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Author: Dan Bieler
The FCC's first auction of Advanced Wireless Services spectrum licences in the 1.7GHz and 2.1GHz bands ended on 18 September. A total of 1,122 licences were offered in the auction, and 104 bidders have now won 1,087 licences. The remaining licences remain with the FCC. The auction began on 9 August and closed after 161 rounds of bidding, raising total gross bids of nearly $13.9bn.
The top-five winning bidders based on the net amount of their winning bids are as follows: T-Mobile bid $4.2bn for 120 licences; Cellco Partnership (Verizon Wireless) bid $2.8bn for 13 licences; SpectrumCo (Sprint Nextel, Comcast, Time Warner, Cox and Advance/ Newhouse) bid $2.4bn for 137 licences; MetroPCS AWS bid $1.4bn for 8 licences; and Cingular bid $1.3bn for 48 licences.
Comment: It was well known from the start that T-Mobile would have to be amongst the top bidders to win enough spectrum to close the gap with the key national players: Cingular, Verizon Wireless and Sprint. The urban areas of New York City, Chicago and San Francisco were a key focus for T-Mobile USA. It is also well known that Deutsche Telekom needs the extra spectrum in order to drive its 3G strategy in the US effectively. To achieve this goal, T-Mobile USA will also have to spend a significant extra amount on network rollout in the years ahead.
Over recent quarters, Deutsche Telekom has become increasingly dependent on its US mobile operation, T-Mobile USA, although it is only the fourth-largest nationwide operator. In 2005, the US operation generated well over 100% of group revenue growth and over 200% of group EBITDA growth. Whilst the ongoing growth in the US wireless market presents Deutsche Telekom with an impressive growth engine, the flipside should not be underestimated. Any problems in the US will significantly affect Deutsche Telekom group. This is particularly problematic, as its domestic performance is suffering significantly as the Q2 2006 results have shown.
The importance of the mobile activities is also beginning to manifest itself as far as cashflow is concerned. Whilst Broadband/Fixed Network accounted for the lion's share of operating free cashflow (OFCF) until recently, in Q2 2006 T-Mobile contributed 53% of group operating free cashflow. It is therefore imperative for Deutsche Telekom to secure strong foundations for its US wireless arm. The capex spent on spectrum acquisition and network rollout is likely to change this picture somewhat over the medium-term - and will also put pressure on the EBIT margin through depreciation. But in the interest of longer-term benefits for the group, we believe that Deutsche Telekom is right to pursue its aggressive US strategy.
The plans for quadruple-play offerings by the largest national operators and their partners have been boosted by the auction outcome. Without having a quadruple-play offering itself, T-Mobile USA must redouble its efforts to produce an attractive 3G service.
But the auction outcome could have another effect on the US mobile landscape. Two regional operators, MetroPCS and Leap, are amongst the perceived winners. These players are increasingly pushing flat-rate bundles. The additional spectrum extends their reach and could force the national players, T-Mobile USA amongst them, to join the trend. Just days ago, T-Mobile Germany was forced to adjust its tariffs to flat-rate offers from its competitors.
The US wireless market remains a key growth opportunity for Deutsche Telekom. But the signs are there that it is becoming harder to compete in the mobile hunting grounds of North America.
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