700 MHz Auction Observations Part 2: Vendor Impact

Summary

Liberal buildout requirements for recently auctioned 700 MHz auctions will result in lower short term sales for infrastructure vendors, lower stock prices, and further consolidation.

Analysis

The declared slow rollout time frames for LTE by Verizon and AT&T in 2010 and 2013, respectively, combined with the liberal 700 MHz auction buildout requirements, 35% geographic coverage by 2013 for the A, B, and E block (AT&T (T) one mostly B block) and 40% population coverage requirement for Verizon's  (VZ) mostly C Block winnings, will have a direct negative impact on vendor stock prices in the coming years.  Even though AT&T has also declared they will eventually use LTE in their original 850 MHz cellular spectrum "in 2010 or beyond", expect dry times and suffering stock prices for the next two to three years for the major infrastructure equipment vendors that have, or whose futures are dependent on having, significant North American wireless infrastructure sales.  

Any increased wireless infrastructure sales will be incremental in terms of technology evolution on existing networks or coverage.  The demand for additional capacity on existing sites, including data, will depend on the how aggressive the carriers choose to promote innovative apps and associated pricing plans.  The carriers have not proven adept in promoting novel apps to date, notwithstanding the greater percentage of ARPU that are comes from data.  The open network movement embodied by Android, the Verizon initiative and others, is still a couple years from fruition.  Video services and streaming will in part be supported separately by the likes of Qualcomm's (QCOM) MediaFlo and the whatever is rolled out on Dish Network's (DISH) E band winnings.  In addition, we should consider that the video streaming to mobile devices may not be the bandwidth hog as it is for landline, due to the smaller screens, until networks get to the point where many users are streaming.

As a result, it's reasonable to expect consolidation among vendors, especially, as has been suggested by other venerable analysts, pressure on a Nortel (NT)-Motorola (MOT) marriage.  Another possibility might be an Alcatel Lucent (ALU) hookup with Motorola, but not only for the obvious reasons of the Lucent-side hooking up with Motorola.  Many (perhaps too many) ears ago, Motorola was a base station partner with Alcatel on the switch side. Other possible acquisitors could be aspiring foreign vendors seeking entry into the U.S., such as Huawei, ZTE or an Indian player.