Our cell phones are becoming more and more powerful by the day. LTE coverage has become the standard across all networks and it is reaching even the most rural areas of the country. As we continue to grow and expand, Wireless companies, such as Verizon, AT&T, T-Mobile, and Sprint are acquiring a heavy burden. In today’s article, I’m going to be explaining the rising cost to the wireless sector that could be detrimental to these major companies in the future.
How LTE works
Before we get into the meat and potatoes of this article, we first need to have a firm understanding of how wireless communication works. Data from our phones is transmitted to one another in the form of radio waves which is commonly known as the broadband/wireless spectrum. These radio waves travel in different frequencies and different bandwidths. Each particular geographic location/county in the United States has its own frequency spectrum that we transmit data from. The frequency spectrums vary from:
- Low 700 MHz
- Mid (in between)
- High 2.6 GHZ
Major wireless companies, like AT&T, T-Mobile, Sprint, and Verizon, buy licenses for these spectrums in these different geographic locations. There are two main qualities that all wireless carriers want in their products:
Low frequency spectrums (700Mhz) are more reliable because they offer a wider range of coverage. High frequency spectrums (2.6 Ghz) are faster but are less reliable because they have less coverage. When a company like Verizon says, “we have a large LTE network”, they are generally referring to the large amount of licenses they have in the low spectrum.
4G stands for 4th generation wireless systems. The ITU Radiocommunication Sector (ITU-R) is one of the three sectors of the International Telecommunication Union (ITU) and is responsible for radio communication. This is the organization that set the standards for speed requirements for 4G and 5G. For instance, the standards of 4G are 100 megabits per second for high mobility communication (such as from trains and cars) and 1 gigabit per second for low mobility communication (such as pedestrians and stationary users.) For the power of a 4G network to be fully utilized, a company, such as Verizon, needs to own many spectrum licenses in many different locations
In most recent years, the demand for licenses has gotten to a point where the need for capacity is greater than the need for coverage. There’s actually more demand for mid-band spectrum than there is for low-band spectrum because of the need for companies to switch to 4G and even 5G in the future.
How Companies Acquire Licenses
Here is where things get interesting. These spectrum licenses are not just handed out to these major companies, they come at a price. These licenses basically trade in their own market. Let’s take a look at some ways a company can acquire these licenses.
The Federal Communications Commission (FCC) sells spectrum licenses in chunks at an auction to maximize profit. When they decide to auction off spectrum, they release a chunk like the 700MHz we discussed above. A carrier’s best chance for a better network is to own more bandwidth in that spectrum. If a company like Verizon wants a big, fat network, it has to have more of these spectrum licenses.
Because the demand for a better network is constantly being risen to a new standard, the demand for these licenses at auction are going up by enormous amounts. The most recent sale for some spectrum licenses at auction went for 10 billion dollars. No matter how big a company is, that is a massive expense to take on for licenses that only cover a certain area of the country. Over the past few years, these licenses have auctioned off for tens of billions of dollars.
- Open Market Between Companies
Companies within the industry buy and sell these licenses off of each other in strategic moves to help improve their business as well as to balance their books. They also lease the licenses out to other companies to gain a revenue stream.
- Growing scarcity and demand for Spectrum Licenses
The prices of these licenses is only growing because of the demand for companies to provide the fastest and most reliable network. As technology continues to evolve and we carry on into 5G, 6G, and 7G who knows what companies will be paying for these different spectrums across the country. In fact, in every one of these companies 10k statements, their #1 risk factor for business is usually something like this:
“The scarcity and cost of additional wireless spectrum, and regulations relating to spectrum use, may adversely affect our business strategy and financial performance.”
- Growing Debt
These companies are accruing a massive amount of debt that could inhibit future growth. Verizon obtains 70% of its revenue through wireless services and AT&T obtains 50% of its revenue from wireless services. Currently AT&T has 125 billion in debt and Verizon is close behind with 110 billion. Verizon’s Debt to Equity ratio is currently 479%. This means that they have 479% more liabilities than they do in shareholder equity!
- Higher Phone Plans
We have all seen our phone bills go up drastically over the years. If these major companies continue to pay enormous cost for licenses we could see a dramatic rise in our cost as well. They could very well pass the cost on to the consumer in the form of higher premiums.
T Mobile has grown considerably in the past year and just recently there has been new rumors of their company buying sprint, causing the stock to go up another 5%. Much of this success came from their unlimited data plans which now both Verizon and AT&T are now offering. T Mobile has talked about doing a merger with Sprint in the past but it was always shut down by the government because they do not want an oligopoly to form in the wireless communications sector. People now argue that since Trump is in office, he would approve of this merger. Deal talks won’t start until April, after the next spectrum licensing auction from the FCC.
Regardless if this happens or not, I believe that the increased debt that these companies are taking on from accruing spectrum licenses will cause them to become less and less profitable in the future. Currently I would short either Verizon or T-Mobile because I believe they are highly overpriced for the kind of debt they have and will take on in the future. I also currently do not believe that the Sprint/T Mobile merger will take place, and both stocks will drop considerably because of it.
Homework: Keep an eye on the major companies of the Wireless sector in the future such as AT&T, Verizon, T-Mobile, and Sprint. If we continue to see a major demand for these licenses it will be interesting to see how these companies manage the rising cost. **Investment Alert**