AT&T warns it might skip 600 MHz incentive auction due to FCC's proposed restrictions

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AT&T (NYSE: T) warned that it would have to "reevaluate" whether it would participate in the FCC's planned incentive auctions of 600 MHz broadcast TV spectrum if the FCC places restrictions on how much spectrum it could purchase.

Joan Marsh, AT&T's vice president of federal regulatory, wrote that AT&T could be restricted from bidding in markets covering over 70 percent of the U.S. population.

Recent reports have indicated that the FCC is currently contemplating an auction rule that would restrict bidding. After auction bidding hits an as-of-yet unknown threshold in a given market, the FCC would set aside up to 30 MHz of spectrum in that market. Companies that hold at least one-third of the low-band spectrum in that market then wouldn't be allowed to bid on the 30 MHz of spectrum that has been set aside.

Marsh wrote that AT&T has "significant concerns with this proposal, both conceptually and in its specifics," and that such restrictions are "complicated and unnecessary." She wrote that "unless the threshold is defined at a significant and material level, non-restricted bidders could get spectrum at a discount that the FCC cannot afford to give in this auction."

The restrictions would put AT&T "in an untenable and unacceptable position." Marsh noted that "AT&T has never declined to participate in a major spectrum auction and certainly did not intend to do so here, where capital contributions will be needed across the wireless industry for a successful outcome. But if the restrictions as proposed are adopted, AT&T will need to seriously consider whether its capital and resources are directed toward other spectrum opportunities that will better enable AT&T to continue to support high quality LTE network deployments to serve its customers."

According to the Wall Street Journal, which cited unnamed sources familiar with the matter, the FCC's threshold could include some combination of the overall bids in the market, or the price per MHz. Additionally, the Journal reported that is there wasn't large enough demand for the restricted spectrum in a market, it would be returned back to the "unrestricted" pool so any company could bid on it.

Marsh wrote that in all scenarios in which carriers are bidding on less than 70 MHz of spectrum, restricted bidders, which she cited as "specifically AT&T and Verizon (and in a small number of markets, potentially US Cellular or C Spire [Wireless])," would be limited to bidding for only three blocks of spectrum. "And in each market where the restrictions attach to at least two carriers, at most only one restricted carrier could emerge from the auction with a 10x10 MHz allocation," she wrote. AT&T has said it needs at least 10x10 MHz blocks to economically deploy LTE.

"The auction restrictions as proposed make it a virtual certainty that, for many proposed band plans, either AT&T or Verizon or both would be limited by the auction restrictions to a fragmented, uneconomic and inefficient 600 MHz footprint," she wrote. "This is in stark contrast to the preferred treatment given to unrestricted carriers, who would not only be free to bid for any available spectrum block, but would be able to bid for valuable spectrum without competition from AT&T or Verizon. By precluding AT&T and Verizon from even bidding for certain blocks, the proposal would essentially create a set aside that eliminates real bidding competition for the benefit of the favored non-restricted companies."

Analysts said they thought AT&T would need to seriously weigh the costs of boycotting the auction. "For AT&T to say that, 'We're not going to participate in the 600 MHz auction,' ignores their capacity issues today," New Street Research analyst Spencer Kurn told FierceWireless.

While Kurn said he could not say definitively that AT&T is bluffing, he said: "I would be very surprised if they don't participate at all. I think they're clearly trying to do stuff to influence the process and allow them to acquire spectrum as cheaply as possible."

Jeffrey Silva, a former telecom policy analyst at Medley Global Advisors, said AT&T abstaining from the auction would be difficult to explain to investors. "They have to think long and hard whether it's in their corporate interest," he told the Washington Post. "This is the last big auction for a long, long time. There's nothing on the drawing board that's anywhere comparable to what they're going to be doing in the incentive auction."

However, BTIG analyst Walter Piecyk said he does not think AT&T is bluffing "at all."

"With restrictive rules like that and AT&T's need for capacity rather than coverage, they might be better off just buying Dish (NASDAQ: DISH)," he wrote in comments to FierceWireless. "At the end of the day, consumers are choosing AT&T and Verizon over Sprint and T-Mobile. If the government is not willing to let Sprint and T Mobile merge to become more competitive, they should at least allow the preferred providers have enough spectrum to offer a decent quality of service in the United States. I'm not sure how restricting M&A and spectrum purchases by the big operators is in the public interest or how it will appropriately position the United States for the next decade."

The FCC is expected to vote on the incentive auction rules in May, though they will be subject to public comment and could be revised after that. The incentive auctions are scheduled to begin in mid-2015.

The FCC declined to comment on AT&T's filing. "All who want to participate in the auction will be able to bid," Wheeler has said in a statement distributed to media outlets. "In order to assure coverage and competition in rural America it may be necessary to assure no one can monopolize the bidding."

Over the course of the past year, Verizon (NYSE: VZ) and AT&T have repeatedly and vehemently argued against bidding restrictions, arguing that such rules will depress auction revenue and amount to picking winners and losers. Sprint (NYSE: S), T-Mobile US (NYSE:TMUS), U.S. Cellular (NYSE:USM), Dish Network (NASDAQ: DISH) and an array of groups, including the Competitive Carriers Association, have urged the FCC to adopt such restrictions in the name of promoting competition and ensuring AT&T and Verizon don't get the lion's share of the 600 MHz spectrum.

For more:
- see this FCC filing (PDF)
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article
- see this Re/code article

Related Articles:
Report: FCC's planned incentive auction rules would set aside spectrum for smaller carriers
Wooing TV broadcasters is FCC's next big job for 600 MHz incentive auction
T-Mobile blasts AT&T's 600 MHz auction position as 'sacrificing competition'
L.A. TV stations show broadcast channel sharing for 600 MHz auction is possible
TV broadcasters remain wary of 600 MHz incentive auction
FCC's Wheeler lays out vision for 3.5 GHz band, incentive auctions
FCC to issue report on 600 MHz incentive auction structure in the spring

Article updated April 17 with additional commentary.