The Cingular Proposition: Grab Spectrum in New York

The wireless player must win spectrum in the FCC's Dec. 12 auction to succeed nationally.
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A hotly contested spectrum auction slated for Dec. 12 will be a crucial forum for

Cingular Wireless

in its bid to become a player with true nationwide coverage.

The 60-40 joint venture of

SBC Communications

(SBC)

(which owns 60%) and

BellSouth

(BLS)

is already the second-largest provider of wireless services in terms of subscribers. Even so, its coverage is rife with holes throughout the U.S. And despite gaining a small foothold in New York City, it still possesses less spectrum in the nation's most populous market than any of its major competitors.

It is essential for Cingular to fill in the blanks. "They need to pick up licenses in different parts of the U.S. to be on an equal footing with their competitors," says Frank Marsala, an analyst at

ING Baring

. "Cingular needs geography."

Location, Location

Should Cingular fail to catch its rivals, the company will be relegated to the minor leagues of mobile telephony. The auction presents its best chance at getting spectrum, especially in the New York metropolitan area. If it doesn't, the Atlanta-based company faces less palatable options, such as swapping spectrum with a competitor, as it did earlier this month, or making an acquisition.

Currently, Cingular is lagging in fourth place in the spectrum sweepstakes. In the top 50 markets,

Merrill Lynch

estimates that

AT&T Wireless

(AWE)

,

Sprint PCS

(PCS)

and

Verizon Wireless

are the leaders. Meanwhile, AT&T Wireless and Sprint PCS own licenses in all those markets. Aside from adding spectrum in New York, Cingular needs to fill gaps in eight of the top 50 markets.

Spectrum is the range of electromagnetic frequencies used in the transmission of voice, data and video. Only a fixed amount is available, which makes spectrum a coveted commodity. The more spectrum a carrier has licenses for, the more services it can offer, especially as data traffic increases with the development of third-generation networks.

I Love This Town

Cingular's desire for spectrum in the New York region -- including portions of Connecticut, New Jersey, Pennsylvania and Vermont -- is emblematic of its search for spectrum in other parts of the country.

Cingular, formed on Oct. 5 when BellSouth and SBC merged their wireless units, managed to win a necessary foothold early this month when it swapped licenses with

VoiceStream Wireless

(VSTR)

in a deal where no money changed hands, trading spectrum in the Los Angeles and San Francisco markets for 10 megahertz of spectrum in the New York City area. (A megahertz is essentially a measure of bandwidth, or the width of a communications channel.)

But Cingular will need at least another 10 megahertz of spectrum to provide full service in the region. With 30 megahertz available in New York, the auction is a huge opportunity and "the best way to get spectrum in New York," says Peter Friedland, an analyst with

W.R. Hambrecht

. "It's pretty clear-cut. If you're willing to pay, the spectrum is there."

Spectrum in New York won't come cheap. AT&T Wireless, with 35 megahertz, and Verizon Wireless, with 25 megahertz, are "going to try to stand in its way. That will make New York very expensive," Marsala, the ING analyst, says. Even so, Merrill Lynch estimates that Cingular has $10 billion in available capital and that its total bids will amount to less than half that, at $5.22 billion.

The

Federal Communications Commission

plans to auction the spectrum next month over the protests of wireless telecommunications operator

NextWave Telecom

, which filed for bankruptcy in 1998 and is fighting to retain its licenses for much of that spectrum. Merrill Lynch estimates that $18.5 billion could be spent on the auction by all the players. Cingular will say only that it plans to be "select, opportunistic and disciplined" when approaching the auction.

Crop Rotation

Should it not fulfill its New York spectrum needs at the auction, Cingular will be left to build through swaps or acquisitions. Swaps will be harder to engineer now, especially because many of the players with spectrum are competitors. Even assuming a willingness to swap, "They have to support a huge customer base as it is. They don't want to be spectrum-deficient," Friedland explains. The VoiceStream swap was an exception. The company "had a ton of spectrum," he continues -- 40 megahertz. "Also, they were relatively early in their growth stage and had fallow spectrum to swap or give away."

Acquisition prospects in New York are few and far between. Marsala believes that Cingular could target

Northcoast Communications

, a private company that owns a 10-megahertz license in New York. Meanwhile, Herschel Shosteck of wireless consultancy firm

Herschel Shosteck Associates

thinks that even Sprint PCS or

Nextel Communications

(NXTL)

could be in play eventually.

"There is only room for four entities to be profitable," Shosteck explains. "Nextel and Sprint are losing the most money, so they are the most likely to be acquired." Sprint has 30 megahertz of spectrum licenses in New York, while Nextel has 15 to 16 megahertz.