Market Fall May Hurt the Wireless Auction

As bidders watch their capitalizations melt, they may downsize their plans for the FCC's wireless spectrum auction

by Olga Kharif

The bidding for a valuable new chunk of wireless airwaves the federal government is selling was expected to raise $15 billion—or more money than any wireless auction in U.S. history. But with stock markets crumbling, expectations for the auction that begins Jan. 24—called Auction 73—are sliding fast, along with the shares of likely bidders.

In the first round, bidding got off to a slow start. So far, only one entity is vying for so-called Block C, a chunk considered the most coveted slice of airwaves, and offered $1 billion—far short of the $4.6 billion minimum set by the FCC. The FCC is disclosing bid amounts but won't reveal the names of prospective buyers. Stock market declines may be at least partly responsible for the lackluster opening round.

Since the beginning of the year, AT&T's (T) market value has tumbled by $29.5 billion, while Verizon's (VZ) shares are collectively worth $16.5 billion less. The market's plunge on Jan. 18 may have marked the biggest single-day loss in telecom market value ever, says Blair Levin, an industry analyst with Stifel, Nicolaus. Even Internet search giant Google (GOOG), which has been looking to purchase the spectrum licenses to build a new wireless network that would compete with the established players, has lost 20% of its value since New Year's.

A Lack of Bidders?

Combined with the credit crunch, these rapidly shrinking stock values are severely crimping the sector's financing options for big spectrum purchases in the Federal Communications Commission's auction. Many potential bidders may now be unwilling, or unable, to bid as much as they'd intended previously. "We've had, since the beginning of the year, equity values in the U.S. diminished by a trillion dollars," says Harold Furchtgott-Roth, a former FCC commissioner who is the founder of consultancy Furchtgott-Roth Economic Enterprises . "Some bidders will simply decide they can't afford to participate at this point."

Thanks to the market carnage, the auction may now raise only $10 billion to $12.5 billion, figures Carlyn Taylor, who heads the communications and media practice of the consultancy FTI (FCN). Many bidders might have been hoping to raise money for the auction by issuing stock or by securing loans in a more welcoming credit market. "The majority of bidders would be in this category," says Taylor. Cable companies, regional telcos, Alltel, Leap (LEAP), and MetroPCS (PCS) may be unable to raise as much as they'd hoped, she says. The FCC's rules forbid the prospective bidders from talking to the media about the auction.

Taylor's estimate assumes that all chunks of the spectrum being auctioned will be sold—and that might be a big if. In fact, the so-called D block of spectrum, earmarked to provide services to consumers and public safety agencies, may not find any takers. Startup Frontline , which had expressed the most interest in the D block, announced on Jan. 8 that it had been unable to line up financing for its bid and shut down the venture. If no other bidders step forward, the D block may have to be auctioned another time.

Less competition likely

If there aren't enough bidders willing or able to offer the minimum bids the FCC has requested, other spectrum blocks may have to be sold later as well. The FCC may need to "lower the reserve price, eliminate or soften the conditions [for using the spectrum], and re-auction the spectrum," says Levin.

Such an outcome may be bad news for consumers: One of the biggest conditions the FCC has attached to several wireless blocks is "open access," a requirement that winners allow any device, service, and application to run over new networks built using the spectrum. Open access's biggest proponent, Google, is still expected to bid at least $4.6 billion in the auction. But if some of the open access blocks don't get sold, the auction's impact on wireless business models may be more limited.

The industry's established powers, meanwhile, are also seeing their finances threatened on the business side. Already, AT&T has acknowledged softness in its bread-and-butter home phone business. And if consumer spending slows sharply, the company may see a dent in the rapid growth of its cell-phone business. If the economic punch starts squeezing consumers especially hard, some mobile subscribers may start cutting back on their wireless Internet usage and premium services such as mobile TV. Though Verizon recently maintained that its consumer businesses haven't been hurt by the economic downdraft, the trends being felt at AT&T would appear likely to affect the strategies of other telcos expected to participate in the FCC auction. Industry players would likely turn more conservative with their cash, says Paul DeBeasi, an analyst with consultancy Burton Group.

That said, the big telcos may prove to be beneficiaries of the stock market fallout if they encounter less competition in the bidding—and fewer new competitors enter their market through the FCC auction.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.