The Federal Communications Commission on Jan. 7 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 hold the best hope yet of liberating computers from all the wires currently needed to provide high-speed access to the Internet.
Internet providers
A first look at the rules shows that Internet players fared well. In filings prior to the FCC decision, Internet interests maintained the new 700 MHz spectrum-taken from the UHF TV broadcasters that currently operate over channels 60 to 69-would have to be apportioned in very substantial blocks to support viability as a competitive source for high-speed data. (Existing television broadcasters are licensed in increments of only 6 megahertz.)
The new rules allow for two licenses per “economic area grouping”-one permitting operation over 20 megahertz of bandwidth and the other over 10 megahertz.
This is certainly a positive development for those advocating “fat pipes” for broadband applications.
Further, a single telecommunications company may hold both licenses, meaning one player can use the full 30 megahertz. This is another win for the Internet camp because the 30 megahertz bandwidth is generally seen as adequate enough 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 megageographic service areas were apportioned throughout the entire United States. The FCC designated these license areas (“economic area groupings”) 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 smaller “regional” economic area groupings had been chosen, there would have been 12 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.
Traditional carriers
At the same time, there are aspects of the FCC’s choice of service areas that benefit 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 that set up a potential battle of the titans over these licenses.
First, the FCC decided not to impose any restrictions whatsoever on the licensing of incumbent local exchange carriers. 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). This is a favorable development for existing wireless providers, permitting them full rein to bid on some or all of the six geographic areas, for either the 10 megahertz license, the 20 megahertz 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.
Entrepreneurs
So what about the entrepreneurs? Is there room on the playing field for them? For those entrepreneurs able to marshal necessary resources, 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 percent. This means that for every dollar bid, the bidder will need to actually pay only 85 cents-if it ultimately wins a license.
Similarly, even smaller companies (annual gross revenues of $15 million or less averaged over the preceding three years) will be given a 25-percent bidding credit. Also, it is possible for small companies to join together and form a bidding consortium. As 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 start-up players interested in obtaining merely a partitioned portion of one of the six license areas could enter into agreements with bidders-prior to auction-for the post-auction partitioning of one of these megamarkets.
The other 6 megahertz
One remaining piece of the FCC’s work on 700 MHz was left undone. While the commission is bringing 30 megahertz of bandwidth to market immediately, there is an additional 6 megahertz that will not now be released and which remains under study. That portion eventually will be sliced into one 4-megahertz license and one 2-megahertz 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 megahertz 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 the expenditure of 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.
Robert G. Allen, director of International Technology and Trade Associates Inc. (ITTA) Telecommunications Consulting Group, was senior counsel in the FCC’s auctions division until December 1999.
