FCC to Reveal Spectrum Auction Plan

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?"

Will 'unlocked' cell phones free consumers?

By Marguerite Reardon
Photo from PhoneScoop.com

The major cell phone operators' hold on which devices U.S. consumers can use on their networks may be slipping as large manufacturers like Motorola and Nokia dabble in selling "unlocked" phones. Up until recently, unlocked phones--handsets that can be used on multiple carrier networks--have been available only in "gray" markets where Americans have bought phones from overseas. Now manufacturers are selling them on their Web sites and through certain retail channels.
"Cell phones rank just behind keys when it comes to items that Americans don't leave home without," said Albert Lin, an analyst with American Technology Research. "And as cell phones become the most important thing people carry with them through their day, they will look for products that fit their lifestyles better. And believe me, they will want more than 5 to 20 choices. They'll want hundreds of options."

"In general, phone makers do better in markets where the handset purchase is separate from the service purchase."

--Albert Lin, analyst with American Technology Research

Walk into any supermarket in the U.S. and it's easy to see that Americans have more choices, in terms of products they can buy, than most people in the world. But, when it comes to choosing a cell phone, consumers in the U.S. are limited to a handful of devices offered by a few manufacturers, and those devices are sold solely through a single service provider.
This means that Verizon Wireless subscribers are limited to phones sold specifically for the Verizon network. And Cingular Wireless subscribers are limited to handsets that Cingular sells. It also means that when subscribers switch from one service provider to another, they are unable to take their phones with them. This is true even if the carrier they are switching to offers the same phone made by the same manufacturer. For example, a Motorola Razr sold for Cingular's network won't work on T-Mobile's network, even though both Cingular and T-Mobile use the same underlying network technology, GSM.
Worldwide, the cell phone market is split about 50-50 between phones sold through carriers and phones sold through other channels directly to consumers, says Lin. In Asia, about 80 percent of cell phones are sold independently of a carrier. And in Europe, roughly 70 percent of cell phones are sold unlocked. But in the U.S., between 90 percent and 95 percent of cell phones are sold through a mobile service provider.
The subsidy game
The driving force behind the carriers' control in North America is the fact that they subsidize the cost of the handsets. Typically, for customers signing a two-year service contract, operators knock off $50 to $80 from the cost of the phone. As a result, some consumers get phones for free instead of paying $100 or more for a device. This has greatly expanded the market by making phones more affordable, but it's also given mobile operators complete control over the relationship with consumers. The carriers decide which cell phone manufacturers they will work with and which devices they will sell. They also decide which features can be activated on their network. As a result, only a fraction of a manufacturers' total line of products is offered. For example, even though Nokia introduced roughly 50 new products into the market last year, only a handful were offered by operators in the U.S.
"In general, phone makers do better in markets where the handset purchase is separate from the service purchase," Lin said. "More brands compete in lower concentration, which means more suppliers are competing in the market. It's also good for consumers because, in these markets, products come in a wider range of prices with a lot more feature variation."
Last year, Nokia opened several of its own retail stores in the United States, including its flagship store in Chicago. In these stores, Nokia is pushing unlocked versions of its high-end, smart phones. It also sells its fashion phones unlocked through retailers like Neiman Marcus. Stores such as CompUSA are also buying unlocked Motorola, Nokia and Sony Ericsson phones from distributors and selling them.
While it's clear that phone manufacturers are testing the waters in the U.S. market, the companies are reluctant to make a major push that might upset carriers they do business with. "We would welcome a path that provides more direct sales access to consumers, so we can promote our brand," said Bruce Brda, a vice president at Motorola. "But today the carrier subsidizes the phones, and that's great because it makes our phones more affordable to more people. Until that goes away, I see unlocked phones being a very small piece of our business in North America." Indeed, price is the major barrier for cell phone makers looking to sell directly to consumers. It makes little sense for someone to buy an unlocked Motorola Krzr, which costs $330 from Motorola's Web site, when Cingular offers it for $200 with a two-year contract and a $50 mail-in rebate. What's more, unlocked phones require much more programming and manual updating by users than phones purchased through a carrier. For example, an unlocked Krzr that is used on Cingular's network won't get the automatic over-the-air updates that the same device would get if it was purchased through Cingular. This means features like voice mail or the mobile Internet might work one day on an unlocked phone, but not the next.
Unlocked phones are also available only for GSM networks. In the U.S. market, that means they can be used on two of the four large nationwide carriers, Cingular and T-Mobile. Major phone makers today do not offer unlocked versions of their phones for networks based on CDMA, which include national carriers Verizon Wireless and Sprint Nextel.
In Asia and Europe, all the operators use GSM technology. They have built their networks using standardized equipment and software, making it very easy for cell phone manufacturers to sell devices that can be used on all networks. Because of network differences, operators in the U.S. claim it is important for them to certify phones used on their networks to ensure quality. "We only allow devices on our network that have been approved," said Jeffrey Nelson, a spokesman for Verizon Wireless. "People come to Verizon Wireless and stay with our service because of the quality of the experience. And that includes the network and the quality of devices used on the network."
The current business model in the U.S. also gives mobile operators tremendous control over which features and services can be accessed from the handsets. The phones and new multimedia services that consumers most often see are branded by the carrier. In this way, Verizon is able to offer its V Cast video and music service and Sprint can offer its PowerVision service. "If I were a carrier, I would drag my heels too," said Andrei Jezierski, a partner at the consultancy i2 Partners. "It's not clear if the carriers will make money from these value-added services. So if the economic model is still unclear, why give away more control earlier than you have to?"
But, experts say tiny cracks are forming in the current model that could challenge mobile operators' dominance whether they like it or not. Apple, with its iPhone, has the brand recognition and established retail channel to easily sell millions of devices on its own. Initially, that device, whose price starts at $499, will be sold exclusively through Cingular. But experts say it's possible that Apple may eventually sell it directly to consumers. "I think the first time there will be a threat will be if Apple unlocks the iPhone and sells it in its stores," said Lin. "It's already priced near the high end, so subsidies won't make much difference, and Apple already has such good brand recognition."
Experts also see smaller carriers and handset manufacturers potentially upsetting the status quo. For example, regional carrier Metro PCS came out of the Federal Communications Commission spectrum auction last year with more licenses that could help the company build a nationwide network. Metro PCS has already been competing against the big four national carriers in some regions of the country with low-cost prepaid services. And in those markets, it's been able to garner 15 percent of the market in as little as 18 months, Jezierski said. It could compete with bigger carriers by allowing subscribers to bring their own devices and then offer them a lower cost pre- or post-paid service without a service contract.
New hybrid services that combine cellular, Wi-Fi and eventually WiMax services could also put pressure on mobile phone operators to change their business models. Consumers could download music or videos, use Google or Yahoo for messaging and search, or even use voice over IP applications such as Skype to talk over a Wi-Fi network and completely bypass the carrier's cellular network. "Once one carrier breaks ranks or hybrid Wi-Fi services start skimming away customers who might use advanced services, then I think we could see the market becoming more open," Jezierski said. He conceded that the path to a truly open market will be a slow and steady one with real change at least three to five years away. "I don't see major changes anytime soon," he said. "The subsidy offered by the carriers will definitely have to go away for it to make economic sense to consumers."