FCC Looking at Auctioning National Spectrum Blocks—Tramont

Tramont said the FCC has learned from past auctions that there’s “a huge transaction cost on constructing networks” by buying and patching together licenses in various cities: “This is not a local business, by and large.” Precursor analyst Rudy Baca said “that huge sigh of relief you heard was the investment industry,” because the FCC is recognizing those network construction costs. He said the FCC’s old model of maximizing the number of providers in every market has worked, and now the agency appears to recognize that “you need to have larger providers” with economic scale to serve customers. Still, Tramont said spectrum users have different needs. “I don’t think one size fits all,” he said.

Baca argued that if the FCC went to a nationwide allocation, “even if they retained the DE rule, I think they could really bump up the value of this spectrum.” Baca had argued that the DE rule, which permits those entities to bid at discount, depresses the overall spectrum price. “I don’t think the price of the spectrum is going to be as high as it otherwise might have been” in Auction 58 without the DE rule, but he doubted the FCC would change it for that auction. Tramont declined to address the issue directly, but did note that Auction 58 is a “legacy auction.” “Bryan described it perfectly,” Baca said, calling DE use in Auction 58 “probably one of the last we'll see.”

Hogan and Hartson partner Michelle Farquhar made clear her desire for DE’s continuation, and for higher bidding credits. Farquhar said the Auction 35 valuation “was quite a bit higher” than other auctions’, “in part perhaps because of DEs.” “The C-block [auction] raised quite a bit more than A- and B-block,” she said, referring to an auction that permitted DEs to essentially borrow from the FCC using an installment plan. That plan led NextWave into bankruptcy and tied up some of the Auction 58 spectrum for years. Baca pointed out that in this auction, DEs “will be bidding their own money” so the total bids could be less. “That’s a good point,” Farquhar said. Baca also noted that DEs still are permitted to join with major carriers, citing Salmon PCS, a bidding partner with Cingular.

Farquhar said “it’s going to be difficult for DEs” to bid when “some of the major carriers are going to be bidding.” She said bidding credits for DEs “have been in the low range of 15-25%” -- and those figures have been discussed for the upcoming H-block and less controversial J-block auctions as well, if DEs participate in those: “We need something higher than that.” Farquhar has been busy lobbying the issue at the FCC recently. Ex parte records show she met Mon. with Powell and his legal adviser Sheryl Wilkerson, and met Sept. 1-2 with Tramont, Wilkerson, Wireless Bureau Chief John Muleta and others. Representing Council Tree Communications, a DE, she urged continuation of DE rules.

Baca and Farquhar broke down the potential major bidders in Auction 58, which Tramont said would likely be the last spectrum auction for at least a year: (1) Nextel. The company doesn’t have the spectrum to transition to broadband, Baca said, and needs to invest in new technology for that transition. Nextel would be a strong candidate in the H-block auction because of the proximity of spectrum to that proposed by the FCC in a swap with emergency responders, he said. (2) Cingular. Baca said it “got the fill-in spectrum” needed with the AT&T Wireless purchase. (3) T-Mobile. Like Nextel, the service lacks a landline network to port calls, so the company needs fill-in spectrum. Auction 58 gives T-Mobile spectrum much quicker than H-block. (4) Verizon Wireless. It’s “hungry for more spectrum,” Farquhar said, but has been looking at the private market (they purchased NextWave’s N.Y.C. license). Baca said the carrier wants more spectrum to maintain its perceived network quality advantage, a competitive advantage especially with number portability. (5) Sprint. Farquhar said it has wholesale deals with providers such as Virgin Mobile and will be selling to AT&T after it gets its name back following the close of the Cingular deal, so Sprint needs more spectrum.

Text on the H-block auction is “about a week away” -- hopefully no more than 2 weeks, Tramont said. He said he hoped Congress enacts the spectrum relocation trust fund, although he noted that even if it passes, there’s an 18- month delay in the legislation. He said the FCC under a previous act of Congress has authority to act on the spectrum in question, but the bill pending in the Senate is “cleaner.” All spectrum-related questions -- including cognitive radios, 3G relocation clean-up issues, the DTV transition and defining when exactly the market achieves the DTV penetration of 85% allowing broadcasters to turn off analog signals -- will hopefully be done this year, Tramont said. Baca said Senate Appropriations Committee Chmn. Stevens (R-Alaska) backs the spectrum relocation bill, and he predicted it will be attached to the Dept. of Defense FY 2005 appropriations bill. Baca also predicted Congress would shorten the 18-month delay in the bill.

Tramont defended moving forward with Auction 58 and the H-block auction, saying Powell believes it’s important to get as much spectrum in use as possible. “It fits into a broader agenda of pushing a 3rd broadband pipe into the home,” he said. Farquhar said that from the “outside world… some of these decisions look rushed or arbitrary.” But Farquhar -- who worked for a Democratic FCC -- said of Powell, he “has really made good on his promise to get more broadband out there.”

While 2004 is an election year, Baca said the possibility of a new party majority at the FCC “is not likely to slow down this process,” because spectrum allocation “is not a partisan issue. People want this spectrum out there.” Tramont agreed, to a point. “When 700 MHz comes into play,” he said, “there could be a partisan difference on how fast people want to move forward.”