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FCC Seeks Additional Comment on 700 MHz Auction Rules

May 8, 2007                       

Overview:  The FCC recently decided to consolidate several proceedings and seek additional comment on the baseline technical and competitive bidding rules that will determine who can bid, the license service areas and terms, and public safety/commercial obligations for the upper and lower spectrum bands that will be reclaimed from broadcasters following the transition to digital television.  The FCC’s extensive (176 page) Report and Order and Further Notice of Proposed Rulemaking essentially puts off all the fundamental issues for auctioning the highly valuable 700 MHz spectrum.  The FCC issued almost no tentative conclusions, instead inviting comments on several proposals and soliciting alternatives.  The wide-open nature of this proceeding provides a rare opportunity for commenters to affect final regulations so late in the process. 

Timing:  The FCC set tight deadlines—comments on the FNPRM are due May 23rd and reply comments are due May 30th—in light of Congressionally mandated statutory deadlines for commencement of the 700 MHz auction of no later than January 28, 2008 and deposit of the auction proceeds of no later than June 30, 2008.  The FCC plans to complete the multiple rulemakings consolidated in the FNPRM by June of this year.  Adoption of final rules, however, could easily slip into July, or even August, given the five proposed bandplans, the mix of commercial and public safety issues with a lately-filed Frontline proposal, and the billions of dollars estimated for the National Treasury.

Implications:  Ordinarily, delaying final rules would be troublesome to the existing broadband providers (e.g., telcos and cablecos) and new entrants (e.g., satellite and Internet-based) interested in bidding for this last remaining swath of mobile broadband spectrum because Wall Street typically requires more regulatory certainty and attendant lead-time to secure funding and develop bidding strategies.  The inclusion of a mixture of geographic area license sizes in the five bandplans proposed for the “upper band,” however, potentially allows large and small, urban and rural, and established and new entrants to win sufficient spectrum to meet their company-specific technical plans within their financial resources.  Moreover, the propagation and penetration properties of spectrum in the 700 MHz band present what is likely to be not only the last, but also the best, in a generation opportunity to deploy wireless broadband services in a cost-efficient manner.

Discussion:  The remaining open questions and almost complete absence of any tentative conclusions provide an unparalleled opportunity for traditional and non-traditional players to shape the final rules for the 700 MHz auction.  Owing to the enhanced propagation distance and in-building penetration characteristics of 700 MHz spectrum, we estimate (from discussions with wireless engineers and equipment makers) that deployment costs are likely to be one-third to one-quarter that of deploying a wireless broadband network in the 1800 MHz band, i.e., the band already allocated to existing advanced wireless broadband services (AWS).  Although total cost considerations remain critical for adjudging return on investment, as 2G licensees roughly spent double their spectrum acquisition costs in deploying their networks, we believe that a greater percentage will likely be spent on initial spectrum acquisition, owing to fewer towers needed due to increased propagation and penetration.

Of note, especially because it is one of the only issues upon which all Commissioners agreed, is a specific and aggressive build-out requirement.  The FCC rejected the amorphous previous “substantial service” standard and proposed that every licensee provide (1) 25% geographic coverage within three years; (2) 50% within five years; and (3) 75% within eight years.  If adopted, this schedule could rebound to the detriment of smaller licensees, who lack the financial resources to pay “whatever it takes” to the limited number of equipment suppliers and installation technicians capable of meeting these tightened targets. 

Although each of the FCC Commissioners used the expected buzzwords of the need for a “third broadband pipe” to provide “meaningful competition” to the telco/cable “duopoly,” regulatory history has shown that national budgetary considerations drive spectrum management through auctions.  The final rules are typically geared to revenue generation for the national treasury.  Congress established a “hard date” of February 19, 2009 for over-the-air broadcasters to complete the DTV transition in an effort to pay down the national deficits without raising taxes.  The budgeteers in Washington are estimating that the 700 MHz auction alone will bring in more than the ~$25 billion dollars raised cumulatively by all previous spectrum auctions.  Accordingly, we believe that the FCC will most likely adopt the band plan that maximizes auction receipts, which favors larger licensing areas (regional REAGs) bid up by larger players with some small licenses (CMAs) for rural and small business entities (the previously labeled “Designated Entities” (DEs)).

Perhaps the most difficult issue the FCC faces in designing the 700 MHz auction rules is the balance between commercial broadband deployment and the critical and demonstrated needs of public safety and security providers.   Although the FCC Commissioners commented favorably on the concept of a public/private sector partnership to address public safety and, therefore, included Frontline’s last-minute filing in the FNPRM, we question whether the FCC will ultimately mandate public safety pre-emption and priority of a commercial network, at least for the foreseeable (and investable mid-term) future.  The unresolved technical issues and conflicting and contra-profit motive aspects of public safety versus commercial usage makes such a dual purpose network too expensive to design, deploy, and operate any time soon.    

Lastly, the FCC included the hot button issue of “net neutrality” in the FNPRM in the form of a proposal by a public interest group to exclude incumbent LECs (local exchange carriers; e.g., the Bells), incumbent cable operators and large wireless carriers from bidding in the upcoming 700 MHz auction.  Because of the negative impact that such prohibition would have on auction revenues (see above), we believe it is highly unlikely that such bidder exclusion proposal will be adopted.    

 

 

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