By Marguerite Reardon / CNet News
The Federal Communications Commission on Wednesday is expected to begin setting rules for one of the most important wireless spectrum auctions in the foreseeable future.
The new rules, which determine how to divvy up licenses and actually auction them off for the coveted 700MHz wireless band of spectrum, will likely shape the competitive communications market for decades to come, experts say.
The 700MHz band of spectrum, which has been used to provide analog TV service, is considered the last piece of prime real estate left in wireless spectrum. And mobile operators, as well as companies in other industries such as cable and satellite TV, are expected to bid on licenses. The auction is likely to generate between $10 billion and $15 billion in revenue for the government.
Since Congress decided in 1997 to re-auction the 700MHz spectrum used to transmit analog TV signals, communication policy makers have viewed this sliver of the airwaves as a panacea to all the nation's broadband-access problems. The reason is simple. By nature, on the 700MHz frequency band, signals travel about four times farther than those on bands used by the wireless and electronics industries today. Reusing that spectrum could mean easier and cheaper deployment of broadband networks, which should translate into more affordable and widespread high-speed Internet access for consumers.
For years, policy makers have argued that new regulation in the broadband market is unnecessary because new entrants could use the 700MHz spectrum licenses to cost-effectively build broadband services that will compete directly against the cable and phone company broadband duopoly. Others see the spectrum as a perfect way to fill holes in rural cellular phone coverage, because operators serving rural areas with this spectrum would cover more ground with fewer towers. And finally, the 700MHz spectrum could be used by new carriers that want to build 4G wireless networks, using technology such as WiMax, that will leapfrog 3G wireless services of today.
Giving new entrants a fair shot
With so much hope riding on this one sliver of spectrum, getting the rules of the auction right is essential. "This auction is incredibly important," said Harold Feld, senior vice president of Media Access Project, a nonprofit law firm representing a coalition of public interest groups before the FCC. "Pretty much everyone agrees this is the last big piece of spectrum to be auctioned off for the foreseeable future. And if you don't get the rules right, the existing players could control the auction and then nothing in our wireless broadband future will change. But if they do get them right, there is great potential for some dynamic innovation."
Congress has set a deadline of February 2009 to make the switch from analog to digital TV, freeing up the 700MHz band of spectrum. The FCC hasn't set an auction date yet, but under the Digital Television and Public Safety Act of 2005, it's required to start auctioning the remaining unsold spectrum by January 28, 2008. The auction will consist of 60MHz of spectrum in the 700MHz band. The government has also set aside about 24MHz of the analog spectrum for public safety purposes.
As the deadline to begin the auction approaches, consumer advocates have come out of the woodwork to ensure that new entrants get a fair shake in the auction. "The rules are important because they determine the winners of the auction," said Jeannine Kenney, senior policy analyst at Consumers Union.
Joe Farren, a spokesman for CTIA, an industry trade group representing the cell phone industry, agrees the spectrum auction rules are important. But he believes that no special parameters need to be implemented to protect new entrants. "The overall suggestion that the wireless market is not competitive is unsupported," he said. Farren added that wireless is also proving to be a strong competitor to traditional wire-line broadband services like cable modem and DSL service. "A February report from the FCC said that 59 percent of new high-speed access lines came from wireless," he said. "That statistic suggests that wireless is growing faster than cable or DSL combined. So there is already an alternative."
But critics point out that four of the nation's largest broadband providers also have a stake in a mobile wireless provider. This means that even if wireless broadband competes with fixed-line broadband, those services are likely provided by the same companies offering DSL or cable modem service. With the acquisition of BellSouth, AT&T now owns all of Cingular Wireless, making the new AT&T the largest wire-line telephone and cell phone operator in the country. Verizon Wireless is majority owned by Verizon Communications, which is the second-largest phone company in the nation. And Comcast and Time Warner, the No. 1 and No. 2 cable operators in the nation, respectively, are in a joint venture with the third-largest wireless operator in the country, Sprint Nextel.
Control by the incumbents?
Consumer advocates say some of these vertically integrated communications companies used the rules to manipulate the outcome of the most recent wireless spectrum auction. The Advanced Wireless Services auction, held in the summer of 2006, sold 90MHz of spectrum licenses in the 1710-1755 and 2110-2155MHz bands, which had been used by military and law enforcement. Many in the industry deemed the AWS auction a huge success, since it raised almost $14 billion for the government. On Monday the public-interest law firm Media Access Project issued a study analyzing the bidding history in the AWS auction. "Recent history with the AWS auction shows that large incumbent carriers were able to control the outcome of the auction," said Kenney of Consumers Union.
In the report, Media Access Project described how incumbent broadband carriers and mobile operators successfully blocked potential new competitors, including a consortium formed by satellite TV providers EchoStar and DirecTV. The way it worked was that several operators, like T-Mobile and Cingular Wireless, would target key bidders with "retaliatory" bids. And once the competitive bidder dropped out of the auction, most of these other bidders would also drop out of that auction, leaving only a couple of bidders.
Wireless DBS, which was formed by EchoStar and DirecTV, dropped out after the 11th round of bidding. And a group backed by the Dolan family, which controls Cablevision Systems, was also targeted and withdrew from bidding after 20 rounds. Meanwhile, SpectrumCo, the consortium formed by Comcast, Time Warner Cable, Cox Communications, Advance/Newhouse Communications and Sprint Nextel, won about 61 percent of the licenses on which it bid, according to Media Access Project. T-Mobile and Cingular, which also used this targeting tactic, also ended up with significant slivers of bandwidth from the auction, the report notes. "The blocking behavior was very targeted," Feld said. "And the fact that on most occasions once the new entrant dropped out of the bidding so did the other bidders indicates the purpose was to control the bidding process and block new entrants from amassing spectrum. And it worked."
Media Access Project along with several other consumer advocacy groups have formed a coalition, called Save Our Spectrum, to fight for new rules to protect new entrants in the bidding process. The group filed a proposal with the FCC earlier this month, which recommends, among other things, that the FCC adopt anonymous bidding to alleviate the issue of targeted bidding. "Anonymous bidding would help solve a lot of these issues," Feld said. "In particular, it would help new entrants seeking to build a national footprint." While open versus blind, or anonymous, bidding is likely to be hotly debated for the 700MHz spectrum, Feld said it isn't likely to be resolved during Wednesday's meeting. Instead he believes the commission will handle some of the most basic rules for the auction, such as establishing the geographic size of the licenses.
Companies looking to establish a nationwide footprint, such as the satellite TV providers, are likely pushing for fewer, larger licenses. Smaller licenses benefit rural carriers because they reduce the cost of the licenses, allowing smaller players--often companies already serving rural areas--to afford the price. They are also good for large operators, like AT&T and T-Mobile, that are looking to fill gaps in their coverage areas.
The FCC will likely offer a mix of large and small licenses, much like it did for the AWS auction that took place last summer, Feld predicts. He also predicts the commission will also seek public comment on a proposal submitted in late February by a company called Frontline Wireless, which wants the FCC to block off a 10MHz chunk of the 700MHz spectrum for companies interested in building a nationwide infrastructure to support a broadband network for public safety agencies. The licensee would also be required to allow open access, offering the spectrum to local public safety agencies on a wholesale basis.
"Wednesday represents the first cut on how the FCC will proceed and the general direction it will go for the auction," Feld said in his blog posted Tuesday. "Will it favor the incumbent push for large license blocks and open bidding? Will it allow the Frontline proposal to go forward?"
