AT&T has threatened to not participate in the upcoming incentive spectrum auction if the Federal Communications Commission adopts rules that set aside spectrum for smaller carriers.
In a filing with the FCC on Wednesday, AT&T said that it has never declined to participate in a spectrum auction in the past. And it said it has no intention to not participate in this one. But it warned that if the FCC adopts rules that restrict how many licenses AT&T can bid on, it will not participate at all.
"If the restrictions as proposed are adopted, AT&T will need to seriously consider whether its capital and resources are directed toward other spectrum opportunities that will better enable AT&T to continue to support high quality LTE network deployments to serve its customers," Joan Marsh, vice president of federal regulatory affairs for AT&T, wrote in her ex parte letter to the FCC.
If AT&T lives up to its threat, it could put the whole auction in jeopardy. Not only would it likely negatively affect how much revenue the FCC could raise from the auction, but it would also mean that a key wireless operator would not be using the 600 MHz sliver of wireless spectrum to deploy 4G LTE service. And that would be mean that less interoperability among LTE devices for wireless consumers.
It's difficult to say at this point if AT&T's threat is real or if the carrier is merely bluffing in order to get the FCC to adopt more favorable rules. So far Verizon, the other major operator that could be affected by these new rules, has not filed a complaint with the FCC. And a source close to the company said Verizon has no intention of filing anything regarding the proposed rules. Verizon has not put out an official statement on AT&T's actions.
Some in Washington, DC think that without Verizon's public support in opposing these rules, it might be hard to convince regulators that AT&T is truly at a disadvantage under the proposed restriction. What's more, a closer look at AT&T's arguments don't seem to hold up to scrutiny, which may suggest the carrier is bluffing in an effort to force the FCC to adopt more favorable rules.
The FCC has not commented on AT&T's filing. But FCC Chairman Tom Wheeler issued a statement to news agencies regarding reports of the proposed auction rules.
"All who want to participate in the auction will be able to bid," he said. But he acknowledged that the agency may also try to make sure that smaller operators have a chance to participate. "In order to assure coverage and competition in rural America, it may be necessary to assure no one can monopolize the bidding," he added.
So what exactly is the FCC proposing in these rules?
Specifically, the new rules would set aside as much as 30 MHz of wireless spectrum in the auction once an undetermined threshold that shows that bidding is competitive has been hit. The rules would prohibit companies that already hold at least one-third of the low-band spectrum (spectrum under 1 GHz) in a given market to bid on additional spectrum in the 600 MHz auction in those specific markets. In its filing, AT&T complained that the rules are specifically targeted at restricting AT&T and Verizon from bidding on certain blocks of spectrum.
And the carrier argues that the rules unfairly hurt AT&T's chances of obtaining enough spectrum to do anything meaningful with it.
"AT&T estimates that if such restrictions are adopted, it will be restricted in markets covering over 70 percent of U.S. POPs," Marsh said in the filing. She further argued that AT&T and Verizon "would be limited by the auction restrictions to a fragmented, uneconomic and inefficient 600 MHz footprint."
But it seems that AT&T's doomsday interpretation may be a bit overstated. If the FCC is able to get TV broadcasters to give up a total of at least 80 MHz of wireless spectrum for the auction, which many experts feel is doable, that would leave about 40 MHz of spectrum that would be available for unrestricted bidding by AT&T and Verizon. (Roughly 10MHz of spectrum would be reserved as guard bands to prevent interference with TV broadcasters who remain on the air.)
AT&T's Marsh states in the letter to the FCC that AT&T needs at least two channels of 10 MHz spectrum to build its 4G LTE network using the 600MHz spectrum made available through the auction. If AT&T and Verizon walk away with all 40 MHz of unrestricted spectrum, they each could still get at least 20 MHz of spectrum.
Second, AT&T argues that setting aside a slice of spectrum would eliminate "real bidding competition." The company complains that not allowing AT&T and Verizon to participate in bidding for licenses in certain markets might result in lower auction revenue.
But AT&T's logic seems a bit flawed in this respect. Once smaller companies realize they are competing against deep-pocketed AT&T and Verizon, it's unlikely they will stay in the auction. Instead, smaller players may drop out of the auction early. In this scenario, AT&T or Verizon may actually end up with the licenses at a far cheaper price than they would have paid had more bidders remained in the auction, since the more bidders that remain in the auction would drive up prices.
The FCC's plan has not been finalized yet. It will likely be updated and revised before it's circulated among the five FCC commissioners. The rules are expected to be voted on at the FCC's open meeting in May. The incentive spectrum auction is slated for mid 2015.
A delicate balancing act for the FCC
The issue of whether the two largest operators could be restricted from bidding has been debated since the legislation that authorized the auction was even written. AT&T and Verizon lobbied Congress and now the FCC to keep the auction free of restrictions. They have argued that this is the best way to maximize auction revenue. Meanwhile, competitive carriers, such as T-Mobile and Sprint, have asked for an auction design that would ensure that smaller operators are not shut out of the auction.
"You have AT&T and Verizon taking 82 percent of the profits in wireless and about 68 percent of the subscribers," Kathleen Ham, vice president of federal regulatory policy at T-Mobile, said during a panel at the Competitive Carrier Association in San Antonio last month. "We are nipping at their heels, but they have deep pockets."
The fear among smaller operators is that without any restrictions in the auction, AT&T and Verizon, which have the most money to spend, will outbid all other competitors and will ultimately walk away with the lion's share of the spectrum. It appears the FCC has listened to these arguments and is trying to design an auction that will at least give smaller carriers a chance to win licenses they need to keep their businesses alive.
This auction is particularly important to the wireless industry because it is likely the last time low-band spectrum will be made available for a long time. Low-band spectrum, or spectrum that is below 1 GHz, is particularly useful and valuable to wireless operators because it can propagate signals over longer distances and penetrate obstacles like walls. This makes it ideal for deploying services in rural areas and it improves in-building coverage.
"It's critical to get this auction right," Ham said during the panel discussion in San Antonio. "As the Department of Justice argued last year, we can't compete without spectrum. And AT&T and Verizon have the size and power to dominate this auction. So this isn't just about putting out spectrum and allowing the highest bidder to take it. You also have to care about competition."
Operators such as T-Mobile and Sprint are in desperate need of this low-band spectrum. And rural operators also need it, since higher frequency spectrum, which travels over shorter distances would be more expensive in terms of deployment. Meanwhile, AT&T and Verizon, which already own spectrum in the 700 MHz band, say they need more low-band spectrum in order to improve in-building coverage of their existing LTE networks.
Smaller carriers have said in the past that it would be disastrous for AT&T and Verizon to not bid at all in the auction. It is essential for them to participate and win some spectrum licenses because that will help create an ecosystem for mobile devices and network equipment. It will also ensure interoperability among carriers, which is crucial for smaller carriers who need to roam onto other networks.
"We need AT&T and Verizon to participate in this auction," Ham said. "As we move to a common LTE band, we want to create an environment where everyone can roam on different networks. And that can only happen if AT&T and Verizon get some of this spectrum, too."