New York city wireless fees break records - Government Activity

As the dust settles on the biggest wireless spectrum auction ever held in the United States, the industry is still reeling from the prices paid for metropolitan area licenses, which rivaled the much-criticized sums paid last year in the United Kingdom and Germany.

In New York, population 20 million, Verizon Wireless Co. spent $4 billion on two licenses, winning that contest by paying nearly three times more, on a bandwidth-per-potential-customer basis, than was paid in Europe's most recent third-generation (3G) license auctions.

"Those licenses went for far above what anybody expected," said Eugene Signorini, a wireless analyst at the Yankee Group Inc., of Boston, Massachusetts. "Even $1 billion for a license in New York would have been a surprise, but they got $2 billion for [each of] two of them."

Calculating how much was paid per MHz of bandwidth per prospective customer in a license's footprint, New York financial institution Lehman Brothers found that on average the U.S. bids equated to $4.18/MHz/pop [person in the license area], which exceeded the European average per MHz/pop price of $2.73. However, it was below the $4.28 paid in the U.K. and $4.69 paid in Germany.

In Europe, the auctions were for national licenses, but in the United States, the licenses were auctioned off on a market-by-market basis, providing some insight into the carriers' strategies and willingness to bid up markets viewed as the most important. In New York, Verizon paid about $11.40 per MHz/pop, according to Merrill Lynch, a New York financial institution. Verizon won two of three 10 MHz licenses in New York, and a small company bidding in association with AT&T Wireless won the third New York license.

Whether $11.40 per pop turns out to be exorbitant or a smart strategic move depends on your point of view.

Verizon "Spectrum bullishness"

Lehman Brothers wireless equity analyst John Bensche speculated that Verizon had "an offensive strategy aimed at grabbing the high ground for wireless data.

"It will be incumbent upon management to be much more forthcoming about their view of the revenue and [EBITDA earnings] potential around wireless data than they have been in the past," he said.

Other potential reasons for Verizon's strong bids include trying to prevent other bidders from assembling enough clean spectrum to roll out UMTS in New York, Bensche said.

"Verizon went in thinking New York was a priority and a win-at-all-cost strategy," said Yankee Group's Signorini. "The jury is still out on whether it will burden them down the line."

Not only does Verizon already have a strong market presence in New York, but New Yorkers also have certain attributes, like high income, a long average daily commute and the presence of a major financial center, that are key factors for wireless usage. Yankee Group's Signorini suggested that had the U.K. auction been set up differently, with licenses covering localities instead of the whole nation, London might have drawn similar record-breaking bids.

"New York is so valuable because of the population density. You need a lot of spectrum to serve the market effectively, and you can fill it up fairly easily so it's efficient, but you need as much as you can get," Elliott Hamilton, senior vice president at Strategis Group, a consulting firm in Washington D.C., said.

The U.S. Federal Communications Commission (FCC) will not require Verizon or the other bidders to use the spectrum for any particular service, so Verizon will have the option of using the spectrum for voice and data, or to sell it or swap it with other carriers. New York is a must-cover market, so from that perspective, Verizon's bidding exuberance there may be justified, Hamilton said. However, he adds that this auction signals "a dramatic reversal of the fortunes of wireless," because the spectrum sold was taken back from a previous owner who had bid $4.3 billion for it in an earlier auction and then was unable to find financing to build a network covering those markets. Litigation continues over the licenses that were just sold.

Bensche said Verizon's remarkable aggressiveness in bidding was perhaps inspired by the philosophy of Vodafone, which he called "the world leader in spectrum bullishness."

AT&T Wireless won the third New York license, bidding through its affiliation with Alaska Native Wireless, a smaller company.

Strengthening their footprint

The U.S. auction raised $17 billion from big U.S. carriers including Verizon Wireless, AT&T Wireless, Sprint PCS, Voicestream and Cingular, all of whom are expected to use their new spectrum to build up 2.5 and 3G services, and add to current voice services. Verizon ended up with the highest tab, paying $9 billion for licenses in 113 U.S. markets. Across the auction, AT&T Wireless paid $2.9 billion for 44 markets with 63 million pops. Bensche said AT&T used the bidding to carry ahead its UMTS strategy, announced November 30, when AT&T said it would implement a GSM/GPRS overlay network on its 1900 MHz PCS spectrum as part of its migration from the current TDMA network to EDGE and UMTS. Bensche said AT&T focused on the 30 markets where it needed to bulk up its spectrum position for the UMTS buildout, in particular in New York and Los Angeles.

Because of the way the FCC set up the auction, with rules designed to allow smaller companies to participate, the large carriers in several cases bidded through partnerships or arrangements with smaller companies. Cingular Wireless, the venture that combines SBC and BellSouth, bid $2.3 billion on 79 licenses covering 77 markets, filling in several holes in its national coverage. Cingular also cut a spectrum swapping deal with Voicestream prior to the auction that involved bandwidth in five major U.S. cities, according to Lehman Brothers. Voicestream, which is being purchased by Deutsche Telekom, is the main GSM carrier in the U.S. It used the auction to shore up its spectrum position in the U.S.

The auction that just concluded was of spectrum in the 1900 MHz range known as the C- and F-bands of Personal Communications System spectrum. The next U.S. wireless auction, of the 700 MHz band, is scheduled to begin March 6. That piece of spectrum is currently used by some U.S. television broadcasters who are supposed to vacate it in several years. But because these broadcasters expect to be reimbursed for costs associated with clearing out of the spectrum, the next auction could pose some potential problems for bidders.

                      Top 10 wireless markets by pops
Market        Population MHz Net Bids $ per $ per
              (m)            ($m)     pop   Mhz pop
New York      18.1       30  5580     309   10.3
Los Angeles   14.5       30  1358     93    3.11
Chicago       8.2        10  494      60    6.05
San Francisco 6.4        10  399      62    6.21
Philadelphia  5.9        10  277      47    4.7
Dallas        4.3        10  214      49    4.94
Boston        4.1        30  529      128   4.26
Washington    4.1        30  552      134   4.47
Houston       4.1        30  344      85    2.83
Atlanta       3.2        10  322      101   10.07
Source: Lehman Brothers

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