Verizon Wins the Battle for Straight Path. Will It Win the War for 5G?
Only a little more than a month ago,Straight Path Communications(NYSEMKT: STRP)stock was at $36 per share. Last week, however,Verizon(NYSE: VZ)agreed to buy the company in an all-stock deal for $184, a whopping 404% premium to where the little-known, nine-employee company was trading on April 7. That's becauseAT&T(NYSE: T)and Verizon were involved in a bidding war for Straight Path'shigh-band spectrum assets, which may be the building blocks of a future 5G network.
AsI previously wrote, AT&T and Verizon are competing to assume pole position in the 5G race because their core wireless businesses are in trouble, due to theincredible success of low-cost providerT-Mobile. AT&T and Verizon are still much bigger so they are attempting to leverage their scale to be the leader in the next wave of innovation and differentiate their service based on quality. Right now, bothSprintand T-Mobile have upgraded their networks to a similar level of quality as the bigger players, so that advantage has waned.
5G is make-or-break
It is perhaps fitting that Verizon won this bidding war, as the new 5G is most crucial to its future. 5G is also important to AT&T, but the company has more diversification than Verizon, with a large media arm due to its acquisition of Direct TV and the pending acquisition ofTime Warner, a larger enterprise fiber network, and a growing Latin American division.
T-Mobile has promised a 5G network by 2020 as well. It believes that it will be able to deploy 5G on the low-band spectrum it purchased in the government auction this winter, when it spent $8 billion for lots of low-band 600 MHz spectrum. It's still unclear how comprehensive that network will be, however.
Verizon, however, seems to be betting on leading technological innovation of the core network. While it has ventured into media with the purchase of AOL and Yahoo!, these were much smaller acquisitions that probably won't make a difference to the bottom line anytime soon.
5G: Holy grail or hype?
There is still a debate about what 5G is and what it will mean. Perhaps the most bullish and intriguing thesis is that 5G could eventually replace cable companies' fixed broadband delivery. That would be an incredible boon for companies with 5G capabilities and a potential danger for players such asComcastandCharter, whichdominate this space. Interestingly, those two companies recently teamed up to offer wireless service and coordinate on similar technology platforms going forward. This is intriguing, and could be due to this potential threat as wireless operators move into cable and vice versa.
Image source: Getty Images.
Cowen & Co.'s analyst Colby Synesael recently discussed this phenomenon ina 25-minute video, in which he concludes that 5G could very well be a cable killer, but will not arrive until 2020 or later, and then only in developed countries such as the U.S. Also, the 5G buildout is likely to be complex and expensive.
In the presentation, he notes that 5G will initially incorporate millimeter-wave spectrum (the kind that Straight Path owned), but will eventually be available on all spectrum waves.The government is likely to open up even more spectrum for 5G deployments in the years ahead.
One might ask, then, why Verizon just paid $2.2 billion for these spectrum assets, when 5G will eventually become available on mid-band spectrum as well. Probably because even at $2.2 billion, the price paid for Straight Path's spectrum amounted to a rate of less than a penny per megahertz per person.
This is in contrast to the recent auction the Federal Communications Commission held for the 600 MHz band, where that spectrum went for $0.93 per MHz-POP. So, Verizon is paying up now to likely be the first -- though not the only -- company to build out 5G, which will require this millimeter-wave spectrum for the first part of the network.
Conclusion
Verizon shelled out $2.2 billion in stock for spectrum that will allow it to be a leader in the race for 5G. It's still unclear how much this will mean for its network superiority and its earnings in the 2020s, but investors need to keep an eye on the 5G race, as it will likely transform many big industries as we know them.
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Billy Duberstein owns shares of AT&T. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends Time Warner, T-Mobile US, and Yahoo. The Motley Fool has a disclosure policy.