz spectrum owned by Aloha Partners.

Most analysts applauded the move, although industry observers were divided on what strategy AT&T would pursue in the wake of the deal. Some believe the Aloha purchase is just the first step in an AT&T strategy to aggressively bid on spectrum throughout the 700 MHz band, while others think the Aloha agreement means AT&T only needs to bid on a few licenses in the adjacent B Block to give the giant carrier a nationwide footprint in the 700 MHz band.

Regardless of what AT&T’s auction strategy is, the Aloha deal “gives you a little idea what everybody thinks 700 [MHz spectrum] is worth,” said mobile wireless consultant Andrew Seybold.

Indeed, it appears that 700 MHz spectrum will be valued highly — a sign that should be a relief to Congress, which needs the auction to generate $10 billion in money for U.S. Treasury to meet budgetary expectations. In the Aloha deal, AT&T is paying $2.5 billion for 12 MHz of spectrum that covers 65% of the U.S. population.

Projecting the price it paid Aloha on a per-population basis, AT&T would have valued 12 MHz of nationwide spectrum at about $3.85 billion, despite the fact that one analyst described the spectrum purchase as a “steal” for AT&T. Indeed, more than one industry observer has noted that AT&T would not have done the Aloha deal if it didn’t receive a discount compared to what the carrier expects to pay for spectrum at auction.

Given this and the fact that the wireless industry has always placed a premium on nationwide licenses, it would seem reasonable — maybe conservative, according to some — to value an unencumbered license for 10 MHz of nationwide 700 MHz spectrum at $3.5 billion or $4 billion.

Of course, the only two nationwide 10 MHz swaths available in the auction — the commercial D Block and public safety’s broadband airwaves — are both expected to be used as the foundation of the public-private network that is supposed to meet public-safety’s wireless broadband needs.

Unencumbered, this 20 MHz block of nationwide spectrum would be worth $7 billion to $8 billion. Of course, the spectrum is encumbered by the high-priority obligation that the wireless broadband network feature the kind of reliability and coverage that public-safety entities expect from their own private LMR networks. At least one projection estimated that it would cost between $6 billion and $7 billion more to build a public-safety-grade network than it would to build a typical commercial network.

If the D Block winner bids only slightly more than the $1.3 billion reserve price for the spectrum, it would appear that the commercial operator would be in the ballpark for making this work economically. But Seybold — noting that incumbents AT&T and Verizon, as well as newcomer Frontline Wireless, are the most likely bidders for the D Block — cautioned that the public-safety licensee’s statement of requirements will play a critical role in making the public-private venture work.

“If the public-safety community puts too many terms and conditions on what they expect that network to look like, they could scare away the bidders,” Seybold said. “The shame of that is, if the bidders get scared away and nobody shows up, the rules will get changed somehow — and we don’t know how — and the spectrum goes back out to bid.

“The losers [in this scenario] are the first-responder community, because they don’t get their 12 MHz built. The only way they get their 12 MHz built in a nationwide system is if there is a [D Block] winner, and somebody builds it.”

Thus the national public-safety licensee — most observers believe it will be the Public Safety Spectrum Trust, with Cyren Call Communications as its advisor/agent — has a formidable challenge before it. In its statement of requirements, the licensee must strike a delicate balance between protecting public safety’s interest in the network and maintaining the economic viability of the network for the commercial operator.

While public safety should not compromise on its needs regarding this network, its leaders at the same time must ensure that the statement of requirements does not simply become a wish list filled with unnecessary bells and whistles, no matter how tempting they may be. With such restraint, this public-private arrangement can work economically for everyone.

Without it, this once-in-a-lifetime opportunity likely will prove to be little more than an unfulfilled fantasy.

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