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Why the US AWS-3 spectrum auction result exceeded all expectations and what it means for future auctions

Philip Bates Principal, Consulting

Looking forward to future auctions, the unexpectedly high level of bids in the US AWS-3 auction will have raised the hopes of the Canadian government for its own AWS-3 auction in March.

Before the recently concluded US AWS-3 spectrum auction began, we wrote that it might struggle to reach its USD10 billion reserve price. In fact the auction closed with just under USD45 billion in provisional winning bids, and is expected to bring in receipts of USD41 billion once discounts offered to eligible bidders are taken into account. This makes it the second biggest spectrum auction ever, raising almost as much as the USD46 billion proceeds from the 2000 German 3G auction, and more than double the previous US record of USD19.0 billion from the 700MHz auction in 2008. Why did it raise so much and what does this mean for future auctions in the USA and elsewhere?

The AWS-3 auction offered 2x25MHz of paired spectrum adjacent to existing North American AWS assignments at 1.7/2.1GHz, plus 15MHz of unpaired spectrum at 1.7GHz. The spectrum covers the whole of the USA and was offered through a series of regional licences (176 economic areas for all blocks except for the G block, which was offered in 734 cellular market areas). It increased the supply of mid-frequency (PCS and AWS) paired spectrum by 23%, yet the bids were almost as high as those in all previous mid-frequency spectrum auctions put together.

AT&T was the biggest bidder, with bids totalling USD18.2 billion, followed by Verizon which bid USD10.4 billion. To most commentators' surprise, the third-placed bidder in terms of net bids (and second placed in terms of gross bids) was DISH Network, the satellite TV and broadband company, which is set to pay a total of USD10.0 billion.1  T-Mobile was a distant fourth place on USD1.8 billion, while Sprint – the other national player in the US mobile market – decided not to take part.2

Aggressive bidding by DISH appears to be the main reason why the auction raised so much money. Figure 1 shows the winning bidders for each block in the ten cities where most money was raised.3  It can be seen that DISH won the G block in all ten cities, the A1 block in nine cities, the B1 block in seven cities and the H and I blocks in the three of the top four cities. In total it won 32 out of the 60 blocks available, compared to 15 for AT&T, 7 for Verizon and 2 for T-Mobile.

Figure 1: Winning bidders by block in the top ten cities [Source: Analysys Mason from FCC data, 2015]

Nationally DISH has won 92% of the unpaired A1 and B1 licences and 56% of the G block paired licences, plus around 15% of the H, I and J block licences. Consequently, there has been much speculation about what the company intends to do with its new assets. Without access to significant amounts of low-frequency spectrum it will be very difficult (and extremely expensive) for DISH to launch a national network. It therefore seems more likely that DISH will use its holdings to try to forge a partnership with one of the existing national operators, so that it can offer mobile services to the 14 million DISH satellite customers and DISH satellite services to its partner's mobile customers.

Looking forward to future auctions, the unexpectedly high level of bids in the US AWS-3 auction will have raised the hopes of the Canadian government for its own AWS-3 auction in March. The next big event in the USA is the 600MHz incentive auction scheduled for early 2016. We and other analysts originally expected this to raise far more money than the AWS-3 auction.4  The outcome of the incentive auction would now appear to be constrained primarily by the amount of fresh capital that operators can raise over the next year, though any changes to the FCC's position on spectrum caps and discounts for bidders like DISH could also have an impact. However, as far as the rest of the world is concerned we are inclined to view the US AWS-3 result as an anomaly resulting from high ARPU and high data consumption relative to other markets, plus the unusual competitive dynamics in this auction, rather than the start of a trend towards much higher spectrum valuations.

Analysys Mason is experienced in supporting regulators and operators in the valuation of mobile spectrum and auction preparation. Please contact Philip Bates for more information.

1 DISH bid through two vehicles which qualified as small businesses under the FCC's designated entity rules for the AWS-3 auction and were thus entitled to a 25% discount on their payments.

2 Sprint already has large holdings at 2.5GHz.

3 For the purposes of calculating the total amount raised by city we have summed the gross bids for the A1, B1, H, I and J blocks in the economic area containing the named city and the gross bid for the G block in the cellular market area containing the named city.

4 See previous Insight article