Verizon Wireless (NYSE:VZ) is tussling with the Competitive Carriers Association over how large an area spectrum licenses should cover for airwaves carriers will purchase in the 2015 600 MHz broadcast TV spectrum incentive auctions. Verizon is arguing for large areas, while the CCA is pushing for small--or at the least, medium-sized--areas, arguing that smaller-sized licenses will benefit rural carriers.
The issue may seem arcane but is actually of significant importance. For instance, in the 700 MHz auction of 2008, Verizon purchased licenses in the Upper C Block 700 MHz spectrum that covered massive geographical areas, and used those licenses to build out its nationwide LTE network. CCA, a trade group that represents carriers smaller than AT&T and Verizon, effectively argues that the larger the licenses are in geographic size, the more likely it is that smaller carriers will be shut out of the auction, since they do not have the resources both to bid for such large blocks and to deploy such extensive networks.
Verizon, in a filing with the FCC, said that the agency should use large Economic Areas (EAs) to license the 600 MHz spectrum blocks. Verizon also wants the FCC to preserve the ability of carriers to package together bids of spectrum blocks.
"By licensing this spectrum in EAs and permitting package bidding at the auctions, the commission would achieve its stated goals of 'facilitating access to spectrum by both small and large providers, providing for the efficient use of the spectrum, encouraging deployment of wireless broadband services to consumers, especially those in rural areas, and promoting investment in and rapid deployment of new technologies and services,'" the carrier wrote. "If, however, the commission were to adopt smaller license area sizes, to achieve these goals licenses should 'nest' into existing EAs and, as with EAs, auction participants should be permitted to combine licenses through package bids."
Verizon wrote the FCC has noted that "[w]hen [license] areas are inefficiently small, the costs of aggregation during or after the auction in terms of delay and transaction costs may harm both service providers and customers alike."
Essentially, Verizon argues, bidding for larger spectrum areas is more efficient and will lead to faster deployment of coverage, since smaller blocks would need to be merged together. "With license areas smaller than EAs ( e.g ., Partial Economic Areas ('PEAs') or Cellular Market Areas ('CMAs')), aggregation is especially necessary because national and regional wireless providers generally do not deploy networks on such a localized basis," Verizon wrote. "Instead, they deploy networks to serve certain economically integrated metropolitan areas, regions, or the entire nation. Acquiring a single CMA-sized license, however, often equates to acquiring spectrum in a single county, and PEAs present similar challenges. Therefore, to most efficiently serve a metropolitan area, auction participants must acquire multiple licenses."
In contrast, the CCA wants the FCC to use smaller CMAs to determine the licensing areas, and if it chooses not to do so, at least choose the PEA proposal. "The PEA proposal strikes a balance between carriers interested in bidding for larger licenses and those who depend on smaller license sizes, without running the risk of delaying rural and smaller bidders' access to needed spectrum," CCA President Steve Berry said in a statement. "PEAs would allow larger carriers to bid on more populous areas, while still providing smaller and rural carriers with the incentive and opportunity to bid. More bidders in the forward auction, together with appropriate aggregation limits, means more competition for the industry and higher auction revenues for the U.S. Treasury."
Interestingly, T-Mobile US appears to be siding with CCA's proposal, albeit with some caevats: "CCA's proposal seems to be a reasonable compromise between these two positions," T-Mobile wrote in a recent FCC filing. "As CCA points out, a PEA approach would blend the different license size approaches and promote participation in the auction by a variety of carriers. In addition, PEAs do not represent a wholly new geographic licensing scheme, as they track CMA boundaries in many cases and nest within existing Economic Areas ("EAs"). Although a PEA-based approach may create significant exposure risk, this risk could be mitigated with reasonable spectrum-aggregation limits or a limited set of predetermined packages without á la carte bidding."
FCC Chairman Tom Wheeler decided in December to push the start of the 600 MHz auction back to mid-2015. Under the FCC's proposed rules, broadcasters will submit bids to relinquish their 6 MHz pieces of spectrum in a reverse auction where the FCC will pay them. (The FCC's band plan for the broadcast spectrum carriers would use calls for 5 MHz blocks.) The process is voluntary for broadcasters, but many worry that broadcasters might not give up their spectrum based to their previous resistance to the auctions and uncertainty over how much money they will ultimately receive.
After broadcasters give up their spectrum, it will be "repacked" so that broadcasters that do not give up their spectrum can stay on the air. Then the FCC will conduct a traditional "forward" auction in which wireless carriers will bid for the freed spectrum. There is an ongoing debate over what the "band plan" should be for the spectrum once broadcasters are repacked. The final rules for the auction have not been set.
The debate over the license area size is crucial because it could determine how much carriers bid for the spectrum in the forward auction, which in turn will determine how much money broadcasters get paid, and how successful the auction ultimately is.
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