Spectrum

FCC Signals Spectrum Auction Players: Let the Games Begin

On Friday, January 7, 2000 the FCC released its decision establishing a new 700 MHz wireless service, setting the stage for a spectrum auction expected by congressional budget writers to raise $2.6 billion for the U.S. Treasury. This FCC action has significant implications for a number of telecommunications and Internet-related companies. Among other things, the auction will provide an opportunity for interested companies to obtain needed spectrum. Second, the FCC has adopted rules that may well hold the best hope yet of liberating computers from all those wires presently needed to provide high speed access to the Internet.

A first look at the rules shows that Internet players have done well. In filings prior to the decision at the FCC, Internet interests maintained that the new 700 MHz spectrum – taken from the UHF television broadcasters presently operating over Channels 60 to 69 – would have to be apportioned in very substantial blocks in order to achieve viability as a competitive source for high speed data. (Existing television broadcasters are licensed in increments of only 6 MHz.) The new rules allow for two licenses per "economic area grouping," one permitting operation over 20 MHz of bandwidth and the other over 10 MHz.

This is certainly a positive development for those advocating "fat pipes" needed for broadband applications. Further, a single telecommunications company may hold both licenses, meaning that one player can utilize the full 30 MHz. This is another win for the Internet camp in that the 30 MHz bandwidth is generally seen as adequate to support high speed data uses.

In delineating the geographical service areas of licensees, the FCC handed Internet interests yet a third plumb. Only six mega-geographic service areas were apportioned throughout the entire United States. These license areas ("economic area groupings") were designated by region of the country: Northeast, Mid-Atlantic, Southeast, Great Lakes, Central/Mountain and Pacific. By contrast, the Commission could have used any number of smaller market definers in setting license boundaries. Doing so, however, would have increased the difficulty of establishing a solid competitive Internet presence within a region. For example, if "regional economic area groupings" had been chosen, there would have been twelve service areas, twice as many as the FCC adopted. Had the Commission elected "economic areas" to define the limits of a licensee’s authorized footprint, there would have been 172 geographic service areas. Critics, however, saw the delineation of smaller, more numerous service areas as a form of "balkanization" of markets that would retard the delivery of a competitive wireless Internet service.

At the same time, there are aspects of the FCC’s choice of service areas that benefits "traditional" carriers. The Commission’s market demarcation is significantly reminiscent of the regional market areas served by the original Regional Bell Operating Companies. This dimension of the FCC’s decision should be well received in the wireline and traditional commercial wireless communities. In those quarters, 700 MHz is seen as a potential launching pad for third generation wireless and as a means of expanding existing market share in the more established uses of wireless telephony.

There are three other features of the rules that score winning points for the established telecommunications players and which set up a potential battle of the titans over these licenses. First, the FCC decided to impose no restrictions whatsoever on the licensing of incumbent local exchange companies. This is a major policy victory for incumbent LECs and is likely to contribute to a robust auction environment. Second, the FCC decided against applying the commercial wireless spectrum cap (limits on licensable bandwidth per market). That is a very favorable development for existing wireless providers. It permits them full rein to bid on some or all of the six geographic areas, for either the 10 MHz license, the 20 MHz license, or both. Finally, in another move likely to drive up the bidding war, the FCC is granting cable television system operators the unencumbered right to be licensed in the new 700 MHz service. This can only make congressional budget balancers gleeful as they look toward the expected yield from the FCC’s auction, likely to take place this Spring.

So what about the entrepreneurs? For those entrepreneurs that do, the FCC has provided some substantial incentives. Companies having annual gross revenues over the preceding three years of $40 million or less, will be entitled to a bidding credit of 15%. This means that for every dollar bid, the bidder need actually pay only 85 cents, if it ultimately wins a license. Similarly, companies that are even smaller (annual gross revenues of $15 million or less averaged over the preceding three years) will be given a 25% bidding credit. Also, it is possible for small companies to join together and form a consortium of bidders. So long as the consortium is properly formed and operated, the gross revenues of the consortium members will not be added together for purposes of determining eligibility for bidding credits.

In its decision, the FCC also suggested that start-up players interested in obtaining merely a partitioned portion of one of the six license areas could enter agreements with bidders prior to auction, for the post-auction partitioning of one of the megamarkets.

One remaining piece of the FCC’s work on 700 MHz was left undone. While the Commission is bringing 30 MHz of bandwidth to market immediately, there is an additional 6 MHz that will not now be released and which remains under study. That portion will eventually be sliced into one 4 MHz license and one 2 MHz license. An innovative new concept called "band management" is under consideration for this unresolved portion of the spectrum. Should band management be adopted, it might allow a licensee to use some of its 6 MHz for its own industrial use, then lease any excess capacity to other private users. Or, the band manager might simply lease all its spectrum to third parties. The proposal has generated controversy and enormous staff resources at the Commission. Its eventual outcome remains unclear. One thing is clear, however. When the gavel falls at the FCC’s 700 MHz spectrum auction this Spring, the competition will be intense and the stakes extremely high.