Despite the Federal Communications Commission’s publicly stated desire to avoid anti-competitive behavior in the 700 MHz auction and its embrace of blind bidding as a safeguard against such activity, there are growing concerns that the combination of hefty reserve prices on key spectrum blocks, a stingy credit market and other factors could have the opposite effect and indirectly favor cellphone giants AT&T Mobility and Verizon Wireless.
Indeed, the FCC-unwittingly or otherwise-may be contributing to a gathering perfect storm of sorts that not only undermines the agency’s professed goals of advancing public safety and commercial wireless broadband communications but also lowers anticipated revenues from the sale of 1,099 licenses next year.
Wait and see
Ambitious startup Frontline Wireless L.L.C. said the conditions are ripe for a failed auction, an outcome it believes AT&T Mobility and Verizon Wireless want and could capitalize on eventually. The FCC set reserve prices of $1.3 billion and $4.6 billion for the 10-megahertz commercial/public-safety license and the 22-megahertz open-access license, respectively. If the latter reserve price is not met, the FCC will re-auction the spectrum block promptly without the open-access condition. Bidders have to meet threshold license prices on the remainder of licenses as well.
Frontline claims AT&T Mobility and Verizon Wireless may well decide to sit back in the hope that reserve prices for the public-safety and open-access 700 MHz blocks are not met and can be bought at re-auction at a lower price-without regulatory strings attached.
“Set at this high level, the prices will depress bidder interest and, coupled with the re-auction proposal, will incentivize strategic behavior by those who want this auction to fail, and thereby jettison the open-access requirements and public-safety sharing requirements,” Frontline told the FCC.
The 700 MHz auction is scheduled for Jan. 16. Congressional budget experts predict the auction could generate between $10 billion and $15 billion for the U.S. Treasury. Under the 1993 law that created spectrum auctions, the FCC is prohibited from making a public-interest finding for a regulation based on auction revenue expectations. But Frontline asserts the FCC has done exactly that by linking reserve prices and re-auction provisions to open-access and commercial/public-safety spectrum blocks.
Credit crunch concern
Moreover, Frontline, backed by Silicon Valley investors and headed by former telecom policymakers, points out that the 700 MHz auction rules fail to take into account a credit crisis that continues to manifest itself here-where recession fears have surfaced-as well as overseas.
“The proposed reserve prices also ignore the massive global credit debacle of the last two months, which is widely acknowledged to have long-term consequences for the market,” Frontline stated. “Indeed, an increase of just 3% in the cost of capital shrinks the present value of future spectrum earnings from $5 billion to $2.5 billion. These problems could be answered by dropping the reserve prices in this auction to levels that work in past auctions-a fourth to a fifth of the current amount.”
Frontline, which also urged federal regulators to strictly enforce anti-collusion rules, is not alone in its criticism of FCC 700 MHz bidding guidelines.
More ‘suggestions’
A group comprised of Google Inc., Intel Corp., Skype Ltd., DirectTV, EchoStar and Access Spectrum L.L.C. said re-auctioning spectrum blocks for reserve prices that are not reached could be anything but straightforward, suggesting a possible solution short of reducing reserve license prices.
“Given the unique nature of this auction, a special stopping rule established prior to the auction commencement is necessary because if the 700 MHz auction were cancelled for failing to reach the reserve price, it would not result in a re-auction, but effectively a different auction altogether,” stated the Coalition for 4G in America. “Specifically, the re-auctioning of 700 MHz spectrum would entail a substantial overhaul of the band plan, service rules and underlying public policy objectives.”
Rural landline carriers, which generally performed well in last year’s advanced wireless services auction, expressed angst about a different aspect of auction rules: minimum opening bid levels.
“The commission should encourage as many bidders as possible to participate in Auction No. 73 because this will ensure that all of the available spectrum is licensed and that spectrum is valued fairly by the marketplace, rather than as matter of administrative convenience,” stated attorneys for rural telephone companies.
MetroPCS Communications Inc. said setting opening bids too high could hinder competition among smaller bidders. The carrier, anxious to acquire rival Leap Wireless International Inc. for $5.5 billion, said FCC package bidding rules have serious shortcomings.
Interestingly, the Coalition for 4G in America went out of its way to urge the agency to keep intact guidelines that could enable bidders to cobble together regional licenses to form a nationwide footprint. The group also encouraged the FCC to accord sufficient bidding flexibility to consortium bidding, strongly suggesting Google and other prospective newcomers to the mobile-phone sector may not go it alone, but rather partner with others if they indeed decide to bid. Such a tack would leverage financial resources of individual companies while reducing the huge financial risk of each spending billions of dollars for spectrum and then billions more to build a nationwide system in a market already dominated by four national wireless carriers.
