The $60 Billion C-Band Sweepstakes: Who Gets the Windfall for Accommodating 5G?

            The esoteric world of spectrum management and valuation made an atypical public splash yesterday, highlighted by a 40% drop in the share price of a major international satellite carrier, Intelesat, on the New York Stock Exchange.  See https://www.cnbc.com/2019/11/18/intelsat-stock-drops-as-fcc-will-auction-satellite-spectrum-for-5g.html.  Buy-side Wall Street investors responded to an announcement from FCC Chairman Ajit Pai that the U.S. would auction off C-band satellite spectrum, used by both private and government satellite operators, to accommodate ever growing terrestrial wireless spectrum demand.  See https://docs.fcc.gov/public/attachments/DOC-360855A8.pdf This announcement cast grave doubt on prospects for a private auction conducted by the three major carriers, none of whom have U.S. corporate citizenship. See https://c-bandalliance.com/about/.

            How does the valuation of a major international satellite operator substantially evaporate in one day?  There’s a simple answer and a more complicated and nuanced one, both of which I’ll offer. 

            The simple answer: A substantial portion of the value attributable to Intelsat and other satellite carriers lies in their near property-like use of radio spectrum and orbital parking places.  Like broadcasters, satellite carriers, licensed by the FCC, only pay a nominal fee for licenses to operate their facilities.  They have a “renewal expectancy” for both the orbital slots where their satellites hover, 22,300 miles above the equator, and for the frequencies used to uplink and downlink content as well as to manage satellites.  The prospect of an FCC auction substantially reduces the payout Intelsat, SES, Telesat and other C-band satellite carriers can expect to receive when they volunteer to make do with less spectrum to accommodate the ever-growing demand for terrestrial wireless services.

            The complicated answer delves into matters of spectrum propagation and value, the payoff from lobbying U.S. congressional decisionmakers, FCC jurisdiction and the non-U.S. corporate citizenship of the major C-Band satellite carriers.  Radio spectrum can have virtually no value or lots, depending on the use that can be made of it.  C-band spectrum, around 3-6 GigaHertz, offers desirable, “beach-front” access for terrestrial fifth generation (“5G”) services.   Signals at these frequencies and transmit across longer distances than the millimeter wave spectrum operating in double-digit GigaHertz frequency bands.  While U.S. wireless carriers have great expectations for 5G spectrum above 10 GigaHertz, current trials evidence serious limitations including shortened battery life, overheating and far less geographic reach than anticipated.  For example, Verizon has made a public relations splash in offering 5G service to several football stadiums, but reliable service is not available throughout.  C-band spectrum offers far greater geographical covers using existing, low cost technology, readily adaptable for 5G services.

            If 200-500 MegaHertz of C-band spectrum could be reallocated to 5G services, auction proceeds could exceed $60 billion. See  https://spacenews.com/satellite-c-band-is-worth-billions-but-how-many/.  A significant portion of Intelsat’s capitalization, an in turn its share price, accrues from the rights to occupy satellite orbital slots and to use spectrum, on an exclusive basis with protection from interfering uses.

            The C-Band Alliance has spent over $500,000 in a short amount of time trying to convince congressional decision makers that a private auction would expedite the clearing of spectrum for speedy reallocation to 5G terrestrial services.  Additionally, the Alliance made the questionable assertion that the U.S. could reclaim or enhance global 5G supremacy by allowing it to jumpstart the “repacking” of C-band spectrum. 

            Perhaps implicit in this pitch was a faulty assumption that the U.S. could only achieve expedited C-band spectrum availability if the carriers themselves had “skin in the game” and big—make that VERY BIG—financial incentives to play along.  The C-Band Alliance stakeholder may have mistakenly assumed that without their voluntary participation, the U.S. government, including the FCC, would have a difficult time dislodging three foreign carriers from their lock on spectrum.

            I believe the Alliance has misperceived the speed with which the FCC can amend satellite landing rights and operating licenses issued to foreign carriers.  No one disputes the sovereign right of a nation to determine whether and how a foreign telecommunications carrier can land submarine cables on U.S. soil, or operate earth stations that transmit and receive signals from a geostationary satellite, licensed by the FCC.  The Alliance may have banked on the assumption that the FCC could act only at the conclusion of a lengthy, already issued license period.  With the incentive of a self-administered private auction, the Alliance carriers gladly would agree to expedited spectrum clearing and repacking.  Without such a financial windfall, these carriers would litigate their right to retain the status quo for the duration of their existing licenses.

