Going Once, Going Twice: The FCC's Latest 5G Auction
& What it Means for the Future of 5G
The latest news in 5G has been the FCC’s recent auction of wireless licenses to cell phone service providers. The December 2020 auction of mid-band spectrum licenses has fetched record sums, ballooning to $70 billion and blowing past even the steepest analyst estimates. Gross revenue from the auction will climb even higher once bidding resumes today on Jan 4, 2021. Before we discuss the importance of the current auction, dubbed Auction 107, and how it will affect the future of 5G, let us first take a look at what exactly the FCC is selling.
$70B+ for Licenses?
First things first: what exactly are cell service and cable companies shelling out tens of billions of dollars for? The answer is licenses—licenses that grant their holders the right to transmit cell signals over particular bands of the electromagnetic spectrum. These spectrum resources are scarce, and there are three types that cell providers are attempting to accumulate which, when combined, would allow them to offer the best 5G services to the most number of customers. The three types of 5G spectrum bands that these licenses cover are low band, mid-band, and high band, and they all offer different capabilities.
Low band, mid-band, and high-band are segments of the 5G spectrum as seen above. The three options all provide varying levels of speed and range, with each band representing a tradeoff between those two factors. For maximum range but relatively slower speed, companies can transmit signals over the low-band portion of the spectrum. High-band offers faster speeds over a much smaller range, and mid-band is a compromise between the two. For a company to provide true 5G capabilities, it must have all three. This relationship among the three bands can be seen below on the cake-like graphic from T-Mobile.
The bottom layer represents the functionalities of low band 5G, which T-Mobile has dubbed “nationwide,” and for good reason. The nationwide term comes from the idea that the low-band covers the largest range and geographical space while providing a slower comparable speed. As Jeremy Horwitz puts it, “one low band (600-700MHz) tower can cover hundreds of square miles with 5G service that ranges in speed from 30 to 250 megabits per second.”
Though mid-band 5G has a slightly shorter range than the all encompassing low-band, it makes up for it with increased speed. Mid-band’s ability to compromise between speed and range has many like David Herbert, a CreditSights analyst, calling mid-band the future “cornerstone of 5G networks for the next decade.” T-Mobile’s graphic lists mid-band as “metro,” mainly because mid-band is the 5G range that most large metropolitan areas in the US will operate on due to its unique blend of speed and range to service a large population with high demand for 5G service.
Lastly, companies reserve high-band to deliver 5G to only the densest urban areas, given high-band’s super fast speeds but extremely short range capabilities. The maximum range of the latest high-band antennas stretch to just 1 mile, with the majority not even reaching that distance. Use cases for high-band include concerts, sporting events, festivals, and other large gatherings. If you find yourself near one of these antennas, the service will be astonishingly quick with 1-3 Gbps speeds (about “30-80 times faster than today’s typical U.S. 4G connection”).
The Latest FCC Auction
Regulators turn to auctions as the method of choice when allocating 5G licenses because it’s the best way to make sure that the companies that get such licenses use them most effectively. Spectrum auctions force companies to put their money where their mouth is. They leave no room for favoritism or bias on the government’s part because the FCC doesn’t pick and choose who gets which rights: they simply go to the highest bidder.
On December 8, the FCC kicked off its latest auction of spectrum licenses (Auction 107) this time auctioning off “280 megahertz of prime mid-band spectrum in the 3.7-3.98 GHz band,” according to the FCC press release. In other words, this marks the largest auction of mid-band spectrum ever. While the auction is held behind closed doors, we know that there are 57 registered bidders—including the cell service giants of Verizon, AT&T, and T-Mobile—all clamoring for a piece of the valuable mid-band.
Auction 107 wasn’t always set to happen. After fierce debate within the FCC, Chairman Pai finally got the majority vote to proceed with the auction and offer significant sums of money to the previous users of the licenses: satellite operator companies. Due to technological advances, the satellite operators no longer needed the band’s lower 300 megahertz (3.7-4.0 GHz) section and could instead use the upper 200 megahertz (4.0-4.2 GHz) mid-band to operate the satellites.
In order to incentivize a quick vacating of the lower 300 megahertz mid-band licenses, Chairman Pai (pictured below) offered the satellite operators as much as $9.7 billion of the auction’s profits. The satellite operators accepted, and here we are.
Before the auctions began, analysts estimated the proceeds would land within the range of $25 billion to $52 billion. The current amount fetched has rocketed passed that to a mind-boggling $70 billion and counting. The unprecedented demand for the mid-band licenses have made Auction 107 the largest-ever spectrum auction in terms of gross revenue, beating out the $45 billion generated by the FCC’s AWS-3 spectrum auction in 2015.
Who’s Buying and What It Means for the Future of 5G
Due to the importance of mid-band’s unique combination of speed and range, companies have been waiting to pounce on their licenses. The top players in the auction so far are cell service companies like Verizon, AT&T, T-Mobile, yet they face stiff competition from satellite provider Dish Network and cable internet providers Comcast and Charter Communications, who are all looking to expand their 5G capabilities.
Out of all the major bidders, Verizon’s current share of low-band and mid-band spectrum is low in comparison to its competitors. As such, Verizon is expected to shell out the biggest bucks, having “tapped the debt markets earlier this year to build up cash before the auction.” Below is a graphic demonstrating each cell service company’s holdings of low and mid-band.
As shown on the graphic, the most well positioned player is T-Mobile—largely due to their recent $26 billion acquisition of Sprint which gave them the largest treasure trove of mid-band spectrum in the US. However, that doesn’t mean T-Mobile won’t bid in the auction. T-Mobile is set to bid both to acquire more mid-band spectrum and “to make sure Verizon pays dearly for its own [mid-band] licenses.”
Analysts also expect AT&T to also drop some serious cash, but still expect Verizon to outspend them by about 2:1. The relatively lower spending is in large part due to the fact that AT&T “has a $184 billion debt pile to pay down, a $15 billion annual dividend, a $20 billion capital-spending budget and a WarnerMedia production schedule to keep up.”
With their own 5G network in the works, Dish is also expected to pay a few billion for licenses in order to lay the groundwork for their new network. On the other hand, Comcast and Charter, who recently formed the C&C Wireless Holding Co., are jointly bidding in the auction in an effort to expand into the wireless mobile network from a strictly cable business. The pair has a combined $19 billion cash on hand.
Though it may be a few weeks until we find out who spent what, the stretching of balance sheets, the incurring of billions in debt to be able to bid, and the gross revenue of $70 billion thus far signals that the biggest telecomm companies are fighting fiercely for the rights to a piece of the 5G spectrum. Keep an eye on the announced winners. Without a doubt, the ultimate outcome of the auction will have a sizable impact on the future of 5G, and will dictate who has the rights to profit off of it.
at&t + verizon = value trap^2