to purchase nearly $2 billion worth of prime wireless spectrum licenses from Qualcomm. AT&T, the second largest mobile service provider in the country, will use the spectrum for its next-generation, high-speed wireless service.

The spectrum won’t be usable by current iPhone customers, due to hardware compatibility issues and the time it takes to deploy new equipment. But it will likely be usable by the next generation of iPhones and other smart phones. AT&T said it “expects to begin deploying this spectrum once compatible handsets and network equipment are developed.”

Qualcomm, the San Diego-based wireless chip giant, had previously announced plans to restructure its FLO TV mobile broadcast business. That service, which currently uses the spectrum, will be history by March of 2011.

The $1.925 billion deal covers some seriously valuable radio frequencies — it’s often referred to as “beachfront” or “waterfront,” so let’s call it the French Riviera of wireless spectrum.

All told, the spectrum on the table covers more than 300 million people nationwide. One chunk, the 12 MHz of lower 700 MHz D and E block spectrum, covers more than 70 million people in New York, Boston, Philadelphia, Los Angeles and San Francisco.

Urban dwelling-AT&T wireless customers will be pleased to learn that the lower 700 MHz spectrum works well in cities, something that can’t universally be said for AT&T’s existing wireless service.

“It provides a very strong signal inside buildings and it’s extremely good at penetrating walls and windows,” as Sanford C. Bernstein analyst Craig Moffett told Bloomberg.

Another 230 million people across the country are covered by 6 MHz of lower 700 MHz D block spectrum. (In 2007, Conde Nast Portfolio put together a handy graphic explaining the 700 MHz band. You can see the D and E blocks hanging out down there in the lower 700 MHz section.)

Qualcomm bought 6MHz blocks of spectrum nationwide in the 700MHz band in 2003 for about $130 million and spent another $555 million in 2008 to get even more, according to Gleacher and Co. analyst Mark McKechnie.

AT&T intends to use the spectrum to support its so-called 4G Long-Term Evolution service, which will compete with Verizon’s own recently-launched 4G LTE offering. 4G offers significantly faster data speeds than the 3G service most smartphone users in the U.S. now use. The lower 700MHZ D and E blocks are particularly useful for AT&T because they are adjacent to spectrum chunks that AT&T already owns, according to Stifel Nicolaus Managing Director Rebecca Arbogast.

McKechnie called the deal a win-win for both AT&T and Qualcomm. The mobile giant will get “much needed spectrum” and is now “better suited to respond to Verzon’s LTE launch.” Qualcomm, meanwhile, is getting a “nice return” on assets that had been valued at $746 million on its balance sheet.

“We had expected $1 billion-plus for the assets, and therefore $1.925 billion represents a good price,” McKechnie wrote in a note to clients. “We view this spectrum in AT&T’s hands as a much better use of the spectrum, which should support smartphone growth in the US for years to come.”

Now, you may be wondering if it’s a good idea to concentrate all of this valuable spectrum in the hands of the largest mobile service providers in the country. After all, Verizon Wireless and AT&T were the big winners in the FCC’s crazy 2008 700MHz C Block auction that raised nearly $20 billion for the federal government.

Federal regulators will certainly scrutinize this deal, which isn’t even expected to close until the second half of 2011.

“From a competition policy perspective, the deal will be controversial,” Arbogast wrote in a note to clients. “But ultimately, we believe the government will allow it because from a spectrum management perspective it makes sense.”

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Authors: Sam Gustin

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