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In a letter sent out to customers who still have 2G devices, AT&T told these people that their older devices “might not be able to make or receive calls and you may experience degradation of your wireless service in certain areas.” The carrier says that upgrading to 3G or 4G smartphones is entirely voluntary for now, although AT&T spokesman Mark Siegel told MarketWatch that it has plans to use some of its current 2G spectrum for LTE deployments.

AT&T has been working on multiple fronts to either acquire or free up more spectrum for its LTE network, including its failed attempt to merge with T-Mobile and its aggressive lobbying of the Federal Communications Commission to free up additional spectrum. The failed T-Mobile merger actually wound up costing AT&T a significant chunk of potential LTE spectrum as it had to forfeit 7MHz of spectrum on the AWS spectrum band (1750MHz to 1755MHz for uplink, 2110MHz-2155MHz for downlink) as compensation.

AT&T currently has solid spectrum depth on the prime 700MHz band but will need to free up more LTE spectrum if it wants to match the amount of LTE spectrum currently available to rival carrier Verizon.

AT&T’s quest for more LTE spectrum also received a boost recently when the House of Representatives passed legislation authorizing the FCC to conduct spectrum auctions. The legislation prevents the FCC from excluding carriers from bidding on certain spectrum blocks in the name of preserving competition. AT&T first launched its LTE services commercially in five cities last summer and has been steadily extending its reach to major markets such as New York and San Francisco.

In 2010 the FCC set a goal to make 300MHz of spectrum available for wireless broadband use over the next five years with the eventual goal of freeing up 500MHz of spectrum by the end of 2020. The FCC has said that it could reach 300MHz by reallocating 120MHz of spectrum currently used by television broadcasters, with 90MHz coming from mobile satellite providers, 10MHz coming from the 700MHz “D Block,” 60MHz coming from the AWS band and 20MHz coming from the Wireless Communications Service band.

The FCC has projected that growth in wireless data demand will lead to a “spectrum deficit” of 275MHz if no new spectrum is released by 2014. There is currently 547MHz of spectrum available for dual use in mobile voice and data services.

Those carriers with the biggest batches of high-quality spectrum have more bandwidth to satisfy customers’ growing demands for mobile phone calls, texts and Internet usage. That means fewer dropped calls and faster download speeds.

Those that don’t? Picture a repeat of what happened to AT&T shortly after the iPhone 3G debuted. The data overload crippled the network, leading to spotty reception and slow speeds in some regions.

“Wireless operators have to decide whether they spend money acquiring new spectrum or building tens of thousands of new cell sites all over the country,” says Dan Hays, a partner at PricewaterhouseCoopers’ consultancy. “That’s the big dilemma.”

Both of those options cost billions. There’s a third choice: consolidate. By merging, carriers can gain access to both spectrum and more cell sites.

That can also cost billions, but it’s a turn-key solution.

“You get economies of scale, and that buying power advances the kind of network you can have,” says Akshay Sharma, analyst at Gartner.

There’s just one glaring problem with that scenario: Regulators hate it.

AT&T’s failed $39 billion bid for T-Mobile was largely aimed at getting its rival’s spectrum. The Department of Justice and the Federal Communications Commission killed the deal, saying it would be too damaging to wireless competition.

That put the entire industry on notice: The carriers will have to solve their problems without any blockbuster takeovers.

The regulators’ main concern was that the deal would take the ranks of national carriers down from four to three. That’s why experts now expect the big players to focus instead on acquiring smaller, low-cost carriers like MetroPCS and Leap Wireless. Their spectrum could relieve capacity issues in large metro areas, which are the places most crippled by the crunch.

Industry analysts also think that Sprint and T-Mobile could gain approval to merge, though that’s a bit like two drowning victims clinging together. Sprint is losing piles of money every quarter, while T-Mobile is hemorrhaging customers with contracts.

Another possibility is that several carriers could partner in a spectrum-sharing joint venture.

But the most likely scenario is that the carriers continue fighting each other to snap up the last remaining large swaths of high-quality spectrum.

Last year, AT&T bought a sizable chunk from Qualcomm, which the chip company had used for its failed Flo TV venture. Verizon recently agreed to pay $3.6 billion to buy spectrum from a consortium of cable companies.

That means there are only two commercial holders left of big spectrum chunks: The Dish Network and LightSquared.

LightSquared, a venture-backed company that wants to build its own nationwide wireless network, has vast ambitions and an equally gigantic problem. Its spectrum is only licensed for satellite services, not the terrestrial transmissions needed to carry wireless phone signals. LightSquared is currently caught in — and losing — a high-stakes regulatory fight over the issue.

That leaves Dish. The company has considered building its own wireless network, perhaps by snapping up Sprint or Clearwire, but the costs of doing that are scary. Some analysts think Dish will take the plunge, while others predict that it will go the safe route and sell off its holdings.

