By Jeffrey Krauss, spectrum auction strategist and President of Telecommunications and Technology Policy

In 1991, the FCC granted a license for 1000 MHz of spectrum in the 27.5–28.5 GHz band in New York City to a company that is now known as CellularVision of New York (CVNY). CVNY proposed to use the spectrum to offer 49 channels of analog video, in a network configuration that reused the 1000 MHz of spectrum in cells only a few miles in radius. This differs from the more traditional 2 GHz wireless cable in several respects. It uses FM rather than AM modulation. The propagation distance at 28 GHz is much shorter. But CVNY asked for and got a lot more spectrum than 2 GHz wireless cable has.

In 1993, the FCC proposed to allocate the 28 GHz spectrum for a new cellular wireless cable service called Local Multipoint Distribution Service (LMDS), but satellite interests objected because the band is allocated for satellite service as well as terrestrial microwave service. After a failed attempt to negotiate spectrum sharing procedures between LMDS and satellite interests (see Capital Currents, November 1994, "Negotiated Rulemakings"), the FCC segmented the 28 GHz band so that, for the most part, LMDS and satellite users would not have to share frequencies. But it wasn't until March of this year that the FCC decided on a final spectrum plan for LMDS.

The LMDS allocation now consists of 1150 MHz in spectrum block A and 150 MHz in block B. Blocks A and B will be auctioned separately. Block A consists of three pieces: 27.50–28.35 GHz (850 MHz bandwidth), 29.10–29.25 GHz (150 MHz bandwidth) and 31.075–31.225 GHz (150 MHz bandwidth). The 29.10–29.25 GHz piece is shared with a few satellite earth stations. Block B is 31.000–31.075 GHz and 31.225–31.300 GHz. Why is Block A so complicated? It was the result of complex negotiations between LMDS interests and satellite interests, numerous compromises, and in the end, all the major participants were less unhappy with this plan than with others that were floated.

LMDS service areas will be the same Rand McNally Basic Trading Areas (BTAs) that the FCC has used for PCS auctions and other spectrum auctions. So there will be about 500 Block A licenses and 500 Block B licenses auctioned.

LMDS services and auction problems

What will LMDS service consist of? Right now, CVNY is mainly offering video distribution and data distribution services, but CVNY has not yet converted from its 27.5–28.5 GHz license to the new frequency plan. I'd guess that some LMDS operators will use the two 150 MHz pieces for two-way voice and data services, and the 850 MHz piece for wireless cable video distribution.

But others may decide to forego video and jump fully into the two-way voice and data business. Remember, this is a huge amount of spectrum being auctioned, more than in any other band. Because the spectrum can be reused from one cell to the next, it may just be enough spectrum to "wire" a full city for local telephone service. And that's where one of the problems has emerged.

When the FCC laid out the final channel plan and the auction rules, it also decided who would be eligible to bid, and who would not. In order to promote competition, incumbent local exchange telephone companies and cable companies are not eligible to bid for the Block A licenses in their service areas. The telephone companies were not happy about that decision at all. Some filed court appeals. They could now go to the courts and ask for a stay of the auctions, on the grounds that they will be irreparably harmed if the auctions take place and the courts later overturn the eligibility restrictions—they will have lost the opportunity to bid for the LMDS spectrum.

On the other hand, maybe someone will argue that if they are found eligible to own LMDS licenses, they can just as easily buy out the auction winner later, as they can bid and win in the auction itself. It's only money, after all.

The other problem facing the LMDS auctions is that the PCS "C block" auctions didn't work out as well as the A and B block auctions. The C block bidders got special treatment because they were small businesses, and this special treatment led them to overbid. For example, they were allowed to stretch out their payments by making installment payments. Now that it has become clear to Wall Street that they overbid, no one is willing to lend them the money for the first installments. At least one company has filed for bankruptcy, and others are on the edge.

The FCC Chairman recently said that "We need to eliminate installment payments now and forever." But the LMDS auction rules, as they were adopted in March 1997, explicitly include installment payment options for small businesses. If the ability to use installment payments was one cause of the overbidding, and if the Chairman is serious about eliminating installment payments, the LMDS rules will have to be changed. I doubt that can be done in time to hold the auctions in December.

So I'm betting on spring of next year for LMDS auctions. Am I betting IN the auctions? I won't tell. But if you see an authoritative name like Genghis Khan Holdings, a name intended to scare off the wimps with all the money, it might just be me.