Following the Money in the C-Band for 5G
Things are starting to get exciting in the run-up to the FCC's decision on how to release C-Band spectrum for 5G.
Shares of Intelsat -- one of the three members of the C-Band Alliance (CBA) -- lost almost half their value this week. That's because Wall Street research firm JPMorgan said it no longer believes the FCC will follow the CBA's recommendations for auctioning C-Band spectrum for 5G.
If you're following the money, that would mean Intelsat might not get a big cut of the proceeds from a C-Band spectrum auction. The company's stock is currently hovering around $12 per share, down from around $24 per share just a week ago.
A $50B decision
FCC Chairman Ajit Pai has said that he plans to decide what to do about C-Band in the coming weeks. It's not going to be easy considering Pai will need to figure out how to make sure the TV services that currently use C-Band spectrum won't be affected by re-allocating some of the C-Band for commercial services including 5G.
One key factor in the debate is whether the FCC or the CBA should handle this reallocation process. Critics -- led by Sen. John Kennedy -- argue the European satellite companies that make up the CBA should not profit from the sale of American spectrum to American companies. CBA proponents meanwhile argue that the European satellite companies that make up the CBA -- Intelsat, SES and Telesat -- are in the best position to quickly and efficiently auction C-Band spectrum for 5G because they're the ones currently using the band.
The issue is becoming so tense that Sen. Kennedy is lobbying President Trump on the issue and threatening to subpoena the FCC to appear at his hearing next week on the C-Band.
Again, there's plenty of money if you're following it: Analysts estimate an auction of C-Band spectrum would raise a total of $50 billion. That's because 5G transmissions in C-Band spectrum can both cover large geographic areas and carry lots of data -- that's why operators ranging from Verizon to T-Mobile want it badly.
Sellers, meet your buyers
The CBA has acknowledged that its members would agree to a "voluntary" contribution to the US Treasury if they're allowed to auction off C-Band spectrum. But the amount of money they're willing to part with remains unclear.
Partly as a result of this week's upheavals, the analysts at New Street Research now believe CBA companies won't get as much as they had initially expected. "We are lowering our base case for the split of proceeds that will go to the CBA from 80% to 50%," the analysts wrote in a note to investors this week. "We have little analytical basis for the 50% vs. the 80%; we are just being more conservative to reflect increased uncertainty and a wider range of potential outcomes."
However, unlike the CBA, European satellite provider Eutelsat has been very clear about the money it wants. Eutelsat had been the fourth member of the CBA until its sudden and surprise split from the alliance in September over -- what else? -- money. Now, as a C-Band user and independent player in the negotiations over how to reallocate the C-Band, Eutelsat is being very clear about what it wants: "Given the substantial impact on eligible satellite operators and the fundamental change to their authorizations, Eutelsat does not support a contribution mandate greater than 50 percent of the remaining [auction] proceeds," the company wrote to the FCC recently.
On the other side of the equation sit Verizon, AT&T and others that might want to purchase C-Band spectrum in an auction for 5G.
As the analysts at New Street Research noted, Verizon remains a staunch supporter of the CBA. To get faster access to C-Band spectrum, Verizon has said it is willing to allow the CBA's European satellite companies to conduct an auction of the C-Band. (And if you're following the money, the odds are that Verizon will be the biggest spender in any C-Band auction given its thirst for midband spectrum for 5G and its relatively unencumbered financial situation.)
AT&T, though, has a different perspective. The company generally supports the CBA's plan at a high level but has also offered criticisms and alternatives that could sway the FCC. "AT&T's proposal creates a third option for the FCC: adopt a framework at the December meeting and then move forward with a short process on details that could be wrapped up in a few months," speculated the analysts at New Street this week.
Importantly, the New Street analysts estimated that AT&T could raise between $5 billion and $10 billion via asset sales to buy C-Band spectrum in an auction.
And as for T-Mobile, the operator remains tied up in its efforts to merge with Sprint. But T-Mobile's parent company Deutsche Telekom recently lowered its dividend to have some cash for potential US spectrum purchases. The New Street analysts predict T-Mobile could spend between $10 billion and $20 billion in a C-Band auction.
And what of the money from cable? "Comcast and Charter appear to be building leverage capacity and honing their wireless offerings, with Charter potentially carving out ~$5 billion for spectrum purchases in 2020," the New Street analysts wrote this week.
Following the money
So who stands to profit from the sale of C-Band spectrum for 5G? A growing number of analysts believe the US government will take a big slice.
"We now think there is some possibility that the government takes the majority of net proceeds," the New Street analysts wrote.
Others aren't so sure. "Chairman Pai has stated that his goals for C-Band are to make as much spectrum available as possible, as fast as possible, while generating revenue for the treasury, and protecting incumbents," noted the Wall Street research analysts at Evercore ISI in a note to investors this week. "As with the old saying 'good, fast, cheap; choose two,' there are clearly tradeoffs among these goals. We don't believe that a process that doesn't have the full buy-in of the satellite industry would be acceptable to incumbent C-Band users, as the satellite providers would be key in ensuring incumbent services are protected in the migration process. In addition, a public auction process would extend the time required to make spectrum available to four years at a minimum, in our view."
Because, the analysts explained, if the FCC doesn't work with the CBA and the broader satellite industry that currently uses the C-Band, the entire process will get bogged down in lawsuits.
"At the end we continue to believe the FCC will allow for compensation that satisfies satellite operators," wrote Sami Kassab at Wall Street research firm Exane/BNPP in his note to clients, according to Advanced Television. "Because if unsatisfied, Intelsat and SES will go to the Supreme Court to have their rights upheld. This is the only argument they ever had and still have. This would lead to long delays at a time when there is a consensus that time is the essence."