Can the FCC get the balance right with its spectrum rules?

Phil Goldstein

The FCC on Thursday will decide rules for next year's incentive auction of 600 MHz broadcast TV spectrum. It will also decide rules for how much spectrum wireless carriers can hold in different markets--the FCC's so-called spectrum screen. The event will be the most consequential meeting of FCC Chairman Tom Wheeler's term so far, and it will have a fundamental impact on the direction of the U.S. wireless industry. Right now, it looks like Wheeler is trying to placate different factions within the industry, but he could wind up with most carriers being peeved at the final results.

First, let's look at the incentive auction rules. For the better part of a year, Verizon Wireless (NYSE: VZ) AT&T (NYSE: T) and their surrogates in academia have argued that if the FCC places restrictions on how much spectrum they can bid on in the auction, it will cause broadcasters not to give up their spectrum, depress auction revenues and basically lead to a failed auction. Sprint (NYSE: S), T-Mobile US (NYSE:TMUS) and their allies in academia and the public interest community have argued that they will not be able to effectively compete in the long term without rules that level the playing field and allow smaller carriers a shot at getting low-band 600 MHz airwaves.

It seems like the FCC's draft rules for the auction favor Sprint and T-Mobile, and that the auction may not turn out to be the disaster that Verizon and AT&T predict. Under the proposed rules, the FCC would withhold, or reserve, up to 30 MHz of spectrum for auction bidders that hold less than one-third of the available low-band spectrum in that market. The amount of reserved spectrum would vary on a market-by-market basis based on demand, but wouldn't exceed 30 MHz. All bidders could bid on the unreserved spectrum in the market, but the reserved spectrum is intended for smaller carriers that don't have lots of low-band spectrum. Critically, the FCC would withhold spectrum only after a still-to-be-determined threshold has been met, which could be whether the FCC has already raised enough money to pay broadcasters off for the spectrum they will be giving up.

Basically, the rules could prohibit Verizon and AT&T from bidding on the reserved spectrum in many markets and would ensure that smaller carriers get to bid on the reserved spectrum.

But the rules don't say that Verizon and AT&T can't bid on 600 MHz spectrum. Indeed, they are likely to win a lot of it in many markets, including reserved spectrum in some markets. It just means they won't win all of it. Yes, Sprint and T-Mobile sat out the 2008 700 MHz auction, while Verizon and AT&T paid billions for those airwaves to build LTE networks and have been justly rewarded by taking the lion's share of customers and profits since then. But if the FCC wants to preserve four national carriers, Sprint and T-Mobile need to get 600 MHz spectrum to augment their coverage and capacity. I don't imagine Verizon or AT&T sitting this auction out, and the more bidding they have to do against each other, the more revenue the auction is likely to generate. I see that as a win for the FCC, for carriers and for consumers.

However, it's not all sunshine and rainbows for Sprint, as the changes the FCC is considering on its spectrum screen could make it more difficult for Sprint to strike deals for airwaves in the future after the auction. The FCC currently uses the screen as a factor when reviewing spectrum transactions to determine whether they are in the public interest. If a carrier acquires one-third or more of the available spectrum in a given market, the deal is more closely scrutinized. 

Sprint had argued that its 2.5 GHz spectrum shouldn't be counted the same as low-band spectrum in the FCC's screen. However, the FCC has rejected that argument, and is instead considering rules that would count 2.5 GHz spectrum the same as low-band 700 MHz spectrum.

Sprint has pointed out that the FCC's all-spectrum-is-the-same position doesn't make sense, considering the agency has highlighted the importance of low-band spectrum with its 600 MHz auction rules that reserve some spectrum for smaller carriers. Sprint, for its part, wants the FCC to use a "three-tiered weighted screen" that would take into account the different propagation characteristics of low-band, mid-band and high-band spectrum.

It does seem odd that the FCC would put so much emphasis on the unique characteristics of low-band spectrum for the auction, and then treat all spectrum the same for the purposes of the screen, but it's unclear if the rules will be changed for Thursday's vote. The issue could be critical for Sprint, since a screen could prevent the carrier from merging with T-Mobile.

All of this is said with the proviso that these rules are not yet final. Yet as of now it seems like in trying to please different constituencies in the industry Wheeler could agitate all of them. It could be that he is taking comfort in the old adage that he must be doing something right if everyone is angry. The future of the industry hangs in the balance, and I'll be watching it unfold at the FCC on Thursday.--Phil

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