Either way, it’s got vultures circling.

“If a competitor doesn’t make it, you can assume that AT&T or Verizon would munch up that competitor,” says Rory Altman, director of technology consultancy Altman Vilandrie & Company.

So who needs Dish the most?

Probably AT&T, which has excellent spectrum but is quickly running out of it in many markets. Rubbing salt in the wound: AT&T had to give T-Mobile $1 billion worth of spectrum as part of the failed deal’s breakup terms.

Despite that gift, T-Mobile still has the least spectrum of all the national carriers. It’s also got the smallest supply of unused airwaves, according to the FCC. It has no path to deploying a 4G LTE network, and its parent company is eager to sell it off.

Sprint has by far the most available spectrum through its partnership with Clearwire (CLWR). But not all spectrum is created equal. Clearwire’s is in such a high frequency band that signals travel very short distances and have terrible building penetration. That means Sprint has to build many more cell towers than it otherwise would.

Experts agree that Verizon is in by far the best position, with ample capacity for the immediate future — particularly if its spectrum deal with the cable companies gains regulatory approval.

The nation’s largest carrier also has the highest-quality spectrum. It’s got a foothold in a large, contiguous band across the nation that experts liken to “beachfront property.” Signals in that band can travel long distances and penetrate buildings. That enviable resource made it possible for Verizon to launch the nation’s first and largest ultra-fast 4G LTE network.

But even Sprint and Verizon will need more spectrum within the next few years.

“You’re seeing a move toward broadband and video on mobile devices,” says Brian Clark, managing partner of MC Partners, a wireless venture capital investor. “There will be continued massive bandwidth needs, so it’s not like companies’ current spectrum holdings are fine and there’s nothing to worry about.”

For the full year 2011, it expects to report revenues of $485 compared to $452 million in 2010.

Analysts polled by Thomson Reuters expected the company to post revenues of $123.42 for the quarter and $485.45 for the full year. Analysts’ estimates typically exclude one-time items.

The company also noted that it is transitioning to a business model focused in technology dependent customers. As part of the transition, Cbeyond is refocusing its go-to-market strategy to leverage its 2010 cloud services acquisitions and better serve the growing number of technology dependent small and medium sized businesses.

Cbeyond is now realigning its distribution channels and establishing two new direct sales groups, one that is focused solely on cloud services opportunities and one that is focused on selling secure networking and cloud based services to technology dependent small businesses. At the same time, the Company is reducing its entry level sales associates and re-purposing a portion of those resources for its new focus.

The company forecasts fiscal 2012 revenues between $485 million and $490 million. Analysts currently expect revenue of $509.74 million for the fiscal 2012.

The airwaves auctions are part of a broad accord reached yesterday by House and Senate members to sustain a payroll tax cut. The sales would raise at least $15 billion for the U.S. Treasury, Representative Greg Walden, an Oregon Republican, said in an interview. Both houses of Congress approved the legislation today, sending it to President Barack Obama for his expected signature.

“By freeing up airwaves to be used to build the next generation wireless networks, this package will support massive job creation and untold technological breakthroughs,” Representative Fred Upton, a Michigan Republican who heads the Energy and Commerce Committee, said in an e-mailed statement.

The auctions proposed by the Obama administration would sell rights to airwaves voluntarily surrendered by television stations. TV companies would keep a portion of the proceeds. Participating broadcasters could leave the business or transmit using other airwaves. Wireless companies would use the airwaves to support mobile phones, tablets and other devices.

‘Save Lives’

The package also would allocate $7 billion and airwaves for a nationwide network for emergency workers, said an e-mailed release from Senator Jay Rockefeller, the West Virginia Democrat who chairs the Commerce Committee. More spectrum for emergency workers was a recommendation of the 9/11 Commission that investigated the 2001 attacks in New York and Washington, when police and firefighters had trouble communicating by radio.

“This agreement will allow us to build a nationwide, interoperable communications network that is as reliable as the first responders that protect us,” Rockefeller said in an e- mailed statement. “It will quite literally save lives.”

Spending on the new network may benefit antenna-building companies American Tower Corp., Crown Castle International Corp. and SBA Communications Corp., Paul Gallant, a Washington-based analyst with Guggenheim Partners, said in a Feb. 15 note.

Airwaves sales may spur investment and job creation, the High Tech Spectrum Coalition, a group with members including Apple Inc., Alcatel-Lucent, Intel Corp. and Cisco Systems Inc., said in an e-mailed statement yesterday.

“Congress has made a great decision that will result in significant investment in mobility and will have a meaningful impact on the creation of jobs with private investment,” Rhod Shaw, executive director of the High Tech Spectrum Coalition, said in an e-mailed statement.

