FCC incentive auction rules likely to benefit Sprint, T-Mobile and smaller carriers

WASHINGTON--The FCC adopted rules for next year's incentive auction of 600 MHz broadcast TV spectrum that are more favorable to Verizon Wireless (NYSE: VZ) and AT&T (NYSE: T) than initially contemplated.

However, Sprint (NYSE: S), T-Mobile US (NYSE:TMUS), Dish Network (NASDAQ: DISH) and smaller carriers are likely to claim some measure of victory because the FCC agreed to allow some spectrum to be reserved for carriers that do not control large amounts of low-band spectrum.

The FCC commissioners voted 3-2 along party lines, with Democrats in favor and Republicans opposed, to approve rules for the auction. They also approved changes to the "spectrum screen" the FCC uses to determine whether proposed deals after the auction should be subjected to a more detailed competitive analysis.

In the 600 MHz auction, the FCC approved rules that will withhold, or reserve, up to 30 MHz of spectrum for carriers that currently hold less than one-third of the available spectrum below 1 GHz in a market. Thus, any nationwide carrier with 45 MHz or more of low-band spectrum wouldn't be able to bid on the reserved spectrum. The goal is to ensure that smaller carriers without relatively low amounts of low-band spectrum are able to acquire 600 MHz spectrum in the auction.

According to executives at Mosaik, which tracks the spectrum holdings of the nation's wireless carriers, neither Sprint nor T-Mobile own more than around 20 MHz of low-band spectrum anywhere in the country, and therefore will be able to bid on reserved 600 MHz spectrum. Mosaik executives said that both Verizon and AT&T do own more than 45 MHz of low-band spectrum in locations across the country, but in other locations they don't pass that threshold. The FCC said AT&T and Verizon command around 70 percent of all low-band spectrum licenses and Sprint and T-Mobile hold around 15 percent of all low-band spectrum licenses.

According to the analysts at New Street Research, AT&T owns an average of around 57 MHz of low-band spectrum in the nation's top 100 markets, putting it above the 45 MHz threshold for the FCC's 600 MHz auction. Verizon owns an average of around 47 MHz of low-band spectrum in the nation's top 100 markets.

Under the rules, the FCC will split the spectrum in a market into "reserved" and "unreserved" spectrum only after the auction raises a specific, yet-to-be-determined amount of money. The FCC needs to raise enough revenue from the spectrum auction to pay and clear broadcasters that are giving up their spectrum and to fund the FirstNet public safety broadband network. Importantly, bidding can continue after the spectrum is split into "reserved" and "unreserved" spectrum.

The amount of reserved spectrum in a market will be based on the demand from bidders. If the demand for reserved spectrum is less than what has been set aside, a portion of the reserved spectrum that is not in demand would revert to being unreserved.

The FCC also said that any provider that holds less than one-third of available low-band spectrum in a market would be able to bid on all the spectrum in that market, whether it's reserved or unreserved. Only nationwide carriers will be subject to the rules for reserved vs. unreserved bidding--meaning that regional carriers with more than one-third of a market's low-band spectrum will still be able to bid on reserved spectrum. That's a clear victory for the Competitive Carriers Association, which represents mainly smaller, regional carriers.

The FCC can reserve of up to 30 MHz of spectrum if broadcasters give up at least 70 MHz of spectrum. However, in a compromise that could aid Verizon and AT&T, in situations where broadcasters have given up only 60 MHz of spectrum, only 20 MHz can be reserved, and where broadcasters have given up 50 MHz of spectrum, only 10 MHz can be reserved.

Companies that win 600 MHz spectrum will have restrictions placed on them related to selling the licenses for six years after the auction.

"I am confident that the wireless industry, including providers of all sizes, will rally around the rules," FCC Chairman Tom Wheeler said at a press conference after the vote.

He said the FCC will now work on outreach to broadcasters and "make clear to the broadcast industry that they really have a once-in-a-lifetime opportunity."

The rules ensure that there is a "viable spectrum reserve for competitors in every market nationwide" and "will make sure that consumers are more likely to benefit directly from increased competition in all parts of the country," Wheeler added.

Verizon and AT&T have repeatedly argued against reserving spectrum for smaller carriers. They say such rules improperly favor Sprint, T-Mobile and smaller carriers, and could cause the auction to fail if it doesn't generate enough revenues. They also argue broadcasters will shy away from giving up their spectrum because of the restrictions. For their part, smaller carriers and their advocates argue the FCC has the legal authority to set such rules and that such rules are necessary so that larger carriers don't block smaller carriers from acquiring spectrum. Indeed, the CCA pointed out that Alltel participated in the 700 MHz auction in 2008 but was unable to win any licenses, and was subsequently acquired by Verizon Wireless.

"Creating a spectrum reserve will allow every carrier, large and small, the opportunity to bid in the auction, which is critically important given the superior propagation characteristics of low-band spectrum," CCA President Steve Berry said in a statement.

Republicans, however, sharply criticized the rules. Republican Commissioner Michael O'Rielly said the auction rules essentially create "corporate welfare for certain multinational companies with large market capitalizations and access to global capital markets."

Republican Commissioner Ajit Pai said rules could allow "one of any number of companies to acquire every single 600 MHz license in every market, even though the order claims that the restrictions are needed to prevent any one firm from running the table." He also said the rules ignore the importance of high-band spectrum--perhaps a reference to Sprint, which owns a vast trove of 2.5 GHz spectrum.

"This means that a company that holds 44 MHz of low-band spectrum and large swaths of high-band holdings in the same market can acquire as much additional low-band spectrum as it wants," he said. "But a competitor that has just 45 MHz of low-band spectrum and no high-band holdings in that market would be restricted from bidding for certain blocks of spectrum. Would anyone seriously maintain that the latter company's spectrum position poses a greater competitive threat than the former's?"

As for the FCC's spectrum screen, the agency's new rules represent a defeat for Sprint, since the FCC is going to add the vast majority of Sprint's 2.5 GHz spectrum without weighting high-band spectrum differently from low-band spectrum. That could make it more difficult for Sprint to strike spectrum deals after the auction.

Importantly though, Wheeler said that such rules are "based on the current structure and they could change" if the market changes. That could mean the rules could change if Sprint decides to merge with T-Mobile.

Related Articles:
CCA's Berry expects strong participation from smaller carriers in 600 MHz auction
T-Mobile: FCC auction rules that limit AT&T, Verizon will be a boon for competition
AT&T: There's 'no basis' to give Sprint, T-Mobile a leg up in incentive auction
Verizon takes aim at Sprint, T-Mobile in pushing back on FCC auction restrictions
With 2.5 GHz, Sprint won't have much wiggle room in FCC's new spectrum screen
FCC to add Sprint, Dish spectrum to spectrum screen

Article updated May 15 with clarifications from the FCC and additional information.