Welcome to the shady world of millimeter-wave (mmW) spectrum buying and selling.
At the start of 2017, AT&T announced it was acquiring FiberTower and by association, some, or all of its spectrum licenses. At the superficial level, this seemed like a fairly routine and normal acquisition. However, as time has gone and more details have become publicly known, it is starting to seem anything but routine. While the full details on what has transpired have yet to become available, there is enough to warrant a closer look. As like with any spectrum, there are limitations on available licenses and providing the AT&T and FiberTower deal completes as it seems to already have, there are some serious concerns around how AT&T and Verizon will impact the industry during the arrival of the game-changing 5G. As well as some serious concerns in general on how AT&T has gotten to 5G deployment through the help of FiberTower and the Federal Communications Commission (FCC). These are the behind the scenes power-play moves that are, and have been, happening with very little media attention paid to them. Resulting in AT&T paving its way to 5G with far less of an outlay than a competitor would have to pay, and in doing so, fueling more of the same duoploy.
The battle for Straight Path
Verizon and AT&T vied for Straight Path due to the company’s significant ownership of mmW (specifically 39 GHz) licenses. AT&T reportedly offered as much as $1.6 billion to acquire Straight Path - highlighting from AT&T’s perspective the value on offer with these licenses. While everyone assumed it to be a done deal, Verizon came in with an offer which was reportedly double what AT&T bid - believed to be in the region of $3.1 billion. Again, highlighting the value - some would say, necessity - of acquiring this mmW access from Verizon's viewpoint. AT&T reportedly failed to counter Verizon’s offer and the deal was subsequently done with Verizon. In doing this deal, Verizon significantly added to its ability to deploy 5G in a shorter timeframe, thus winning a major advantage. Furthermore, when combined with its other recent acquisition of XO Communications (itself understood to be a $1.8 billion purchase), Verizon essentially earmarked a significant portion (of a finite amount) of millimeter-wave spectrum. In fairness, however, Verizon paid through the teeth for it, with almost $5 billion laid out over the two purchases.
AT&T vs Verizon: the difference is in the zeroes
With it now become clear that AT&T and Verizon have looked to amass mmW spectrum through acquisitions, these acquisitions are not on an equal footing. Although AT&T lost out in the battle for Straight Path, it had already started proceedings to purchase FiberTower. While that announcement came through months before the Straight Path battle, AT&T was strangely quiet when it came to the finer details of the deal. Even the announcement of the acquisition was not what one would consider a proper announcement as there was no dedicated press release and no major explanation of why the acquisition was going ahead. Instead, all of the details surrounding the AT&T acquisition (of major substance) came down to one sentence buried within an announcement for something related but different, Project AirGig. As a result, it has only been within the last few weeks that more details have come through, with AT&T again quietly (albeit louder than before) announcing the deal had been completed. In AT&T’s own words, “AT&T paid $207 million to acquire FiberTower and will receive a significant footprint in the 39 GHz band, with average holdings of more than 375 MHz in the top 100 markets.”
Which is where things start to become more interesting. With AT&T having now admitted paying only $200 million for a “significant footprint in the 39 GHz band” comparisons can now more effectively be made as this is a figure which pales in comparison to what Verizon laid out to secure its own “significant footprint in the 39 GHz band.” Yes, there are differences in certain attributes associated with the two footprints (for example the difference in size of Verizon’s footprint to AT&T’s), but it seems unlikely there is any attribute which would justify the disproportionately massive difference in the value associated with the two ‘39 GHz footprints.’ More to the point, in spite of the difference in payments, they are both significant footprints which only further serves to fuel a 5G duopoly going forward. So why the difference in price? This is difficult to really get to the bottom of without making wildly unsubstantiated claims. What is clear though is the FiberTower deal has been under scrutiny for some time and certainly the subject of more scrutiny than Verizon’s deal(s) encountered. Although, to understand why the added scrutiny, you first have to understand how un-straightforward the FiberTower deal has been from the beginning.
