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Commentary Newsletters


Rebanding doesn’t look like a ‘sweetheart’ deal anymore

Rebanding doesn’t look like a ‘sweetheart’ deal anymore

In the spring of 2004, U.S. wireless carriers were up in arms over the FCC's consideration of an 800 MHz rebanding proposal that would have resulted in Nextel Communications paying $850 million to mitigate interference that cellular carriers were causing to public-safety radio systems in the band
  • Written by Urgent Communications Administrator
  • 7th March 2008

In the spring of 2004, U.S. wireless carriers were up in arms over the FCC’s consideration of an 800 MHz rebanding proposal that would have resulted in Nextel Communications paying $850 million to mitigate interference that cellular carriers were causing to public-safety radio systems in the band.

Under the proposal, Nextel would end up with contiguous spectrum at 800 MHz and a new, nationwide 10 MHz swath at 1.9 GHz, where most of the other cellular carriers operated. Some of Nextel’s competitors called the proposal a “giveaway” of the valuable 1.9 GHz spectrum.

When the FCC passed its rebanding order in the summer of 2004, it valued the 1.9 GHz spectrum in the proposal at $4.9 billion, and required Nextel to pay at least $2.8 billion for rebanding and contribute some spectrum to make up the difference. With competitor Verizon Wireless claiming that the 1.9 GHz spectrum actually was worth $7.2 billion, the cry that rebanding represented a “sweetheart” deal for Nextel persisted.

And maybe those claims were correct regarding Nextel, which never really dealt with rebanding as a company because it announced a lucrative merger with Sprint shortly after agreeing to the FCC’s order. For the new Sprint Nextel, however, rebanding has not gone smoothly at all.

Under the FCC’s order, rebanding was supposed to be completed in a three-year period ending this June. There was no cap on the amount of money Sprint Nextel would have to spend on rebanding, but most believed the $2.8 billion obligation would be more than enough to cover the costs, with any surplus earmarked to go into the national treasury — the reason is why rebanding accounting was styled to meet government standards.

While rebanding is proceeding, it bears little resemblance to the initial vision expressed by the FCC.

It’s been slow. Four years after the FCC passed an order calling for rebanding to be done in three years, the most optimistic scenario we hear today is that it will take another four years to complete the massive project, in 2012 — and that’s assuming vital border agreements are finalized in a timely manner.

It’s also been a spectral headache. Under the terms of the FCC’s order, Sprint Nextel would be finishing up rebanding and beginning to execute its plans to utilize contiguous spectrum in the 800 MHz and 1.9 GHz bands. Instead, 800 MHz capacity issues related to rebanding have helped erode much of the value of the old Nextel iDEN network, as customers are dropping the service in droves. It’s going to be several years before Sprint Nextel can use the contiguous spectrum blocks.

And it’s been expensive. In its 10-K filing with the SEC a week ago, Sprint Nextel said it is “unlikely” to make any payments to the government after rebanding, estimating that its total costs will be $2.7 billion to $3.4 billion — and that’s the best-case scenario. Bigger money is tied to the outcome of litigation.

In a little more than a week, Sprint Nextel will argue before a federal appeals court that the FCC unilaterally changed the terms of its rebanding “contract” last fall with the carrier. If it loses the appeal, Sprint Nextel will have to abandon its interleaved channels in the 800 MHz band in June, even though rebanding isn’t complete.

Sprint Nextel says the original FCC order stipulated that Sprint Nextel only would have to vacate its interleaved spectrum after rebanding is finished, at which time the carrier would have access to contiguous spectrum in the 800 MHz band. While shuffling spectrum with NPSPAC licensees during rebanding, the ability to maintain operations on the interleaved spectrum is critical to Sprint Nextel’s iDEN operations, said Larry Krevor, Sprint Nextel’s vice president of government affairs for spectrum.

“We didn’t agree to vacate that spectrum before rebanding was done — no one would have,” Krevor said during an interview with MRT at the APCO Winter Summit earlier this year.

Without the interleaved spectrum, Sprint Nextel would have to scramble to keep its iDEN services going, with many believing that the carrier would move much of its operations to 900 MHz — if it can secure the spectrum.

Of course, whatever strategy might be employed would cost more money — an amount that would be “material,” according to Sprint Nextel’s 10-K filing. When asked what is “material” to a company like Sprint Nextel, every analyst I’ve interviewed on the subject has said it would be at least another $1 billion.

When asked whether “material” could mean doubling Sprint Nextel’s original rebanding cash obligation of $2.8 billion, Roger Entner, senior vice president of communications for IAG Research, said, “Possibly.”

Also generally accepted in the analyst community is the notion that the market has not figured the impact of rebanding when valuing the company’s stock price — after all, the consensus was that Sprint Nextel was on the hook for $2.8 billion and additional funds were not expected to be needed.

“I don’t think the investment community really understands the implications of rebanding at all,” said wireless consultant Andrew Seybold.

Amid all the talk about the company’s new CEO Dan Hesse, WiMAX plans, layoffs and eroding subscriber base, rebanding may have seemed like a blip on the radar screen for the investment community. That could change quickly if rebanding ends up costing Sprint Nextel $4 billion to $6 billion instead of the $2.8 billion the company is obligated to spend — and that’s bad news for a company that already has seen its stock price plummet 70% in the last eight months.

In addition to the money, Sprint Nextel has been impacted by the fact that rebanding has to be a huge distraction to its core business, requiring enormous amounts of time, effort and personnel that I bet the company would love to use elsewhere, especially after announcing 4000 layoffs last week.

Rebanding is not going to make or break this company, but it certainly does not look like a “sweetheart” deal at the moment.

E-mail me at [email protected].

Tags: Commentary Newsletters

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