Entner: FCC's Designated Entity program needs reform

Roger Entner Recon Analytics

Roger Entner

There is no dispute that Congress' objective to attract more small businesses to the wireless sector is a laudable one; however, there is some debate over whether offering such entities discounted access to spectrum is the best too to reach the goal. And the results of the recently concluded AWS-3 auction have put the debate over bidding credits for small businesses front and center on DC's policy agenda.

Under the FCC's current rules governing bidding credits for small businesses, non-DE qualifying investors can own the vast majority of the DE, but the DE-qualifying entity must own the majority of the voting shares in the company in order to be in control of the DE. What Congress did not expect is that these rules have been undermined as investors are now frequently exerting their control over the DE with very strict rules and covenants as a condition of the debt financing of these entities. The current discussion around the validity of the DE rules completely ignores the reality that DEs are controlled not by their shareholders but by their debtors via the debt covenants.

Furthermore, as long as build-out deadlines are longer than the holding period applicable to DE licenses, bidders can continue to arbitrage spectrum for an almost guaranteed profit, while the spectrum sits unused. This outcome is clearly at odds with Congress' intent in allowing the FCC to create DE incentives. In addition, the FCC should increase the amount of revenue and funds on its balance sheets a qualifying DE is allowed have. This will allow qualified DEs to certify to being a small business as well as have enough equity on hand to afford build-out without having to take on debt financing that then opens the door to untoward influence by non-DE qualifying entities.

One way to reduce the ability of investors to game the rules would be to significantly shorten the time frame for the build-out requirement. For example, Auction 97 provided a six-year time frame requiring winners to cover 40% of the population, but DE entities have only a five-year holding. No surprise that the DE holds the license for five years, sells it and the new owner builds out quickly. Because spectrum typically increases in value over time, rather than decreases, the DE would likely make a handsome profit over the price paid at auction when the DE eventually flips the naked spectrum at the end of the 5 year holding period. US Treasury is not benefitted under this scenario and neither are US consumers who have been deprived of network improvements during the 5 years the spectrum laid fallow. The benefits of accelerated build-out requirement are indisputable: There will be less consumer harm due faster availability of much needed bandwidth to consumers as less spectrum is being warehoused, earlier investment to build out the spectrum, which means more direct and indirect jobs in America and additional economic stimulus.

If the FCC is really serious about a secondary market for spectrum, and it wants to maintain a robust opportunity for small businesses to meaningfully engage in spectrum auctions as independent entities, the FCC should ease the restrictions on leasing spectrum and bandwidth. Making more spectrum eligible for leasing would lower the barrier of entry for new operators, while bringing spectrum more rapidly to market. If a DE could, for example, lease half of their spectrum when the spectrum was granted, it could use the income stream from spectrum leasing to fund its own build out that would have to occur before the license could be sold. The benefits are clear again: More competition by creating a new operator, less spectrum warehousing, less dependency on outside investors, accelerated investment, more jobs and higher economic stimulus. Companies like Alaska Native Corporation that used the DE program to obtain more spectrum have blossomed into companies with hundreds of millions in revenue benefitting their tribal constituents, proving that Congress' goal and the FCC's execution is well intended and when done right very worthwhile, because those most at risk benefit the most. The question is simply how to provide the benefits to companies seriously interested in building out the spectrum and offering service versus giving the benefit to companies that are merely interested in buying spectrum for cheap, and contrary to the expressed intent of the Act unjustly enriching themselves.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.