How next year's wireless auction could give T-Mobile a shot in the arm

T-Mobile has found itself in an unlikely position, one that bodes well for its prospects in next year's government auction of wireless spectrum.

T-Mobile, Sprint and a cavalcade of regional carriers spent the past two years lobbying for the Federal Communications Commission to set aside a swath of spectrum specifically for smaller players. Spectrum is the radio airwaves that ferry voice calls, text messages and cat videos to our smartphones. With that reserve in place, it appears T-Mobile may be the only player still interested.

Sprint said last month it would skip the auction, and some regional carriers now appear gun-shy as well. It's unclear whether Google, satellite TV provider Dish Network or cable companies will participate.

It's a surprising turn for the auction, which could shake up the wireless industry by giving more players access to the kind of low-band spectrum that can cover wider distances and improve in-building coverage. Verizon and AT&T, the two largest wireless companies in the country, control more than 70 percent of this type of spectrum and are expected to spend big in this auction. Both carriers were major players in the last auction of low-band spectrum, and they've used those assets as the foundation for their 4G LTE networks.

The potential lack of competitors means T-Mobile could have a clear run at the specifically reserved spectrum, enough to bolster the speed and coverage of its nationwide network. The extra assets could make the Bellevue, Washington, company a more viable option as it battles Verizon and AT&T for consumers in the coming years.

"It could be a very big deal," said Craig Moffett, an analyst with MoffettNathanson.

Then there was one

Wireless auctions are costly affairs that typically favor the biggest players. The last FCC auction, which concluded in January, raised $45 billion and was dominated by AT&T, Verizon and Dish.

Beyond the hurdle of paying for the spectrum, carriers often take years to put the spectrum to use. Next year's auction will be complicated by the fact that broadcasters are giving up the spectrum for a cut of the proceeds. Broadcasters have 39 months to move off those airwaves, meaning carriers may not be able to use it until 2020.

It's partly why smaller, rural carriers are reluctant to commit to the auction.

"The fact that we'd be tying up millions of dollars for three to four years is a major concern," Pat Riordan, CEO of Wisconsin-based carrier Cellcom, said at a conference last week hosted by the Competitive Carrier Association.

Riordan also argued that the specific reserve for smaller carriers doesn't cover every market and that Cellcom would likely still have to compete against AT&T or Verizon in some territories.

"We are realizing now that the reserve doesn't do us any good," Riordan said.

Even though rural operators serve a small fraction of consumers in the US, they are the only alternative to AT&T or Verizon in some markets. In some cases, they may be the only carrier offering any wireless service. The auction is supposed to help rural carriers get access to a valuable asset they need to deploy faster wireless service. Without it, they may not survive, which would mean fewer choices for consumers.

Not every regional player shares Riordan's concerns. Steve Berry, head of the Competitive Carrier Association, said a vast majority of his 100-plus member organization is prepared to participate though he acknowledged that some have their doubts.

How T-Mobile benefits

The rules exclude AT&T and Verizon from bidding on "reserve spectrum" in markets where the companies already own a significant amount of low-band spectrum. That means T-Mobile can aggressively bid in urban and suburban markets without facing much competition because the larger carriers already own spectrum in those territories, Riordan said.

T-Mobile's service is strongest in big cities, but it lacks the breadth of coverage of its larger rivals. Additional spectrum could help it cover dead zones and amp up its speed.

Kathleen Ham, senior vice president of government affairs for T-Mobile, said she hopes her company will get the spectrum it needs from this auction.

"We are banking on that," she said. "It's that important."

Surprise bidders?

The big question in the auction is whether any surprise bidders will come calling. Dish was surprisingly active in the last auction, but a lawyer for the company said it is still considering its options.

Google has also been dabbling in the wireless market via a combined Wi-Fi and cellular offering called Project Fi. Despite the potential to use the spectrum to augment the service, the company isn't expected to join in. A Google spokeswoman declined to comment.

The cable operators could also make a move. Charter Communications filed comments in the auction proceeding in May showing support for rules favoring smaller carriers. A spokesman for Charter declined to comment.

If the cable companies do participate, they are likely to do so in a group, according to a person familiar with the industry's plans. It's a strategy they have employed in the past, although the companies are still considering their options this time around, the person said.

For now, that leaves T-Mobile sitting pretty.