Verizon trading beachfront spectrum for penthouse airwaves

Verizon Wireless(s vz)(s vod) has long talked up its extensive 700 MHz holdings as the crème-de-la-crème of 4G spectrum, referring to them on numerous occasions as “beachfront property,” compared to the more modest spectral real-estate many of its competitors own. But on Wednesday Verizon revealed it planned to sell off many of its beachfront 700 MHz licenses in exchange for permission to buy the very same low-rent spectrum it’s derided in the past.

At Verizon’s earnings call Thursday, CFO Fran Shammo tried to explain the logic behind that move, claiming that the Advanced Wireless Services (AWS) airwaves it’s buying from its cable partners is better suited to the kind of urban capacity infill Verizon will embark on in the next phase of its LTE rollout.

Shammo also countered claims that Verizon was merely hoarding spectrum to keep it out of its competitors’ hands. When Verizon picked up all of its 700 MHz spectrum in 2008, the AWS airwaves had all been auctioned off. Shammo said there is no way Verizon could have known the cable operators would be willing to part with their veritable goldmine of 1700 MHz/2100 MHz AWS licenses. In short, Verizon is trading up on the airwaves.

“The lower 700 MHz, A and B [blocks], does not fit as nicely into our spectrum holdings as it may for others,” Shammo said. “We think it’s the prudent thing to do to sell these licenses off to the rest of the industry to the benefit of their customers and to enhance their ability to build out 4G LTE. We would say we’re being good stewards. We did not just wake up yesterday and decide we were going to sell spectrum because we ran into a roadblock at the FCC.”

Shammo’s reasoning may sound suspect, given all of the hype Verizon has pumped into its 700 MHz band. Yes, Shammo is backtracking, but his logic is still sound. 700 MHz is definitely the superior spectrum, but Verizon doesn’t need reams of it to build its 4G network.

When 700 MHz matters and when it doesn’t

The advantage of 700 MHz is its propagation – lower frequencies can carry a signal miles from the tower without it succumbing to white noise – but that type of spectrum is really only useful in the vast spaces between urban markets where Verizon wants to place big towers miles apart. In urban areas that propagation advantage is nullified because high mobile-broadband demand requires operators to build very dense networks of closely packed cells.

Sure, Verizon could install a single tower covering of all downtown Manhattan, but that would mean every trader on Wall Street would have to share a single cell’s worth of capacity, about 50 Mbps. To adequately cover a city like New York, Verizon needs to install thousands of LTE cell sites, and when you’re talking that kind of density it doesn’t matter how well your signal carries over distance. Lower frequencies do penetrate walls better, but again at urban cell densities, the differences between 700 MHz and AWS are negligible.

Verizon isn’t dumping all of its 700 MHz spectrum. It’s keeping its big C-block nationwide license, over which it and its partners are building a LTE networks blanketing the country. After that’s complete it will use its additional spectrum – whether it’s Verizon’s extra 700 MHz blocks or the cable operators AWS airwaves – as capacity infill in urban areas where the bandwidth is most needed and propagation is a non-factor.

If all things are equal, then why bother swapping out one band for another? Well, for one thing, the cable operators own a lot more AWS spectrum in key markets than Verizon owns A-block and B-block 700 MHz licenses. Also, as I explained in my post Wednesday, 700 MHz is a pretty messed up band, and Verizon will have a lot easier time deploying its urban networks over AWS than it would if it tried to contort 700 MHz into a unified band. By buying the cable operators’ spectrum, Verizon can focus its 4G efforts on two big problem-free bands rather than a mish mash of frequencies (and in the process kill off the last hope we’ll ever see interoperable phones at 700 MHz).

LTE chugging along

Verizon sold 6.3 million smartphone sales in the first quarter, traditionally a slow three months coming off the holiday season. As in the fourth quarter, though, Apple’s(s aapl) iPhones continued to outshine its growing portfolio of LTE devices. It sold 3.2 million iPhones, compared to 2.1 million LTE Android (s goog) smartphones. Overall it added 2.9 million LTE devices to its brand new 4G network — which now covers 209 million people in 230 markets — and at least a few of them were new 4G iPads.

The iPad went on sale right before the end of the quarter, but Shammo said that Verizon did see a surge in tablet activations in that short period and expects the iPad to have an impact on LTE device sales in the current quarter. Verizon sold 390,000 tablets in the first quarter.

In total, Verizon now has 8 million LTE devices on its network, two-thirds of which are smartphones. LTE connections now account for 8.6 percent of its total retail customer base. For the quarter, Verizon added a net total of 501,000 contract customers, and ended March with 93 million retail customers (it has a lot more M2M and wholesale connections but Verizon has stopped counting them in its earnings statements).

On the wireline side of the house, Verizon Communications continued to boost its FiOS fiber-to-the-home penetration, adding 180,000 TV and 193,000 Internet customers. Verizon is now is now in 5.01 million homes as an Internet service and 4.35 million homes as TV service, giving it a penetration well over 36 percent.

Bull image courtesy of Flickr user turtlemom4baconBuilding image courtesy of Flickr user wwarby.