AT&T, Verizon may face restrictions in 600 MHz auction

In a significant blow to U.S. mobile market leaders AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ), the U.S. Department of Justice called on the FCC to ensure Sprint Nextel (NYSE:S) and T-Mobile USA have ample opportunity to acquire 600 MHz spectrum that will be made available via 2014's incentive auctions of TV broadcast frequencies.

"The Department concludes that rules that ensure the smaller nationwide networks, which currently lack substantial low-frequency spectrum, have an opportunity to acquire such spectrum could improve the competitive dynamic among nationwide carriers and benefit consumers," said the DoJ's Antitrust Division.

The DoJ successfully prevented AT&T's proposed acquisition of T-Mobile in 2011, going so far as to file suit to prevent the deal. Its new FCC filing could set the stage for restrictions on bidding by AT&T and Verizon, the nation's largest mobile operators and holders of considerable amounts of 700 MHz and 800 MHz spectrum, which is particularly useful for transmitting broadband data inside buildings and over long distances in rural areas.

Saying Sprint and T-Mobile hold "virtually" no low-frequency spectrum, the DoJ contended the two have "a somewhat diminished ability to compete, particularly in rural areas."

The two market leaders might face caps on how much spectrum they could buy at auction. Alternatively, there could be other restrictions placed on them, such as a requirement that they divest some existing spectrum holdings in exchange for being able to bid on the new spectrum. The DoJ suggested allowing large operators to acquire "smaller blocks" of low-frequency spectrum but restricting them from gaining "larger blocks."

The department also raised the theory that larger operators might be tempted to buy spectrum and warehouse it to keep it out of reach of smaller rivals. "Carriers may have incentives to acquire spectrum for purposes other than efficiently expanding their own capacity or services," said the DoJ.

However, Robert Hahn and Peter Passell, economists specializing in regulation, recently issued a report shooting down that theory, arguing incumbent providers are putting spectrum to use about as fast as they can.

Meanwhile, smaller carriers and their representatives cheered the DoJ's filing.

"The Justice Department is absolutely right," said Larry Krevor, Sprint's vice president of government affairs. "Ensuring that all carriers, large and small, have access to low-band spectrum would improve competition and benefit consumers. We are hopeful that the FCC will adopt policies which recognize the importance of low-band spectrum to wireless competition and the American economy as a whole."

Steven Berry, president & CEO of the Competitive Carriers Association, commented, "Access to spectrum, and in particular interoperable, low-frequency spectrum, is critical to competition, and carriers of all sizes must be allowed the opportunity to access usable spectrum. CCA couldn't agree more with DoJ that excessive market power harms competition. AT&T and Verizon control almost 85 percent of the spectrum below 1 GHz, using its (sic) market power to thwart competition and prevent competitive carriers from using their own spectrum in the Lower 700 MHz band."

Problems in the Lower 700 MHz band loom over planning for 600 MHz spectrum auctions. During a Senate Commerce Committee hearing last week on the state of rural communications, LeRoy "Ted" Carlson Jr., chairman of US Cellular, admonished the FCC to avoid a repeat of the Lower 700 MHz interoperability issues as it considers the rules for 600 MHz incentive auctions. Among other things, Carlson alleged AT&T's use of Band 17 equipment instead of Band 12 equipment needed by other Lower 700 MHz A Block licensees, has "fractured the handset ecosystem."

If that is true, however, it might indicate that smaller operators have as much to lose as AT&T and Verizon if the two market leaders are restricted from fully participating in auctions of 600 MHz spectrum. Without the nation's two dominant operators driving device demand and economies of scale, the handset ecosystem could become even more fractured if vendors ignore the smaller carriers' needs for 600 MHz-enabled devices.

Further, less money might be generated for the federal treasury and the national public-safety broadband network, which is supposed to gain funding from auction proceeds.

The auction of 700 MHz digital dividend spectrum in 2009 brought in some $20 billion for about 50 MHz of spectrum. The goal of the 600 MHz auction process is to release 120 MHz of spectrum for wireless broadband use

For more:
- see this Justice Department filing
- see this CCA release
- see this Reuters article
- see this Wall Street Journal article (sub. req.)
- see this CNET article
- see this Associated Press article

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