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Sprint's 4G aspirations depend on spectrum deals

Sprint has hit one roadblock after another in its search for more spectrum. Its last hope may be a slice of wireless airwaves that the FCC must auction off within the next three years.

Sprint Nextel is getting into the 4G LTE game by building its own network. But to make its dreams a reality, it needs a scarce resource that every other wireless operator around the world is clamoring to get its hands on: wireless spectrum.

And Sprint has already missed two major opportunities. Earlier this week, The Wall Street Journal reported that in the first few months of this year, Sprint's board shot down the company's plan to purchase prepaid provider MetroPCS. The company also botched talks with T-Mobile USA for a network-sharing arrangement. The impetus behind each of these deals was to gain more network efficiencies and gain access to more wireless spectrum.

But now thanks to the Middle Class Tax Relief and Job Creation Act of 2012, aka the Payroll Tax Cut bill, that was passed by Congress and signed into law by President Obama last month, Sprint may get to buy some additional spectrum. The new law, which extends payroll tax benefits to workers, also authorized spectrum auctions, including some spectrum in the so-called PCS "H" block that could nicely complement the PCS spectrum Sprint is already using to build its LTE network.

This could be good news for Sprint which only has about half the amount of spectrum for LTE as its competitors AT&T and Verizon Wireless. But actually acquiring the spectrum won't be easy.

"Sprint's LTE network will be fine on day one," said Roger Entner, founder of Recon Analytics. "But they're going to have to buy more spectrum, because in two or three years, what they have will not be enough. The PCS H block would be a nice complement for Sprint, but there's going to be a lot of interest for this spectrum."

Sprint's 4G saga

Sprint's path toward 4G has been a long and bumpy one. The company, which has been in trouble since its 2005 acquisition of Nextel, thought it could outsource its way to 4G. But the partners it has chosen haven't lived up to the challenge.

In 2008, Sprint formed a joint venture with Clearwire that combined the companie's wireless spectrum assets to build a 4G wireless network using a technology called WiMax. The idea was that Sprint, along with other potential wholesale partners, would use the Clearwire network to provide 4G service. And for the past four years, Sprint has offered 4G WiMax services via the Clearwire network.

But over the years, it's become clear that LTE and not WiMax will be the global technology of choice for mobile broadband. Clearwire has said it is switching gears to upgrade its network to LTE, but it won't be quickly enough for Sprint. Plus, after a series of missteps Clearwire's network is in financial trouble. And it's unclear whether the network will ever get fully built due the problems it faces.

Then there was LightSquared. Sprint's second wholesale partner. This company led by hedge fund investor Philip Falcone, planned to build a nationwide 4G LTE network using satellite spectrum. Sprint signed a network-sharing deal with LightSquared in July. The carrier hoped LightSquared's network would jump-start its 4G LTE offering, since the network was expected to be up and running in certain cities by the end of 2012. But politics and claims of GPS interference crushed LightSquared. And after a year-long fight in Washington, D.C., and in the press, the Federal Communications Commission pulled the company's conditional license, leaving Sprint once again in the lurch.

Recognizing that it needed to get into the LTE game and fast, Sprint decided to use its remaining PCS spectrum to start building its own 4G LTE network. In October, Sprint announced plans to launch its next-generation network, which the company hopes will cover 120 million people by the end of this year, and about 250 million people when the network is finished in 2013. Sprint devices supporting LTE should start rolling out this summer.

Sprint's dilemma

But the problem the company faces now is that it only has about 10 MHz of the PCS spectrum to build out this network. That's half of what AT&T and Verizon Wireless are using to build their 4G LTE networks. "Sprint has 10 MHz of spectrum now, which is fine for the initial network," Entner said. "But if they want a really robust service, they need at least 20 MHz or they won't be able to compete with AT&T and Verizon."

Sprint, which was once flush with wireless spectrum, would have been able to build an LTE network with twice the amount of spectrum as its competitors, had it not given a huge chunk of it to Clearwire as part of the joint venture.

Now, Clearwire has more than 100 MHz of spectrum in the 2.5 GHz frequency throughout most of the U.S. And it has more than 130 MHz in some larger markets. While this isn't the best-quality spectrum, since it doesn't penetrate walls easily and propagates over shorter distances, requiring more cell sites, it's still decent spectrum for covering many densely populated urban and suburban areas.

But due to the deal with Clearwire, that spectrum is not accessible to Sprint for its new 4G LTE network.

Buying MetroPCS could have also given Sprint additional PCS spectrum it could use for 4G LTE, especially in urban areas. And a T-Mobile network-sharing arrangement may also have helped the company free up additional spectrum and lower its cost base to address potential capacity constraints on its upcoming LTE network.

But now, months before it's expected to start rolling out its LTE network, Sprint has not made much progress in getting extra capacity for the network.

Sprint's potential solution

Where else can Sprint look for more spectrum? It just so happens that the FCC will soon be auctioning another 10 MHz of PCS spectrum known as the PCS "H" block. This chunk of spectrum, which consists of 5 MHz in the 1915-1920 MHz band paired with another 5 MHz in the 1995-2000 MHz band, was initially identified for auction in 2004.

After eight years, the FCC has finally gotten congressional approval to sell the spectrum at auction. As part of the Middle Class Tax Relief and Job Creation Act of 2012, the FCC has three years to auction the spectrum. By contrast, it's going to take a much longer time to get the TV spectrum from incentive auctions into the market.

The PCS H block of spectrum is ideal for Sprint, because it could work perfectly with the airwaves Sprint is already using for its LTE network. Sprint is using two 5 MHz slivers of spectrum called PCS "G" block, which it got through its 2005 acquisition of Nextel, to build the LTE network.

The big question remains whether or not Sprint will actually get any of this spectrum. The rules of the auction have not yet been written. It's very likely that the licenses for the PCS H block will be divided up geographically. Sprint needs nationwide coverage. So if that's the case, it would need to win licenses in every region.

What's more, bigger players with deeper pockets, such as Verizon and AT&T may make a play for this same spectrum. This is likely why Sprint has been working behind the scenes in Washington to ensure that the FCC doesn't lose its ability to limit participation from larger players in the auctions. In the past, the FCC has put restrictions on certain blocks of spectrum to encourage specific policy objectives, such as increasing competition.

When the Middle Class Tax Relief and Job Creation Act of 2012 was being debated, AT&T and Verizon Wireless pushed Congress to restrict the FCC's ability to put conditions on the spectrum or restrict certain companies from bidding as part of the law authorizing the auctions. Meanwhile, Sprint and several other smaller carriers, including T-Mobile, Leap Wireless, and the Rural Cellular Association, lobbied Congress to make sure that the FCC could put whatever restrictions they wanted on the auctions to ensure they weren't shut out of the auctions.

"Stripping the FCC of its auction design discretion would disserve the public interest by permitting unchecked participation by the two largest, best-funded wireless carriers in future spectrum auctions," the companies said in a letter addressed to key Congressional leads. "That would discourage smaller competitors from participating in future auctions thereby reducing auction revenues and limiting wireless competition and innovation."

The final draft of the legislation which was passed and became law, preserves the FCC's authority to impose some restrictions on the auctions. And no doubt Sprint will do what it can in the coming months as the rules for the auction are being drafted to prevent AT&T and Verizon from bidding on much of this new spectrum, particularly the PCS H block.