FiberTower: bankruptcy, terminated licenses, and a major 5G player
Having previously filed for Chapter 11 bankruptcy, it is understood FiberTower valued its 39 GHz band spectrum at a much lower rate than it should have during the Chapter 11 filings. Certainly, much lower than its market value, which among other things, would have been dictated in today's market by what Verizon has had to pay for similar licenses. In spite of what seems to be an undervaluing of the spectrum, the FCC recently approved a deal which allows AT&T’s purchase of FiberTower to go ahead. Something AT&T confirmed in its recent announcement and something that in spite of being barely covered by the media has piqued the interest of many, including the Competitive Carriers Association (CCA), and of course, FiberTower stockholders.
While some could argue “what’s the problem? If AT&T managed to wrangle a good deal then good for them,” there are genuine concerns here. Firstly, as FiberTower had filed for bankruptcy, the normal procedure in events like this would be for the FCC to reacquire the spectrum and then auction it off. This would presumably have not only settled outstanding debts but would have also opened up a level playing field for carriers (big or small) to try to buy FiberTower’s “significant footprint in the 39 GHz band.” FiberTower did manage to battle through bankruptcy though only to then spend a number of years fighting to reverse a termination of a large number of its licences. The result of the FCC agreeing with the Wireless Telecommunications Bureau that FiberTower had not done enough to utilize the spectrum it owns in the first place. A position which if unsuccessfully defended would be expected to result in terminated licenses reverting back to the FCC's control, and again, back to the auctioning block. A lengthy litigation process followed where FiberTower defended its right to reversal by arguing how important the licenses in question are to the development of 5G. In other words, their value. In FiberTower’s own words, “the Commission [FCC] must restore FiberTower’s licenses so that it can get back to the business of developing and deploying next-generation wireless services that will promote competition, customer choice, and the successful evolution of 5G services.”
Keeping in mind the bankruptcy and the fact that claims of FiberTower’s “failure to meet the construction deadline applicable to these licenses” occurred before AT&T swept in with a purchase offer, one would assume AT&T's chance of acquiring a substantial amount of the sought-after spectrum would be fairly low. Though that assumption would be wrong. As shortly before AT&T announced (Feb. 09, 2018) the completion of the acquisition, the FCC announced (Jan. 26, 2018) it had ‘reached an agreement’ to close the outstanding issues regarding FiberTower. Paving the way for AT&T to close out the purchase and make its announcement. As anticipated, the agreement did involve the revoking of ownership of some of the spectrum but probably not as much as you might expect. While the media did largely report on this with headlines reading AT&T loses 5G spectrum licenses, it is nothing compared to what AT&T was gaining. On offer were 689 licenses in total: “94 licenses in the 24 GHz service and 595 licenses in the 39 GHz service.” The very same licenses FiberTower fought so long and hard to keep hold of due to their industry importance and value. As per the FCC agreement, all of the 24 GHz licenses were revoked and some of the 39 GHz ones with “some” currently understood to be in the same region as the number of 24 GHz licenses (roughly 100). Not only did this agreement conveniently work in favor of AT&T (who realistically was likely more interested in the 39 GHz licenses), but it meant only a small portion of the high-value licenses were going back into the public domain.
What this means for AT&T
This is undoubtedly a windfall. As while AT&T might has been looking to get more from the deal, it has managed to secure what it refers to as a “significant footprint” in the band needed to facilitate its 5G deployment and most importantly, on schedule. Almost as importantly, it has managed to do this at a price that is a steal compared to what Verizon paid, or for that matter, what any other company would have to pay for the same licenses under any other circumstances. To put this price into further perspective, it is understood Verizon paid $34 million to AT&T just as a termination fee on behalf of Straight Path when the deal fell through. On top of that $34 million, the FCC only days ago announced Verizon had paid an additional $600 million as a penalty due to allegations that Straight Path had done the same thing FiberTower had been accused of doing - sitting on its spectrum holdings. Therefore, the costs of the Verizon fees alone are triple what AT&T paid to gain a serious amount of spectrum that is arguably crucial to its immediate 5G ambitions.
