Why T-Mobile wants Verizon’s discarded 4G airwaves

Why does T-Mobile want to build an LTE network using frequencies Verizon hasn’t touched in six years? There are several reasons, but the main one has to do with the different stages the two carriers are at in their LTE rollouts.

T-Mobile(s tmus) just agreed to pay $2.635 billion for Verizon Wireless’s neglected 700 MHz airwaves, and to boot T-Mobile kicked in some valuable higher-band spectrum it originally planned to use for LTE and HSPA+. According to BTIG analyst Walter Piecyk, the package deal amounts to a 38 percent premium over what Verizon originally paid at auction for the spectrum in 2008.

That’s a lot of money for spectrum that Verizon Wireless no longer wanted and that much of the wireless industry had written off as sub-par airwaves. But the value of spectrum to any given carrier is all in how you look at the network.

When Verizon first gained its 700 MHz windfall last decade, it talked a lot about how the low-frequency licenses amounted to owning “beachfront spectrum.” Low frequencies propagate further, making it ideal for building a coverage network that can reach for miles in rural areas and penetrate walls in urban jungles.

Carmel beach

Verizon used the biggest chunk of its 700 MHz holdings to power its initial nationwide LTE rollout, but even as that network neared completion it let a significant amount of spectrum, called the lower 700 MHz band, languish. Instead it turned its attention to the higher-band 1700 MHz/2100 MHz airwaves owned by the cable companies. In order to get regulators to sign off on the cable airwave deal, Verizon agreed to sell off its remaining dormant 700 MHz holdings.

Why would Verizon part with beachfront spectrum it already owned, to spend billions buying these cable airwaves? It’s because it no longer needed them. Verizon had already built out its coverage network to most of the U.S. population. It no longer needed range, it needed capacity, and those high-frequency AWS airwaves were the perfect vehicle for the high-bandwidth network it craved. As I said at the time, Verizon traded in its beachfront property for what it considered penthouse real estate.

We’re already seeing evidence of that with the launch of Verizon’s LTE monster. In urban areas where its subscribers are concentrated and demand is the highest, Verizon has managed to field massive LTE systems that tripled its capacity and doubled its network speeds in many cities like New York, Chicago and Seattle. It never could pulled off that feat with its remaining 700 MHz licenses.

Verizon's LTE coverage in dark red

Verizon’s LTE coverage in dark red

T-Mobile is in the opposite position. It’s in the process of building a very high-capacity LTE network in the big cities using AWS frequencies (networks just as powerful as Verizon’s). But the big knock on T-Mobile has always been that its impressive 3G and 4G speeds disappear once you leave the city limits. These low-frequency airwaves will let T-Mobile build wide-sweeping networks to fill in those gaps.

The reason T-Mobile is acting now to buy those airwaves — apart from having recently raised funds for such acquisitions — is that the 700 MHz airwaves it’s buying recently became much more useful. T-Mobile is getting a portion of the band known as the A-block, which no other nationwide operator is using for LTE.

700 MHz band plan

Until recently, an A-block owner had trouble getting device makers to build smartphones for its airwaves. But a compromise worked out between AT&T(s t) and the FCC has made all the entire lower 700 MHz part of the same interoperable spectrum band. If that band rationalization hadn’t occurred, T-Mobile would have been stuck with orphan airwaves and faced its old problems of getting the latest and greatest devices (remember how long it waited for the iPhone).

Still T-Mobile remains in the market for more spectrum. The Verizon purchase only gives it 700 MHz licenses covering half the country’s population. If T-Mobile truly wants to shed its reputation as being a city-only service provider, it will have to buy a lot more airwaves.