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Wireless auctions could tank telecom stocks

A cloud is moving over the high-flying wireless-carrier stocks with the approach of several critical--and likely expensive--auctions for the airwaves the companies need to offer high-speed Net services.

A cloud is moving over the high-flying wireless-carrier stocks with the approach of several critical--and likely expensive--auctions for the airwaves companies need to offer high-speed Net services.

Share prices in the wireless companies have already fallen in recent weeks, with several stocks down today on news of lower-than-expected subscriber growth from Sprint. But analysts say the value of wireless stocks, and particularly the stocks of companies that win the upcoming auctions, could get considerably worse before getting better.

Big wireless phone companies such as Sprint, AT&T Wireless, Verizon Wireless and Nextel Communications are looking to provide fast data services, which could allow features such as streaming video or music over mobile phones.

These features will require considerably faster connections, resulting in the need for more bandwidth, or information-carrying capacity. Yet phone carriers are already running into problems, as many of their networks are clogged simply by the volume of voice calls.

To get this extra wireless capacity, the companies need to buy new slices of the airwaves in auctions scheduled for December and March.

The pair of scheduled spectrum auctions are the latest in a series periodically held by the Federal Communications Commission, as slices of the airwaves are freed for commercial use.

Demand for these wireless licenses is always high, but with the promise of high-speed mobile services now on the way, the industry is expected to bid tens of billions of dollars for the rights to this wireless "real estate."

In similar auctions held in the United Kingdom and Germany earlier this year, companies collectively spent $36 billion and $46 billion, respectively. Subsequently, the winners' stocks dropped sharply.

"In Europe, it was a disaster. The auctions got out of hand," Banc of America Securities analyst Steven Yanis said in a conference presentation on the industry yesterday. "It's almost a lose-lose situation. I'm concerned, going into the auctions, about the whole group (of U.S. wireless stocks)."

Is it worth the cash?
Most wireless phone companies already offer text-only Web access over mobile phones. But subscribers in the United States are few. However, analysts say today's demand isn't necessarily a good prediction of what will happen when better, faster technology is available.

Wall Street is working to figure out whether the risk of spending billions of dollars is worth the potential competitive advantage for these companies, which already are dealing with rocky share prices.

"There is (already) an overhang in the whole wireless sector," said Peter Friedland, a wireless analyst with WR Hambrecht. "But there's no way to factor it in completely at this point. We don't know what's going to be paid."

Many industry experts believe individual slices of the spectrum, which could give a company licenses to offer wireless services in about 60 percent of the country, could cost between $10 billion and $20 billion apiece, Friedland added.

These auctions will likely affect some companies more than others. Nextel, the smallest of the nationwide carriers, today has less spectrum than larger competitors like AT&T or Verizon Wireless, analysts note.

Although Nextel has repeatedly said it has plenty of bandwidth to deliver on its business plan, most analysts believe it is among the neediest companies. That aspect has given weight to rumors that Nextel could merge with AT&T, which would help the smaller company acquire new slices of the airwaves. Analysts say Nextel has already raised close to $13 billion in the last year in anticipation of the auctions.

Nextel's stock was down 6 percent today by market close, in part on larger market fears about wireless-subscriber growth.

Nextel isn't alone in its need for spectrum, however. AT&T, Verizon, Sprint and others also are running into capacity problems on their networks and will need to find new alternatives if they want to offer high-bandwidth features over their networks such as audio, video and even graphics-intensive Web pages.

Others worry the bidding process will have effects that ripple beyond stock prices.

Cisco Systems executives, speaking at a company conference in San Francisco this week, said the cost of such auctions would likely delay implementation of the third-generation wireless technologies--a new set of tools expected to jump-start use of the wireless Internet and other advanced wireless services.

Although the two upcoming auctions will attract the most attention to date, analysts say those won't be the last.

"This isn't going to stop here," Yanis said. "The government has found a way to get billions of dollars without losing votes."