Competitive carriers warn FCC to learn from auction mistakes

As the Federal Communications Commission establishes the rules for its upcoming incentive spectrum auction, competitive carriers say they do not want to see a repeat of what happened with the 700MHz spectrum auction in 2008.

"The 700MHz auction was a disaster," Patrick Riordan, CEO of the rural Wisconsin carrier Cellcom, said at the Competitive Carrier Association's annual conference this week. "The FCC needs to get this one right. We all need spectrum too much. It has to be a level playing field."

On Friday the FCC will open comment on a proposal for how the agency will conduct the incentive wireless auctions, which Congress authorized in the Jobs Act passed earlier this year. In that piece of legislation, Congress gave the FCC authority to reclaim and auction spectrum held by TV broadcasters to wireless broadband operators. The auction is expected to raise billions of dollars in revenue, which will be used to help pay for a new wireless broadband public safety network as well as help reduce the deficit.

Details of the proposal have not yet been made public, but smaller competitors who fear that AT&T and Verizon Wireless have already gotten too large and have too much control over the market, say they would like to see the FCC design an auction that will provide access to the new spectrum to all wireless operators.

Learning from the past
They say it's important for the agency to learn from mistakes made in the past.

"I don't think the auction itself was a disaster," said Steve Berry, head of the CCA. "But I think if you ask anyone, even some people at the FCC, they'd tell you it didn't do anything to promote competition or help smaller competitive carriers."

One problem that came to light after the auction was that the two largest carriers ended up with near-nationwide coverage in two separate and distinct slivers of spectrum within the 700MHz band. And these slivers of spectrum were not interoperable with spectrum that smaller providers bought in the auction.

Going into the auction it was known that nationwide block of spectrum Verizon ended up with was not going to be compatible with smaller spectrum licenses in the lower portion of the 700 MHz band. But smaller carriers bidding on this spectrum expected that the licensed spectrum would interoperate with spectrum AT&T bought in an adjacent block.

But after the auction, AT&T worked with a standards body to create its own separate band class that excluded the smaller players' spectrum because it claimed there were interference issues. The smaller carriers say this is just an excuse for AT&T to exclude them. And as a result, they say that they cannot get device and equipment makers to build gear necessary to deploy their network.

"We are sitting on prime beachfront property that we cannot use," said Hu Meena, CEO of C Sprire a competitive carrier who owns spectrum in the so-called stranded lower A block of the 700 MHz. "That's a wasted resource, which means a loss of jobs and a loss of service for customers."

He said that the interoperability problems that followed the 700MHz auction should serve as a lesson for the upcoming incentive auction. And he hopes the FCC will make sure that interoperability is achieved in this next auction.

Interoperability is one issue AT&T's and Verizon's rivals hope the FCC addresses in its proposed spectrum rules. But these carriers also hope the FCC will address other issues. For instance, they don't want to see any nationwide licenses sold. Instead, they believe the FCC should split the licenses into smaller geographic regions. In the 700MHz auction, only Verizon and Google ended up bidding on a nationwide license for the upper C block spectrum, which Verizon eventually won and is now using to build its 4G LTE network.

Eric Graham, C Spire Wireless' senior vice president for strategic relations, that Verizon, which bought a nationwide license for the 700 MHz upper C block spectrum, paid much less per potential subscriber than smaller carriers bidding on licenses covering a smaller geographical area, simply because there were fewer carriers bidding for the nationwide license.

"Some critics will try to tell you that the open access rules kept the price of that C block low," he said. "But the truth is that there were only three bidders in that auction that could have bid for that spectrum."

Revising the spectrum screen
In addition to keeping licenses small and forcing license holders to interoperate, competitive carriers also want the FCC to limit how much spectrum any one carrier can buy as part of this auction. This may mean limiting the percentage of spectrum that one bidder can obtain in certain blocks of geographic areas. CCA's Steven Berry said he would like to see the FCC go even further. For example, he believes the agency should look at the overall spectrum holdings that any one carrier already owns and consider that in terms of the percentage that the carrier is able to get in the incentive auction.

This idea of limiting or capping how much spectrum any one carrier is allowed to own is something the FCC is also considering as part of another proposal it plans to present on Friday.

Last month, after the agency approved Verizon's bid to buy 20 MHz of spectrum from a consortium of cable operators, the FCC said it would consider a review of how it evaluates whether a single wireless provider has too much spectrum. Currently, the agency has a loose "spectrum screen" which it uses in evaluating spectrum license transfers. The deals are evaluated on a case-by-case basis. But now the FCC plans to examine revising its process so that there is a more definite limit that can be used to evaluate deals and help determine rules for future spectrum auctions.

Most carriers in the market support clarifying the FCC's position on this matter. Larger operators, such as AT&T, which are planning to acquire more spectrum, say they're unclear about what the FCC will accept and what they won't.

But the details of how the FCC will determine who has too much spectrum is likely to be controversial.

For instance, carriers like Sprint and T-Mobile believe the FCC should consider the value spectrum when setting limits and not just the overall amount of spectrum. These carriers argue that lower frequency spectrum below 1GHz travels further distances and thus requires fewer cell towers for transmission, and should therefore be considered more valuable than spectrum above 1GHz, which transmits signals over shorter distances and requires more infrastructure. And in fact, these carriers argue that when carriers' value their spectrum assets for Wall Street analysts they give more weight to lower frequency spectrum.

"All spectrum is not created equal," said CCA's Berry. "And the FCC's screen should account for that."

This might mean that a carrier like Sprint for example, which through its partnership with Clearwire has access to but does not control a significant amount of 2.5 GHz spectrum, would not trigger the screen as quickly as Verizon, which has large amounts of very valuable lower frequency 700MHz spectrum.

"The current spectrum screen fails to distinguish between the utility of different spectrum bands for wireless broadband communications," a Sprint spokesman said. "We are pleased that the commission plans to consider improvements to its spectrum aggregation regulations and we look forward to participating in these discussions."

It's unclear at this point how far the FCC will go in suggesting how the new spectrum screen should work. Some sources suggest that the FCC will ask more questions than it answers in its proposal on Friday. But one thing is clear, the rules of the next spectrum auction and any changes in how the FCC determines its spectrum screen will have a long-lasting effect on competition in the wireless market.