Spectrum Crunch Spells Hidden Upside

NEW YORK ( TheStreet) -- Lack of available wireless spectrum -- the government-controlled airwaves that carriers license -- is a major headache for telecom players AT&T ( T), Verizon ( VZ) and Sprint ( S).

Yet on the flip side, the so-called spectrum crunch spells upside for firms whose technologies help minimize traffic on big networks -- companies like Aruba Networks ( ARUN), Ericsson ( ERIC), Juniper ( ERIC) and Airvana.
Lack of available wireless spectrum may actually spell upside for a host of network gear-makers.

With smartphones and tablets causing an explosion in mobile data, telecom networks are under massive pressure and need more capacity. The FCC is looking to free up 500 MHz of wireless spectrum for broadband over the next decade, and is pushing for spectrum auctions to grab unused capacity from broadcasters.

Until then, "anything that helps provide capacity and reduces the demand is going to play an important role," said Peter Rysavy, president of consulting firm Rysavy Research. "Companies involved in providing whatever alternatives there are are well-positioned, whether it's companies that specialize in Wi-Fi offload, like Ruckus Wireless, or femtocell companies."

Wi-Fi specialist Aruba Networks, in particular, could be poised to tap into this trend. "Carriers such as AT&T and Sprint view offloading to Wi-Fi and femtocells (from towers/basestations) as key to their network strategy," said Goldman Sachs analyst Simona Jankowski, in a recent note. "Spectrum constraints are likely to drive greater microcell and Wi-Fi deployments over time."

Femtocells are essentially mini cell towers, designed to improve network connections inside buildings. Typically, femtocells have been used to provide better cell coverage inside homes and small businesses; today, carriers see the system as a way to help add capacity to their next-generation networks.

Sprint, which uses technology from Airvana in its 3G AIRAVE offering, told TheStreet that it is looking to extend its reach from 50,000 femtocells to 100,000 in the near-term, and to 1 million over the next three years. Rival AT&T is also getting busy in this space, touting its Cisco ( CSCO)- built 3G MicroCell as a "mini cellular tower" for consumers and small business users.

"Femtocells allow operators not only to offload traffic from the macro network, but to do so onto a backhaul connection that they are not paying for (the customers pay with their home broadband)," said Charles Golvin, an analyst at technology research firm Forrester, in an email to TheStreet.

Companies that provide wireless backhaul, fiber and Ethernet technology, which include the likes of Motorola Solutions ( MSI) and Alcatel-Lucent ( ALU), are also in a good position. "Since less spectrum means more cell-splitting and each new cell requires a high-speed connection to the network, there is demand for more such connections," he said.

Set against this backdrop, Rysavy also predicts that heterogeneous networks -- wireless networks that support different access technologies and architectures -- will become increasingly important. "That's where the network can dynamically adjust itself as operators add more cells such as femtocells and picocells for covering city blocks ," he told TheStreet. "As you go to hundreds of thousands of individual cell sites, you don't want engineers at the sites; the network has to be more adaptive."

A number of companies, including Ericsson ( ERIC), NEC, Alcatel-Lucent and Huawei, are championing heterogeneous networks, or HetNets, as a way to help boost network performance. Chinese tech giant Huawei demoed its HetNet solution at the Mobile World Congress event in Barcelona earlier this year, explaining that mobile broadband traffic is expected to increase up to 500 times over the next decade.

More Wireless M&A?

At the CTIA International Wireless 2011 show last week, Ralph de la Vega, CEO of Mobility and Consumer Markets at AT&T, said that data usage on its network had grown 8,000% in the last four years and predicted an eight to ten-fold hike over the next five years.

"One of the key drivers of the T-Mobile acquisition was the need for additional spectrum," he added, during a panel discussion moderated by TheStreet's Jim Cramer.

While the T-Mobile deal has tech watchers wondering about M&A potential in the telecom sector, some analysts say that additional big deals are unlikely.

"AT&T faces some significant hurdles to get the acquisition to pass regulatory muster," explained Forrester's Golvin. "If approved -- in whatever form, including divestitures -- another large acquisition that consolidates the market would be nearly unthinkable."

Future consolidation will likely involve smaller players, according to Golvin, who said that Leap ( LEAP) and MetroPCS ( PCS) would be logical partners. "Each could also benefit Verizon given the match in their technologies and spectrum holdings," he added.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

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