Wireless spectrum shortage? What spectrum shortage?

There is plenty of wireless spectrum available to meet the demand for wireless data services, but the problem may be that too much of it is in the wrong hands, according to a recent report from Citigroup.

A recent report from analysts at Citigroup, titled "Wireless Data: Supply and Demand Spectrum Control, Not Availability, Is the Real Constraint," suggests that the wireless industry already has a significant amount of wireless spectrum available. The problem, the analysts argue, is that the operators that control the greatest amount of unused spectrum may be under-capitalized or unwilling to build out networks to use the spectrum. By contrast, operators who are in the best position to build out these networks, are already using a significant amount of their spectrum holdings to offer existing wireless services.

"We do not believe the U.S. faces a spectrum shortage," Jason Bazinet and Michael Rollins wrote in their Citigroup report. "Too much spectrum is controlled by companies that are not planning on rolling out services or face business and financial challenges. And, larger carriers cannot readily convert a substantial portion of their spectrum to 4G services, because most existing spectrum provides 2G-3.5G services to current users."

For more than two years, the Federal Communications Commission and CTIA, the wireless industry's lobbying group, have advocated for more wireless spectrum to be made available for auction. The FCC identified in its National Broadband Plan the need for at least 500MHz of spectrum to be auctioned off over the next decade to keep up with demand for wireless data.

AT&T, the No. 2 wireless operator in the U.S., has used the impending spectrum crunch to justify buying No. 4 national wireless operator T-Mobile USA. Without T-Mobile AT&T has argued it won't be able to meet demand for wireless broadband service or fully deploy its 4G wireless network.

While no one denies that wireless data usage is growing and more spectrum is needed to keep up with growth, what is debatable is whether the wireless industry already has the necessary resources available to keep up with this demand.

The wireless industry says it needs the government to identify and auction more spectrum, just as other countries, like Germany, have done. But TV broadcasters, which are being asked to give up an additional 120MHz of spectrum for these auctions, say wireless operators need to exhaust their own wireless holdings before they look to other industries for additional spectrum.

"As we have said multiple times in the past, and has been recognized by a bipartisan group of lawmakers in the House and the Senate, the president, and the chairman of the FCC, there is a need to bring additional spectrum to market to fuel what is one of the country's key industries," Chris Guttman-McCabe, vice president of regulatory affairs at the CTIA, said in a statement. "Other countries have recognized the need to fuel their mobile ecosystems and have identified hundreds of megahertz of spectrum for mobile use. Our member companies would not be lining up to spend billions of dollars at auction for the right to use this spectrum if there was not explosive consumer demand for mobile broadband services."

Spectrum abounds, but utilization is low
In total, U.S. operators have licenses for about 538MHz of wireless spectrum. Only about 192MHz of that spectrum is currently being used. And of the spectrum that is being used, 90 percent of it has been allocated to existing 2G, 3G, and 3.5G wireless services by larger wireless carriers, such as AT&T, Verizon Wireless, Sprint Nextel, and T-Mobile USA.

Most of the unused wireless spectrum is owned by companies such as Clearwire, LightSquared, and Dish Network. But so far these companies have been slow to build networks using their available spectrum.

"There is definitely a mismatch when it comes to spectrum in the wireless industry," said Paul Gallant, an analyst with MF Global in Washington, D.C. "There are some companies that have spectrum, but they're struggling financially. Or they aren't quite sure what to do with the spectrum. And others that have the money and business model, but need the spectrum."

Clearwire, which has been building a nationwide 4G wireless network with Sprint Nextel, has had financial problems. LightSquared, which is backed by the hedge fund Harbinger Capital, plans to build a nationwide 4G wireless network but has been fighting with the GPS industry over interference issues and is still awaiting the final approval from the FCC. Then there is Dish, a satellite TV provider, that is also trying to get approval from the FCC to use its satellite/terrestrial spectrum approval to deliver wireless broadband services.

But Gallant is careful not to say that the wireless industry doesn't need additional spectrum.

"It's valid to point out that some spectrum may be in the wrong hands," he said. "Even if there is spectrum that is available elsewhere in the market, that doesn't mean that carriers like AT&T and Verizon aren't the ones who will face the biggest crunch as demand grows. So it is important for Congress to create a pipeline now for more spectrum that can be accessed later by these carriers."

Indeed, wireless carriers AT&T, Verizon Wireless, Sprint Nextel, and T-Mobile USA are using most of their existing spectrum holdings to offer their traditional 2G and 3G wireless services. The top three mobile operators have either acquired or are already starting to repurpose wireless spectrum for 4G use. AT&T and Verizon Wireless have bought additional spectrum to build their 4G networks. And Sprint Nextel said this week it plans to re-use spectrum from its Nextel acquisition to build a next generation network that uses the 4G LTE technology.

Re-farming spectrum for 4G
The move to 4G is very important for these operators because it offers them a much more efficient way to deliver service. According to the Citigroup report, 4G LTE uses the available spectrum roughly 700 percent more efficiently than the 3G wireless technology EV-DO.

Verizon Communications CEO Lowell McAdam, who spoke at a recent investor conference, said that Verizon has enough spectrum through 2015. But after that the company is planning to reuse spectrum it currently uses to offer 2G and 3G services to deliver 4G services. Specifically, the company plans to migrate its voice traffic, which is currently still on the older networks to 4G LTE.

Still even carriers that have acquired additional spectrum recently say more is needed to keep up with demand. AT&T, which wants to buy T-Mobile for $39 billion, bought some 700MHz spectrum licenses in the last auction. But it says it also needs T-Mobile's spectrum, which the company currently uses to deliver its 2G, 3G, and 3.5G services. T-Mobile accepted AT&T's bid to buy it in part because it doesn't have enough spectrum to build a 4G wireless network. According to AT&T, combining the spectrum resources of both companies would be a win for each of the companies as well as for customers.

Some of the companies' competitors saw it this way, too.

"AT&T buying T-Mobile is like gravity," McAdam said at the investor conference. "It had to occur. T-Mobile has spectrum, but no capital. And AT&T has the capital but needs the spectrum. If the government wants to stop this merger, it needs to get more spectrum out on the market."

In addition to making more spectrum available through auctions, McAdam also said that the FCC needs to make it easier for wireless operators to acquire spectrum on the secondary market more easily. This could help wireless operators, who need spectrum and have money to fund networks, strike deals with companies that have spectrum but may not be using it.

Clearwire, which has one of the strongest spectrum positions in the market, said it may consider selling some of its spectrum down the road. For now, the carrier is holding onto its spectrum while it tries to find more funding to build its network.

Gallant said it's important that the FCC and the wireless industry address both avenues for acquiring spectrum.

"At a high-level, this isn't an either/or choice," he said. "Even if the Citigroup report is 100 percent right and there is plenty of spectrum available but it's being unused, it doesn't undercut the wisdom that carriers should re-purpose spectrum they already have or that additional spectrum can't be auctioned off. Doing all the above can only be good for the U.S. wireless market overall."