‘Artistic Freedom’

Broadcasters have said they’re concerned TV station owners may face added costs and lose audience if forced to switch airwaves. The legislative measure provides $1.75 billion to compensate for the costs of relocating.

“Tens of millions of Americans rely every day on local TV broadcasters for news, entertainment, sports and life-saving weather warnings,” Gordon Smith, president of the Washington- based National Association of Broadcasters, said in a statement.

“We look forward to working with Congress and the FCC to implement an incentive auction program that does not jeopardize that service,” said Smith, whose group’s members include CBS Corp., Comcast Corp.’s NBC, the Walt Disney Co.’s ABC and News Corp.’s Fox.

‘Public Rulemaking’

Language in the package may make it harder for the Federal Communications Commission to limit participation in the auctions by Verizon, the largest U.S. wireless company, and No. 2 AT&T, Jeffrey Silva, a Washington-based analyst for Medley Global Advisors LLC, said in an interview.

“They wouldn’t have the artistic freedom they’ve had before,” Silva said. “When this started the FCC had carte blanche.”

Under the proposal, the FCC can’t exclude wireless carriers as part of an auction proceeding, Jim Cicconi, AT&T’s senior executive vice president-external affairs, said in an e-mailed statement.

“It could only make such a decision through a separate public rulemaking,” Cicconi said. “This provides procedural safeguards, and also an opportunity for a court challenge.”

Cicconi on Jan. 13 said he was “troubled” that FCC Chairman Julius Genachowski wanted his agency to keep its power to set terms for the auctions.

Biggest Winners

Genachowski said yesterday the agency has sought to develop “fair, effective mechanisms for providing all carriers an opportunity to obtain spectrum.”

“Congress has recognized the vital importance of freeing up more spectrum for mobile broadband, both licensed and unlicensed, although the legislation could limit the FCC’s ability to maximize the amount and benefits of recovered spectrum,” Genachowski said in an e-mailed statement.

AT&T and Verizon were the biggest winners in the FCC’s 2008 auction of airwaves suitable for smartphone use, spending a combined $16 billion. In 2010, the companies objected after the agency restricted their ability to lease airwaves from a company that is now Philip Falcone’s proposed LightSquared Inc. wireless service.

AT&T in December abandoned a $39 billion merger with T- Mobile USA Inc. after resistance from the FCC and Justice Department, which said the combination would lessen competition. In January AT&T Chief Executive Officer Randall Stephenson in an earnings call said availability of spectrum is the “No. 1 issue for us.”

‘Job Creation’

AT&T and Verizon combined had 60.3 percent of wireless subscribers in 2010, according to data compiled by Bloomberg. Verizon Wireless is owned by Verizon Communications Inc. and Newbury, England-based Vodafone Group Plc.

Sprint Nextel Corp., the third-largest U.S. mobile carrier, said in an e-mailed statement that the legislative proposal “preserves the FCC’s ability to promote competition as it conducts future wireless spectrum auctions.”

“Sprint agrees with the Federal Communications Commission that all wireless carriers — small, regional and large –should have a meaningful chance to participate in wireless spectrum auctions,” Vonya McCann, Sprint’s senior vice president for government affairs, said in the statement.

The auctions will help “meet Americans’ voracious appetite for mobile Internet,” Steve Largent, president of CTIA-The Wireless Association, a trade group, said in an e-mailed statement yesterday.

“Mobile data usage is expected to grow by a factor of 16 over the next five years,” Largent said. “The spectrum made available by this legislation is key to meeting that demand.”

Separately, rivals are also asking questions about a Verizon deal with Cox Communications to purchase some of its spectrum for $315 million. In November 2011, Cox announced it was discontinuing its wireless service, citing its inability to compete in the marketplace, and in December it announced that it was selling its 20HMz licenses, covering 28 million people, to Verizon, and that each would become “agents” to sell the others products and services.

“As a result of the incomplete submissions by the applicants, neither the Commission nor interested parties have an adequate basis upon which to assess the public interest implications of the proposed transactions,” according to a Feb. 8 letter to the FCC signed by Sprint and the other above-mentioned parties. Wireless Week first reported the letter and the publication received an advanced copy of the document from the public interest group Public Knowledge.

The letter continued, “The Commission should suspend both the pleading cycle in this proceeding and the informal 180-day ‘transaction clock,’ and reset them to zero once the applicants have provided full disclosure of their arrangements.”

Public Knowledge, along with three companies, asked the FCC on Feb. 7 to stop its review until more marketing-related information is released, said the report.

Facing criticism, Verizon and Cox very quickly submitted marketing details to the FCC, though as sealed files under a protective order.

On Feb. 3, Sprint signed a second letter, essentially saying they’re glad Verizon filed something, but they can’t respond to something that’s not public, so more information is still needed.