What this means for FiberTower shareholders
One can only assume shareholders are the ones who have lost out the most here and through no fault of their own. As FiberTower had control over a stockpile of spectrum which was about to flourish in value due to the onset of 5G. However, due to a combination of the company allegedly hoarding and not using that spectrum, the bankruptcy process, and selling off high-priced spectrum to AT&T at a fraction of the going rate, the stockholders will likely see very little, if anything, on their return. The whole FiberTower process here is one which raises serious ethical concerns as it does seem clear that at every stage of the process, business was conducted without the best interests of the shareholders in mind. Not only through the actions of FiberTower, but arguably through the actions of the FCC who presumably had the power to ensure the best price was met for the 39 GHz licenses. It seems highly unlikely there are any justifiable reasons as to how $207 million is the best outcome for stakeholders when in excess of five hundred 39 GHz licenses were on offer. During its own litigation arguments, FiberTower argued to the FCC that it has spent $300 million in just preparing the landscape for the use of these spectrum licenses - only to then go on and sale the same licenses to AT&T for $207 million... with the FCC's approval.
What this means for the general market (and consumers)
This arguably does mean that the level playing field is not quite so level after all. While companies like AT&T and Verizon will satiate the market by using words like “accelerating deployment” (which undoubtedly brings the benefits of 5G to the consumer more quickly), it do so at the expense of competition. Not only are AT&T and Verizon already cementing their position as part of the backbone of 5G in the US, but in some cases - namely, AT&T's one - are seemingly doing so at a bargain basement price. $207 million is not a lot of money for what AT&T is getting here and there is little doubt smaller and less powerful entities looking to disrupt the market by increasing the level of competition would have had to pay significantly more to secure similar licenses - and this on the basis they would not be automatically priced out by the bigger players in the first place. Not only does AT&T and Verizon now account for a majority of the currently available high-frequency spectrum, but there can be little doubting these two companies would also be looking to secure any other available high-frequency spectrum in upcoming auctions. T-Mobile, for example, has recently urged the FCC to ensure an auction takes place in 2018 to offset the significant advantage AT&T and Verizon now have. It remains to be seen whether that will happen and if it does, whether it would result in a more competitive landscape anyway.
Expect the big four to return to a big two
There are many reasons for some to be concerned about the AT&T/FiberTower deal, although first and foremost is the reduction in competition that will arise. AT&T and Verizon are often referred to as the big two due to their general dominance in the market and while that has been changing more recently (thanks to the likes of a resurgent T-Mobile), even at a more liberal vantage point, the level of competition in the US is anything but competitive, growing from a big two to a big four. 5G represents the next major paradigm shift in the industry and everyone in the industry already knows that being first is the power play that matters the most. Which is one of the reasons why you are hearing so much noise at the moment from AT&T and Verizon on their 5G plans, routes to, and timelines for deployment. They, along with other vested parties not only want to be first, but want the industry to know they are first. Although none of this would be possible if it were not for mmW spectrum.
Previously, mmW had been largely overlooked by carriers for a number of reasons. One of which is its limited reach. As unlike lower frequency bands, mmW is not capable of travelling as far and is less capable of obstacle penetration. Therefore, it has previously offered lower value, compared to lower frequencies. More recently, however, and in particular during the multi-year preparations for 5G, more of the industry players have started to pay attention to mmW as it is now seen as one of the key parts of 5G deployment due to its handling capability. Basically, while mmW is not far-reaching, it is very pliable when it comes to the amount of data it can transfer and by utilizing mmW, carriers gain an increased ability to transmit significantly more data, more quickly - underpinning the power of 5G. Resulting in 5G becoming more of a race to see who can grab as much mmW as possible, and again, be the first to do so. While many would assume the race to be ongoing, the way AT&T and Verizon have gone about their business, the race may indeed have already ended.