Market Overview

Wireless Spectrum Auction Could Benefit Verizon over AT&T, Sprint

An upcoming auction of airwaves to wireless companies may boost revenues for telecommunications companies, although the gains may not be seen for years. Some carriers will benefit from the sale more than others, with Verizon (NYSE: VZ), AT&T (NYSE: T), and Sprint (NYSE: S) poised to profit to different degrees.

From the government's perspective, a sale of airwave licenses is a good thing because it will increase income and spur job growth. The Wall Street Journal quoted Rep. Greg Walden, a Republican from Oregon, who said that the sale would translate to "700,000 jobs for America once the spectrum-auction rules are out." The auction would also translate to $16 billion in cash from telecommunication companies, $7 billion of which would improve emergency wireless networks used by police and firefighters.

For wireless companies, the spectrum sale could help them raise revenue and expand operations without exorbient operational costs. The companies are positioned to benefit from the planned sale, since the FCC cannot exclude any company from bidding in the auctions, although regulators will limit how many airwaves are held by any single company.

First, let's look at AT&T, which recently attempted to acquire Deutsche Telekom's (FRA: DTE) T-Mobile for $39 billion. That deal was stymied by political opposition, as the Justice Department fought to block the deal last summer, citing concerns that the merger would hurt competition and raise prices for consumers. AT&T countered by saying that it needed T-Mobile's spectrum due to higher bandwidth demand from its customers. A merger, the firm insisted, would improve services without raising prices.

More wireless spectrum to AT&T would help it expand its bandwidth without limiting competition, which would help it to stop throttling customers who signed up for an unlimited data plan--a move that has faced criticism amongst tech enthusiasts. However, the company is already by far the biggest spectrum holder and largest wireless company, so FCC limits on how much spectrum any company can hold will limit the company's growth potential from this auction.

Sprint is in a stronger position, as the nation's struggling, third largest wireless provider, but it will not be able to expand aggressively from the sale since all companies will be able to bid at the auction. If the bigger firms had been excluded, Sprint could have gobbled up much of the spectrum and positioned itself to grow out of its persistent and growing losses. As it stands, cash-rich competitors may limit how many airwaves Sprint will take away from the sale.

That leaves Verizon, which has used its limited bandwidth more efficiently than AT&T and seen explosive growth since it began offering Apple's (NASDAQ: AAPL) iPhone. Since then, the company's stock has risen 7 percent and the company's revenue has seen consistent growth from $26.4 billion in the quarter before offering the iPhone to $27 billion, $27.5 billion, and $27.9 billion in quarters thereafter. While subsidies for new iPhones hurt the company's bottom line, this also means greater future revenue as customer demand for smartphones persists and points to top line growth for at least the next two years.

Higher demand for bandwidth and the upcoming spectrum sale could spell out a Goldilocks situation for Verizon, where Sprint is too small and AT&T is too big to profit from the auction. However, an open auction and Verizon's already rapid expansion of its wireless spectrum may limit how much the company can benefit from the new sale. Until then, investors are likely to see upward growth potential in all wireless networks thanks to this much needed airwave sale.

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