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CAPITAL CURRENTS: The FCC spectrum auction failure – How to fix it

Mon, 06/30/2008 - 8:05pm
Jeffrey Krauss, President of Telecommunications and Technology Policy

Last year the FCC adopted rules for auctioning the 700 MHz band spectrum that included the creation of a 10-megahertz license in the D Block to be part of a Public/Private Partnership for public safety communications. The auction itself was a huge success – it raised $19.6 billion. But the D Block part of the auction was a huge failure. It received one bid, which Jeffrey Krausswas far below the FCC-established minimum reserve price of $1.3 billion. Now it’s back to the drawing boards to try to fix a really bad idea – trying to hatch a nationwide communications network by auctioning off the spectrum it would use, rather than treating it as a procurement.

The D Block consists of two bands of 5 MHz each, 758-763 MHz paired with 788-793 MHz. It is adjacent to other bands allocated for public safety mobile communications. But those other bands are being used in the same way previous public safety spectrum allocations have been used, with individual jurisdictions making technology decisions without regard for interoperability with adjacent jurisdictions. So the FCC thought that a single operator could adopt one nationwide interoperable technology, and could lease capacity to public safety agencies for their high-priority needs, and lease whatever excess capacity there was to commercial users, but subject to preemption.

There are four established nationwide mobile networks today: Verizon, AT&T, Sprint and T-Mobile. None of them had any interest in operating such a network. The only company expressing any interest was Frontline Communications, a start-up with no operating experience. During the dot-com bubble, Frontline might have been able to get funding to support a bid, but not now.

The FCC planned to create two licenses for the D Block, one for the public safety folks and one for the winning commercial bidder, and require the two licensees to enter into a Network Sharing Agreement. The public safety community created a non-profit corporation called the Public Safety Spectrum Trust (PSST) and hired a company called Cyren Call as its advisor. After the auction, there were complaints that Cyren Call scared off Frontline and other prospective bidders by demanding that the commercial licensee kick in $50 million a year in “lease payments” to the PSST. The FCC had its Inspector General investigate these charges, and he found that the real reason there were no bidders was the impossible rules the FCC had adopted. For example, Frontline might win the auction, but then not be able to negotiate a satisfactory NSA with PSST and Cyren Call. If that happened, Frontline would have to retract its bid, and then be subject to millions of dollars in FCC penalties.

In addition, Frontline and its potential investors faced considerable uncertainty about network performance and buildout requirements. PSST regarded the quality of service necessary for public safety to be much higher (and much more expensive) than what is acceptable for commercial use. Emergency responders should not be subject to the kind of interruption and loss of service experienced by the typical cell phone user. Moreover, commercial users on the D Block might be subject to unacceptable service interruptions during periods of peak preemption, because the PSST considered some 9 million entities to be eligible as “Public Safety” users in addition to some 3-4 million “first responders.”

PSST expected the D Block winner to build out the system to reach a higher percentage of the nation’s public safety users than Frontline had anticipated, even though the costs necessary to reach only a few additional users might entail a vastly disproportionate additional cost. The expected cost of constructing the network could be far greater than the winning auction bid.

Another major concern was revenues. Although the goal was to build a network capable of reaching all public safety users, there was no requirement and no guarantee that any users would actually sign up to use the system. Nor was there any guarantee that commercial users would sign on, since Frontline would be competing against Verizon, AT&T, Sprint and T-Mobile.

So now the FCC has begun a new inquiry, asking for comments on “what went wrong?” It’s asking questions that should have been asked last year.

In the end, it will turn out that no new startup company will be capable of building such a network. Even if a new company wins the auction, it will contract with Verizon or AT&T or T-Mobile or maybe the Sprint/Clearwire/Cable joint venture to build and operate the network. The only entities that can do the job are those that are already operating nationwide networks.

But those companies simply aren’t willing to take the risks. In order for this Public/Private Partnership to get off the ground, the federal government is going to have to subsidize it and cover those risks. And rather than companies bidding to win the D Block spectrum, the federal government should treat this as a procurement contract, with the government supplying the spectrum. It should award the contract just like it awards contracts for Air Force tankers. Well, maybe not exactly like that. But you get the idea.

 jkrauss@krauss.ws

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