Elon Musk Just Delivered Great News to SpaceX Investors and Bad News to Traditional Telecom Investors
Key Points
The low-band spectrum consists of radio frequencies that travel better through walls and solid structures, making it ideal for Starlink's mobile service.
SpaceX plans to develop a hybrid mobile service that combines Starlink's satellite infrastructure with a built-out ground infrastructure network.
It could eventually make SpaceX more of a threat to the traditional telecom giants.
Space Exploration Technologies Corp (NASDAQ:SPCX) recently announced plans to acquire a low-band spectrum portfolio that will better enable it to broadcast the internet through walls and other solid structures.
SpaceX is acquiring the portfolio from the communications infrastructure company Grain Management for reportedly $8 billion. The deal requires regulatory approval from the U.S. Federal Communications Commission.
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In a statement, SpaceX said the acquired portfolio contains up to 14 megahertz of paired spectrum in the 800 MHz band.
"This is the last critical piece of the spectrum puzzle needed for SpaceX to provide complete phone coverage in America," SpaceX Founder Elon Musk wrote on X.
Here's why this is great news for SpaceX investors and bad news for traditional telecom investors.
Image source: The White House.
Starlink is now more of a threat
SpaceX's low-Earth-orbit satellite internet network, Starlink, has made waves, particularly in rural areas, where it has an edge over the big three telecom players, Verizon, AT&T, and T-Mobile.
Because rural areas have less internet infrastructure, such as cell towers and fiber, Starlink's satellite coverage is often superior. It can also provide service in dead zones where the carriers have no signal.
Starlink was available in over 200 countries and had garnered over 12 million subscribers as of June 30.
But SpaceX still needs spectrum to transmit signals. Prior to this deal, the company had purchased mid-band spectrum for wireless transmission and high-band spectrum for data transmission.
The low-band spectrum is well-suited for carrying signals over long distances and through walls and other solid structures, which could improve indoor performance for Starlink Mobile once SpaceX builds out a ground network.
This could eventually make SpaceX more competitive in the mobile market, which is why shares of Verizon, AT&T, and T-Mobile were all getting hit hard on news of the deal.
The traditional telecom players make most of their money from wireless and mobile service plans, so just the threat of a new competitor will spook investors.
Now, this doesn't mean SpaceX will be able to compete overnight, because it still takes time to build out a ground network for mobile service, including installing antennas on towers and rooftops, equipment to connect them, and other issues, such as ensuring all phones are compatible.
"We do not expect SpaceX to materially impact operating results of the big-3 Telcos until at least 2029," Citigroup analyst Michael Rollins wrote in a research note, according to Barrons. "Whether the aspirations are to be in the device-to-device or device-to-cell market is still up for debate, but as we have said before: It sounds bad, and we can't disprove it, so the negative narrative is expected to rule the day."
A shifting industry
From a financial perspective, Starlink is currently the best-performing business at SpaceX, so the potential to offer enhanced mobile service is great news for investors.
While all the hype surrounding SpaceX involves artificial intelligence, Starlink is the most proven business, and Musk said on SpaceX's last earnings call that he thinks Starlink at some point "will deliver a majority of the world's Internet."
Meanwhile, investors view the traditional carriers as operating in mature, slow-growing businesses, and all have significant debt. The potential emergence of Starlink as a key mobile competitor is the last thing these companies need.
It may force them to cut prices to defend their market position. Again, it's still hard to know SpaceX's exact plan or how long it will take them to build out their ground network, but investors are in the business of predicting the future, so they have to try to look ahead.
Citigroup is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.