Bidding on the Future Of Cellular Services

The U.S. government announced last month it was vacating a swath of spectrum, which it would put it on the auction block, perhaps this coming June.

The government estimates auctioning the spectrum will more than recoup the $936 million it will cost to relocate the wireless services of more 2200 systems spread across 12 federal agencies. While the U.S. Commerce Department won’t speculate how much the auction will generate, the last major spectrum auction raised more than $2 billion.

But is the 1710-1755 MHz portion of spectrum that the government will make available, which it described as "beach-front" property, really that desirable for cellular operators? And what will all this mean for cellular users in terms of wireless services and prices?

Are Cellcos Motivated?

In real estate parlance, the government might be a motivated seller. Like a home owner who buys a new house before selling his or her current homestead, the U.S. government needs cellular companies to purchase the spectrum in order to pay to relocate federal agencies now inhabiting the radio waves. But if the government holds an auction, will bidders show up? The experts agree: maybe yes, maybe no.One problem is the 1710-1755 MHz spectrum itself. While additional spectrum is always welcome, that swath of bandwidth lies outside the 1900 MHz cellular carriers typically use, according to Derek Kerton, principal of the Kerton Group.

Carriers have their eyes instead on the “Everyone Loves Raymond” spectrum -- the sub 700MHz frequencies long used by analog television broadcasters. Sub-700 MHz frequencies can travel three times the distance of traditional cellular signals and can more easily penetrate walls, perfect characteristics for delivering wireless broadband services to urban, rural and mobile customers, according to Kerton.

If the carriers do bid on the spectrum, what services might we expect to see them offer? The U.S. government is hoping the newly-opened radio waves will foster 3G.

Cingular and others are already offering 3G cellular data service and they are hoping that their mobile media services such as Verizon's V CAST service, will catch on. To offer video, music and data, more spectrum will be welcome, according to Kerton.

Other services likely to use the spectrum fall under the heading of "emerging technologies." Carriers could use the spectrum for data-rich synchronization among PC, phone and instant messaging. Current location services could be enhanced with mapping permitting, for instance, foremen to pinpoint crewmembers. In the enterprise, VoIP phones will be upgraded with video and linked to mainframe computers allowing for a mix of voice, video and data. Another potential application: real-time inventory assessment. Web browsing, search engines and photo recognition will be linked enabling a photo of London’s Big Ben to trigger a travelogue for Piccadilly Circus.In addition, future use of the spectrum could literally remain up in the air. Carriers could use the new spectrum for air-to-ground communications when in-flight use of cell phones is approved, foresees In-Stat analyst Allan Nogee.

A Horse Race

To use yet another metaphor, the spectrum auction between the top four U.S. carriers – Sprint, Verizon, Cingular and T-Mobile - could be a horse race. T-Mobile seems to top the list of every handicapper as having the greatest need for more spectrum.

“All of those four carriers will be hungry for the new spectrum, perhaps with T-Mobile leading the pack,” reasons Kerton. “If [T-Mobile] doesn’t get new spectrum it will affect their ability to compete directly with the others.”

In December, T-Mobile hinted its plans to roll-out 3G service by the end of 2006 hinges on the outcome of this summer’s spectrum auction.

"We are very hopeful that by the end of 2006, and definitely in 2007, we'd be able to bring 3G services to the market. Some of this is auction dependent," according to a BetaNews interview with Neville Ray, T-Mobile’s senior vice president of Engineering Operations.Both Verizon Wireless and Cingular may be interested because the additional capacity could help them attract more customers in their on-going battle to be the largest carrier in the country.

Although Sprint-Nextel is overflowing in spectrum, the carrier still may bid for the government’s airwaves. One reason for that a part of Sprint's business plan involves leasing off portions of its existing spectrum to the increasing number of mobile virtual network operators -- companies such as Disney, MTV and Virgin Mobile -- that want to offer cellular services yet have no spectrum. Gaining more spectrum in the auction could give the company some “wiggle room.”

Kerton believes there is potential for some smaller dark horses bidding for the spectrum because the FCC has reduced the size of license areas, encouraging smaller operators to bid. However, the small companies will likely lose out to larger carriers with deeper pockets and greater hunger.

Increasing Prices

If the new spectrum is likely to be home to 3G-oriented data services offered by one or more of the top four cellular carriers, what will it mean for consumers? In the short term, be prepared to pay more, say analysts.“Since it will largely be the (larger) incumbents bidding, we shouldn’t expect a spike in competition,” says Kerton. In addition, the new spectrum will require consumers to ditch their current phones in favor of new handsets capable of operating in the 1710-1755MHz band, say Kerton and Nogee. Phones designed and FCC-approved for the 1900 band won’t work.

Another potential problem is that no other country uses the 1700 band for 3G, meaning phones will need to be custom ordered for the U.S. market. That means greater expense, potentially, and that the phones will need to support multiple bands if they are to be usable in other countries.

“Carriers don’t want people to use their old phones on the new frequencies,” according to Kerton. “They want people to get new phones that can handle new services, otherwise, how do they make money on the new services?”