            The Alliance underestimates the lawful flexibility of the FCC to amend its rules, regulations, spectrum allocations and issued licenses.  Of course, the FCC would have to comply with administrative rules providing due process rights, even for alien licensees with corporate homes in Bermuda, Canada and Luxembourg.  It’s quite possible that a private auction would proceed faster than the FCC’s methodical process.  But with $60 billion at stake, and only a maximum one-third cut for the U.S. offered by the Alliance (see https://spacenews.com/c-band-alliance-says-it-would-send-billions-to-u-s-treasury-under-private-spectrum-auction/, FCC Chairman Pai made a smart decision.

           

More Overstatements About the Lovefest a Merged TMobile-Sprint will Deliver

            Having received FCC approval of its merger proposal, (see https://www.fcc.gov/transaction/t-mobile-sprint), TMobile and Sprint have turbocharged their array of less than meets the eye consumer welfare enhancing promises.  See https://www.finder.com/t-mobile-to-unveil-new-t-mobile-un-carrier-1-0

The companies have targeted states joining in an antitrust law suit to block the merger.  For example, the Attorney General of Colorado, a guy I used to admire, who should know better than to take the bait, agreed to withdraw from the law suit in exchange for significant Colorado-specific employment and facility commitments. See https://www.reuters.com/article/us-sprint-m-a-t-mobile/colorado-abandons-legal-effort-to-stop-sprint-t-mobile-merger-idUSKBN1X01QC

            Today’s New York Times contains the latest reiteration of why 3 national wireless competitors are better than four.  Before I “deconstruct” and refute the value of the Uncarrier’s commitments, I return to a basic question: If TMobile and Sprint can offer such a better value proposition than what AT&T and Verizon offer, would consumers fare even better if TMobile and Sprint also had to compete with each other?  In this age of historically low interest rates and the deep pockets of two foreign owners (Softbank and Deutsche Telekom), what prevents either company from offering what they now make contingent on their merger?

            In a nutshell, TMobile and Sprint treat the 5^th generation of wireless innovation as salvation for consumers, if and only if the companies merge.  If they cannot, then apparently AT&T and Verizon will capture the benefits of faster, better and more efficient technology all for themselves.  Only if Sprint and TMobile merge will the much overcharged and cheated consumer finally get a fare deal.  Again, what prevented either company from offering everything they make contingent on their merger?  At the very least, in light of far more concentrated market shouldn’t the Uncarrier explain why it can only become more competitive and innovative through consolidation, rather than competitive necessity?

            Today’s advertisement characterizes AT&T and Verizon as greedy, slow to innovate and unlikely to change.  Agreed, but doesn’t that make these two incumbents easy targets for lean and hungry competitors?  TMobile has increased its market share by offering consumers a better value proposition.  This company already has a 5G buildout plan and already offers lower prices.

            The ad offers 5G service to 99% of the U.S. population, a 50% discount for its lowest service tier, better rural 5G penetration in rural locales, fixed wireless broadband service and 11,000 more jobs by 2024. 

            I’d be wowed by these promises if I didn’t know the host of caveats, non-disclosures, misrepresentations and inability or unwillingness of the FCC to track and enforce pre-merger commitments.  In a nutshell, the Uncarrier promises far less than it could possibly deliver.

            The major BIG DECEPTION lies in the assumption the Uncarrier expects consumers to make about the nature of delivered 5G technology.  Rural locales will not now, or in the foreseeable future, have the tiny millimeter wave cell contours that will offer the promised vast improvements in transmission speed, capacity and latency.  TMobile has announced plans to use 600 MHz spectrum for rural 5G, far lower than the GigaHertz bands expected to be used in cities.  Every carrier, regardless of competitive necessity and the number of competitors will engage in the same prudent spectrum management process.  No carrier can execute a profitable 5G business plan that offers rural residents truly equivalent geographical market penetration, transmission speed, available capacity, etc.

            TMobile and Sprint will offer 5G networks that are no more or less “transformational” than what other carriers will deploy at the same time.  The Uncarrier may throw a bone to rural residents by installing more 600 MHz towers, but there is nothing I’ve seen from AT&T and Verizon indicating that these carriers will underinvest in the migration from rural 4G to rural 5G. Bear in mind that 5G is a wireless transmission, switching and routing technology, not a service.       The small print in the Uncarrier ad today underscores that 5G will not change the nearly identical technological nature of what any and all U.S. carriers will offer.  The merged company STILL will throttle video to DVD, standard definition 480 lines of resolution, despite the much touted higher capacity.

            TMobile and Sprint have expanded their charm offensive with targeted inducements now including first responders.  The companies imply that the remaining state Attorneys General need to be “educated” about the lovefest the Uncarrier will deliver.  If not, it’s curtains for the free world, American consumers and the country in general.

            Don’t buy it.