Will the 700 MHz Auction Create as Much Effect as Fanfare?
The conclusion of the Federal Communications Commission (FCC) ’s 700 MHz Auction (Auction 73) received much acclaim. Commissioner Kevin Martin touted the many positive aspects of the auction by making numerous buoyant statements. With $19.59 billion in bids, it was certainly the richest auction ever in terms of revenue generated. (See Verizon & AT&T Win 700 MHz Sweeps.) Considering the long history of U.S. spectrum warehousing, the question remains whether or not this auction will increase broadband access for consumers.
Carriers won a lot of valuable spectrum in this auction. However, the D-Band segment, which had riders requiring that winners provide public safety access needs, did not meet the auction reserve price of $1.3 billion and did not sell. (See FCC Delinks 700 MHz D Block.) The FCC decided to reconsider its options for this band at a later date. The other bands of A, B, C and E all sold, with a total of 1,090 licenses.
There were 101 successful bidders who won spectrum in Auction 73. Of these, a total of 99 carriers, deemed by the FCC to not be nationwide wireless carriers, took home 754 licenses. (See FCC Closes 700 MHz Auction.) Presumably the nationwide wireless carriers were AT&T Inc. (NYSE: T) and Verizon Wireless . And clearly there were some new players in this auction including EchoStar Satellite LLC bidding through Frontier Wireless LLC, which garnered 168 E-Block licenses. And numerous smaller winners, including Cavalier Wireless, James Valley Cooperative Telephone Company, and Pioneer Telephone Cooperative, Inc., placed successful bids. One definite positive was Google (Nasdaq: GOOG)’s success in lobbying for the opening of device and application access in the C Block. (See Google Lauds 700 MHz as a Consumer 'Victory'.)
Looking at the list of winners, local telephone companies and cooperatives are well represented, while pure broadband players seem lacking. Of 428 Rural Service Licenses auctioned, 75 new players bagged 305, which is very encouraging for potential rural deployments.
However, the giants prevailed. Verizon won the C-Block license, among others, bidding over $9 billion in this auction. AT&T spent $6.6 billion to acquire spectrum, mostly in the 12 MHz swath of the B Block, which is largely adjacent to the 12 MHz of spectrum it purchased last year from Aloha Partners LP — in practice giving AT&T a 24 MHz band of frequencies in many markets. And Qualcomm Inc. (Nasdaq: QCOM) added to its 700 MHz holdings, likely for use in its MediaFLO video product, which it broadcasts in the 700 MHz bands. Other large bidders include CenturyLink Inc. (NYSE: CTL), Cox Wireless, Inc., King Street Wireless, LP, MetroPCS 700 MHz, LLC, and Vulcan Spectrum, LLC, owned by Paul Allen.
The past revisited
So what effect on service to consumers will the distribution and type of spectrum winners mean for buildouts using 700 MHz? And what does this auction mean in the context of the overall availability of commercial spectrum? There are several places to look for hints.
First of all, there is a construction buildout requirement of four years on these licenses, designed to accelerate the use of the spectrum. But extensions have commonly been granted by the FCC in the past. On the other hand, it is also true that there exist spectrum clearing issues that will slow deployments. Broadcast TV stations are not required to completely vacate the band until February 2009. So in some markets even the very best intentions for buildouts could take a while.
One great source of clues to carrier intentions is to look at past 700 MHz auctions. There have in fact been six of them: Auctions 31, 33, 38, 44, 49, and 60. These have been relatively smaller auctions; the largest holder of 700 MHz spectrum prior to Auction 73 was Aloha Partners LLC, which held 12 MHz of spectrum in numerous Top 100 markets. The majority of these smaller licenses also went to smaller phone companies, Telco cooperatives, and rural providers.
Some of these carriers have spectrum clearing issues to contend with. But a number of firms launched early broadband service in the 700 MHz range using proprietary equipment. CTC Telcom in Wisconsin provides service for several hundred customers using 700 MHz broadband radios, which it has done for several years. Another firm, Cameron Communications in Cameron, Louisiana, is testing gear for its spectrum. Among large companies, Qualcomm has widely deployed its 700 MHz service, MediaFLO, a PCS video product it wholesales to other major carriers. In terms of rural buildouts where independents won licenses, prompt buildouts may not only be possible but appear to be likely. So, will 700 MHz spectrum be deployed to help drive broadband to American consumers? Yes, perhaps even a good number, in fact. But it will likely be mostly by smaller firms. What the major carriers ultimately choose to do with their 700 MHz spectrum is not certain. But once again history gives clues.
Lack of spectrum is a myth
There is a tradition in America of spectrum warehousing by major carriers with the financial resources to do so. Why?
In general it sometimes makes sense for one major carrier to spend a little money to prevent the possibility of later facing a major carrier competitor in a given market. Spending billions to defray potential competitors seems to make no sense, but relative to the market caps of the companies involved, it can seem like small beans to nationwide carriers.
We commonly hear in the media and from industry sources that there is a lack of licensed spectrum. But this is really a lack of licensed spectrum for smaller carriers to launch businesses. If the wireless assets of a given major carrier are looked at across all of the frequency bands it owns — most commonly 800 MHz, 1.7 GHz, 1.9 GHz, 2.3 GHz, and 2.5 GHz — there are markets where carriers can own over 100 MHz of spectrum, and chunks of that may be completely unused. There are many markets in the U.S. where over 50 MHz of spectrum lies completely unused, for example Sprint’s 2.5 GHz spectrum assets.
Part of why spectrum warehousing opportunities occur has to do with the size of licenses purchased. Typically, in most spectrum ranges the FCC will auction national licenses, then regional licenses, and then smaller license segments. Major carriers will often try to control the larger license segments in order to lock out a competitor, likely reasoning that smaller license holders pose little threat. So if a carrier has no pressing business need or business case (for some smaller markets) to immediately deploy in an area, this spectrum remains unused. Sometimes the auction rules play a part — as has been claimed in this 700 MHz auction — where bidding rules prevented carriers from shifting from small-market bids to regional bids in some cases, resulting in larger regional bids costing less than some small market bids.
At the end of the day, does this auction signal a major change in business-as-usual for the U.S. wireless industry? It seems unlikely.
— Tim Sanders is President of TheFinalMile, Inc., a broadband wireless consulting group. His experience came from running a multistate Wireless ISP. He can be reached at [email protected]