On Dec. 2, Verizon announced a deal with SpectrumCo, the joint ventures between Comcast, Time Warner and Bright House Networks, in which Verizon would pay SpectrumCo $3.6 billion for 122 new spectrum licenses for its Long-Term Evolution (LTE) network in exchange for allowing the cable companies to resell its products and services.

“These joint-marketing agreements will turn these rival companies into partners, rather than competitors,” wrote a concerned Sen. Al Franken (D-Minn.) in a Jan. 31 letter to FCC Chairman Julius Genachowski. Franken called on the FCC to hold a hearing to “further analyze the competitive impacts of these deals,” and according to The New York Times’ Bits blog, Sen. Herb Kohl (D-Wis.) agreed that he would.

Gangbuster sales of smartphones and tablets and the rising use of mobile video and other data-crunching applications have created an industry anxious for more spectrum to support users’ habits. In March 2011, AT&T announced its intention to purchase T-Mobile. The smaller carrier’s spectrum would be a great asset in AT&T’s planned LTE rollouts.

In December, however, the FCC released a report finding that the deal—which would have made AT&T the largest network by far—would be damaging to smaller players’ ability to effectively compete and so ultimately hurt Americans, who would face fewer options and higher prices. Following the report, AT&T said it would stop its pursuit for the time being.

In January, during an earnings call, AT&T CEO Randall Stephenson described an FCC that’s “intent on picking winners and losers” and acting as a logjam to progress.

“In the absence of auctions, our company and others in the industry have taken the logical step of entering into smaller transactions to acquire the spectrum we need to meet this demand,” Stephens said during the Jan. 26 call. “But even here, we need the FCC’s action and leadership, and unfortunately, even the smallest and most routine spectrum deals are receiving intense scrutiny from this FCC, oftentimes taking up to a year and sometimes longer before these are approved.”

Sprint CEO Dan Hesse, during that carrier’s Feb. 8 earnings announcement saw the competitive landscape differently, remarking that “the decision of AT&T to abandon its acquisition of T-Mobile clearly provides many more opportunities for us and for companies outside the top two to become much stronger competitors over time.”

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AT&T went down fighting. It warned that consumers will be worse off because of the Federal Communications Commission and the Department of Justice’s successful moves to block the deal.

AT&T claimed that the deal was necessary because of a nationwide wireless spectrum crunch. As smartphones and tablet sales have soared, consumers’ demand for data — and the spectrum that carries it — has grown exponentially.

“The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage,” Randall Stephenson, AT&T’s CEO, said in a prepared statement. “In the absence of such steps, customers will be harmed and needed investment will be stifled.”

Because spectrum is a scarce asset, the wireless industry is scrambling to consolidate, with larger companies buying up smaller companies with big spectrum allotments. Verizon earlier this month bid $3.6 billion for spectrum held by a consortium of cable companies, and Sprint agreed to throw its partner Clearwire a $1.6 billion lifeline.

AT&T’s solution was much grander in scale. The nation’s second-largest wireless provider would have purchased the fourth-largest, creating a megacompany with well over 120 million subscribers.

The FCC and DOJ both sought to block the deal, citing the likelihood of higher prices, worse service, less consumer choice and massive job cuts.

Realizing it would not gain the approvals it needed to buy T-Mobile, AT&T ended its bid — but hinted that it will be forced to buy something else soon.

“Adding capacity to meet these needs will require policymakers to do two things,” Stephenson said. “First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the U.S. wireless industry. Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.”

AT&T is currently vying for regulatory approval of its $1.9 billion spectrum purchase from Qualcomm, but industry analysts say that still won’t be enough to satisfy customers’ long-term demands.

Meanwhile, AT&T will pay T-Mobile’s parent company Deutsche Telekom a $3 billion breakup fee over the scrapped deal. It will also allocate $1 billion worth of spectrum to the company before the year’s end. AT&T also plans to enter into a roaming agreement T-Mobile, which will allow customers of both networks to make use of the other’s network.

That will keep T-Mobile afloat for the near term. But without enough spectrum to deploy a competitive 4G network, and with its parent company determined to sell, the carrier will almost certainly have to merge with someone else.

“For T-Mobile, it’s tough sledding,” said Josh King, general counsel at Avvo.com and former senior corporate development executive at AT&T Wireless. “A Sprint tie-up is definitely possible, as is a sale to [Latin American providers] Telefonica or TELMEX.”

Though a Sprint purchase of T-Mobile would mean the third-largest wireless company would buy the fourth largest, analysts believe that it could get approval thanks to Sprint’s puny size compared with market leaders Verizon and AT&T.

“If they merge with Sprint Nextel, that would build three big competitors,” said Jeff Kagan, an independent telecommunications analyst. “Merging with AT&T would have turned the marketplace into a two-company race.”

Shares of AT&T barely budged in after-hours trading, but Sprint’s stock soared 5%.

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