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➤ Verizon is probably the biggest winner in the FCC C-band auction.
➤ While Verizon paid exorbitant amounts for spectrum, T-Mobile’s acquisition of spectrum under the Sprint deal is “a stroke of genius”.
➤ The results of the auctions could have an impact on the budgets of the operators for the construction of the network in 2021.
Alex Gellman, CEO and Co-Founder of Vertical Bridge REIT LLC, a private owner and operator of wireless communications infrastructure, recently spoke to S&P Global Market Intelligence about what he expects to see in in-band auction results C of the Federal Communications Commission. Below is an edited transcript of the interview.
S&P Global Market Intelligence: While we don’t yet know the auction results, who do you think will get the most spectrum and what does that mean for them going forward?
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Alex Gellman, CEO of Vertical Bridge |
Alex Gellman: I think Verizon [Communications Inc.] will be the biggest winner, as they’ve been needing the mid-spectrum for some time. I think AT&T [Inc.] will have played hard too, [spending] much bigger than they thought. And then I think T-Mo[bile US Inc.] maybe the surprise. You might see that T-Mo went a bit harder than initially expected. And then I guess the real wildcard will be DISH [Network Corp.]
The gross product exceeded $ 80 billion. Did you get the feeling that wireless carriers were overpaying? And did they need to do it because they needed the spectrum to be competitive with 5G offerings?
I think there are several related reasons and they are a little different for each company. First, I think it’s the last big chunk of the middle spectrum that’s easily seen. So it may be the last to come for a while. It has become a real estate by the sea for broadband. As you examine 5G and beyond, it becomes harder and harder to see large chunks of clear spectrum that the FCC can find. It was just a very large block of spectrum, with no prospect of much more in the immediate future, or even in the medium term.
Secondly, I think it implicitly implies that the millimeter wave spectrum has its challenges and that it doesn’t propagate very far. And I think it’s a tacit recognition that this mid-band spectrum is better.
I think thirdly, T-Mobile getting Sprint really put the pressure on [other operators], because T-Mobile got 2.5 premium [GHz] spectrum, large blocks, which they are currently deploying, which will give them an inherent advantage without a countermove from AT&T and Verizon. So that’s what drives it all.
There was speculation before the auction that AT&T would sell DIRECTV to pay for its stake in the C-Band auction. Instead, it got a $ 14.7 billion loan. How much of Verizon and AT&T spending do you think will need to be funded by new debt?
The honest answer is, I really don’t know. I wouldn’t assume AT&T won’t sell DIRECTV – I just think they’ve set themselves a big challenge. I will now label DIRECTV as the Carson Wentz asset of AT&T’s portfolio. Let’s see what moves first: Carson Wentz or DIRECTV. As I understand it, what they tried to do with DIRECTV is thread the needle, where they can continue to consolidate it into their income statement and so it won’t affect their leverage and ratios, but will still sell a lot of so they can get the money. And I don’t know who’s willing to do this. I think Verizon’s leverage will increase a bit, but my understanding is that it won’t be a drastic change. I think AT&T have a little more difficult needle to thread here with their existing leverage levels. These companies are huge, so $ 25 billion or $ 40 billion seems like a ton. It’s actually, in context, more manageable for them.
Editor’s Note: In June 2019, the Philadelphia Eagles signed a four-year, $ 128 million contract extension with quarterback Carson Wentz. In December 2020, Wentz was benched. Now the Eagles would be pursuing a trade.
What does the auction result mean for Vertical Bridge?
I don’t think it can have any effect other than deferring capital spending for a period of time. You can’t just say, “Oh, instead of $ 40 billion, that’s $ 80 billion” without affecting the short-term investment in deployment. I think this specifically means 2021 will be a fairly low year for carrier capital spending, which is driving demand for space in towers. And I wouldn’t be surprised if 2022 is also weak, just because it’s a lot of money to absorb. In context, the capital budget for AT&T, Verizon, and T-Mobile combined is around $ 40 billion per year. So that’s two years of their budget.
I also think there are two other factors at play that we need to keep an eye on. One is the corporation tax. All of these companies are taxpayers – if their corporate tax goes up it takes money directly from free cash flow, which I think would have a direct impact on their capital budget. And then two, a little more nebulous, but net neutrality. When Net Neutrality was a policy of the Obama administration, AT&T, for example, was very, very vocal about not investing in their network in the United States – and they did not. And if the problem resurfaces under the new administration, it could also dampen the carriers’ capex investment plans.
If Verizon ended up paying what we think it ended up paying, do you think it’s fair to say that T-Mobile is the real auction winner because they were able to get so much midband spectrum in under the Sprint agreement?
Yeah, I think it makes the Sprint chord look genius.
Regarding cable, how involved do you think cable operators were in the auction and what does it say about the future of cable operators’ mobile offerings?
I think the cable has a problem. I think wireless access at home is more efficient. It is more robust. It is a better business model as long as there is capacity in 5G networks in the suburbs and it allows homes to be reached directly by the existing wireless network. Cord cutting will simply continue. The more efficient wireless is, the more ubiquitous it becomes, the more capacity it has – it’s a better business model for everything else. So as long as it can meet all of the minimum consumer requirements, it will win, and I think the cable companies know that. They hedge their bets. You have seen Charter [Communications Inc.] and Comcast [Corp.] participate in the CBRS auction, which is very interesting with about the same amount invested. It will be interesting to see if this report fits in C-band. But I think there is a real threat to them that will continue to emerge.
Is the pandemic slowing the changeover to landline wireless given the remote working situation we are all in?
I think we all depend more on broadband. What I would say is basically, a wireless network is better able to adapt to change faster. I can tell you where I live, the quality of my service from my supplier has not been excellent. Maybe it’s because I’m no longer at home, but the blackouts amaze me. While my LTE is working. It’s the same every day. I think it highly depends on where you live, who your provider is, and how much that provider invests in their mainnet.
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