To Be or Not To Be the Spectrum King
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Lately there have been huge discussions about Sprint’s (NYSE: S) prospects after it gets its hands on Clearwire’s (NASDAQ: CLWR) abundant spectrum by acquiring the wireless service provider. Recently, the Japanese telecom giant Softbank acquired a controlling interest in Sprint, and now both the firms are looking at rigorously improving the US operations, bringing us to spectrum. Spectrum is of utmost importance for the growth of a wireless telecom service provider, and a relatively recent article on CNN Money beautifully illustrates this point:
Spectrum is a finite resource and a crucial asset for wireless competition. As smartphone and tablet owners gobble up a rapidly increasing number of gigabytes, a spectrum war is emerging between the haves and have-nots. Those with capacity can offer service with fewer dropped calls and faster data speeds, competitive rates and niceties like unlimited data plans. Those without are starting to force customers to adopt tiered data plans and higher prices, and many have-nots are being swallowed up by competitors.
Once Sprint buys the remaining 50% of Clearwire for $2.2 billion, the 3rd largest US telecom company will have a combined 184 MHz of spectrum under its belt. Sprint presently has 51 MHz of spectrum, and this combined with Clearwire’s 133 MHz will result in a solid hold, much greater than Verizon’s (NYSE: VZ) 83 MHz and AT&T’s (NYSE: T) 77 MHz. So, Sprint will truly become the Spectrum King, and that will aid its growth strategy. Or will it? The reason I am asking this question is, there are also a lot of concerns about the deal.
First of all, having a lot of spectrum is good only if the spectrum is good spectrum. Not all spectrum is of the same quality, and this is where several industry experts are having concerns. Clearwire’s 133 MHz spectrum is not of a very superior quality, since it belongs to the 2,500 MHz range. Now, the problem with this range is that it is not that widely accepted and service range is poor. As pointed out by CNN Money,
Sitting way up high in the 2.5 GHz (2,500 MHz) range, Clearwire's signals don't easily penetrate walls and weaken significantly over long distances, requiring way more cell towers to transmit signal as lower-band airwaves. Also, no smartphones or tablets support the 2.5 GHz band. It's currently only used for wireless gadgets like Mi-Fi hotspots or USB modems.
In contrast, the nation’s top telecom service provider Verizon operates in the 700 MHz band, which is considered the most valuable because of its ability to easily penetrate buildings and travel greater distances. This also explains why Verizon decided to pay as high as $9 billion for it. Thus, several experts are of the opinion that spending $2.2 billion to get hands on spectrum which doesn’t have much of use may not be the wisest decision.
There are risks for sure. For starters, Sprint uses the Frequency division (FD) LTE technology, while Clearwire uses the Time division (TD) LTE technology. The problem is that TD LTE is not presently supported by any of the smartphones and tablets, and thus there will be no users of the spectrum. However, this doesn’t mean the spectrum is worthless. It can be expected that in the future phone manufacturers may make devices that will function in this range. According to Yankee Group’s telecom analyst Ken Rehben ”Clearwire has awesome spectrum for small cells and absorbing capacity. You can look forward to the future and see even Apple coming out with a device that will support 2.5 GHz.”
In fact, there is a good amount of scope for Clearwire’s spectrum, but only in the future. According to Clearwire, about 45% of the world's population, including much of India and China, is currently covered by the 2.5 GHz band. Again, big foreign telecom players such as Japan’s Softbank and China’s China Mobile owns or has plans to build TD LTE network on the 2,500 MHz range. China Mobile is the world’s largest telecom service provider with more than 700 million users. If such big names in the space are considering entering said spectrum range, then automatically major phone makers of the world such as Apple, Samsung, and Nokia, among others, will also manufacture handsets that will support the frequency. So, the problem of not having handsets and thus not having users for the range will automatically get addressed.
Secondly, “Clearwire has awesome spectrum for small cells and absorbing capacity,” according to Ken, and this will start showing results once the movement to small cells gains momentum. Small cells are tiny cell towers that can be placed anywhere. According to Nomura analyst Stuart Jeffrey, small cells will make up 90% of total cell tower deployments by 2015.
Moreover, with each passing day, the importance of data services compared to voice calls is increasing. The business models of telecom companies have already started focusing on data services, and we can safely say the future of telecom companies lie in that space. So, as data usage gains dominance, higher frequency such as Clearwire’s is likely to gain huge importance, as these bands are better capable to transferring data and at the same time face less disturbance compared to 700 MHz or 1,200 MHz bands.
So, keeping in mind all these points and keeping an eye on the future, I think it’s definitely a good idea to acquire Clearwire’s spectrum. Once the spectrum gets ready for regular use and Sprint starts providing cheaper and faster data services, it will earn a huge competitive edge over its bigger rivals Verizon and AT&T.
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