5G mmWave Spectrum: Was Straight Path Worth the Price?

This past week saw Verizon overtaking AT&T in bidding for Straight Path Communications, owner of 28 and 39 GHz ‘5G’ spectrum, closing the contest at $3.1 Billion, more than double AT&T’s initial bid of $1.25 Billion ($1.6 B transaction value). The acquisition is framed within the context of spectrum for 5G services. What makes this an interesting case is that it comes at a time when both carriers did not play actively in the 600 MHz auction with Verizon not bidding at all, and AT&T spending just over $900 million in the $19.8 Billion auction. So, is this a rational acquisition? Continue reading and take the poll at the end of the article!

Background

In July 2016 FCC opened 4 mmWave spectrum bands for 5G fixed and mobile wireless services:

• 27.50-28.35 GHz – local multipoint distribution service (“LMDS”) A1: Licensed for Basic Trading Area (BTA).
• 37.0-38.6 GHz (37 GHz).
• 38.6-40.0 GHz (39 GHz): Licensed for Economic Area (EA); total of 175 EAs.
• 64.0-71.0 GHz (60 GHz): License-exempt spectrum.

Straight Path Highlights

1. Straight Path spectrum assets:

• 28 GHz: 133 BTA licenses, with 16 licenses LMDS A1.
• 39 GHz: 931 licenses with average 800 MHz in top 30 markets.
• Spectrum used for backhaul by WISPs and MNOs.

2. Spectrum assets were acquired in 2001 following the Winstar bankruptcy who originally paid at auctions:

• $43 m for 16 LMDS licenses in 1998.
• $161.4 m for 931 licenses in 39 GHz in 2000.

3. 28 and 39 GHz licenses are granted based on 10-year terms, which means many are due for renewal in 2018 and 2020 for 28 and 39 GHz, respectively.

4. Straight Path 2016 revenue from spectrum leases is $461,000. The remainder of the $2.1 m revenue is from IP licenses.

5. Straight Path has 9 employees.

Comparison with XO

For context, consider Verizon’s $1.8 Billion acquisition of XO Communications announced in February 2016:

1. Fiber network: Metro fiber in 40 major markets with over 4,000 on-net buildings and 1.2 million fiber miles, and an intercity network spanning 20,000 route miles and connecting 85 cities.
2. Lease of 93 licenses in 28 GHz and 9 licenses in 39 GHz; with an option to buy in 2018 at reportedly $200 million.

Market & Technology Consideration

The bet is that mmWave spectrum will work at least for fixed broadband wireless services as extension to fiber services: this is 100+ Mbps in speed coupled with a rich suite of applications such as TV and video.

While mmWave spectrum has the capacity, it suffers on reach. So, how to make this bet work given that fundamentals will always remain the same?

There are different facets to this question. From a technology perspective, the bet is on beamforming technology which:

1. Will enable the target use the case with the challenge of bridging outdoor to indoor coverage. Integral to this point is non-line-of-sight (NLOS) where proponents of mmWave. Proponents of mmWave claim that the NLOS myth has been crushed (but has it really?!)
2. Will enable the end-to-end business case of the broadband access application. End-to-end is underlined to highlight that the equipment capex is not the main factor and a cost effective silicon implementation of beamforming is only one piece of the puzzle.

Is 5G mmWave Spectrum Worth the Price?

One can presume that this was a rational acquisition: both AT&T and Verizon know very well the operating environment, the use cases and the value of spectrum. However, there are elements pointing to over-valuation. So, with this context on the acquisition, was Straight Path worth the price? Did heat of the bidding war make the emotional win over the rational?

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Note: Xona Partners engaged in technology and business case feasibility for fixed and mobile 5G use cases. Contact me if this is an area of interest.