Assessing success in the FCC's 700MHz auction

News.com's Anne Broache co-wrote this report.

The Federal Communications Commission generated $19.6 billion in the 700MHz spectrum that ended Tuesday, but the true success of the auction will take months or even years to assess.

There's no question that the auction, which began on January 24, was a monetary success for the government--it raised a record $19.6 billion in 261 rounds of bidding. During a conference call with reporters Tuesday after the bidding closed, FCC Chairman Kevin Martin said the 700MHz auction was the most successful auction the agency has ever conducted, raising more money than all previous auctions put together, excluding the Advanced Wireless Services, or AWS, auction in 2006.

"The $19.6 billion generated by the auction nearly doubled congressional estimates of $10.2 billion," Martin said. "All other 68 auctions conducted by the FCC in the past 15 years collectively generated a total of only $19.1 billion in receipts. Even with open-platform and aggressive build-out obligations, each of these blocks sold for more than AWS-1 blocks with comparable bandwidth and license areas."

Despite the obvious financial success of the auction, it will be a long time before it's clear whether the FCC was successful in achieving some of its broader policy goals, such as creating a more open wireless marketplace and a nationwide interoperable public safety wireless network.

The 700MHz spectrum has long been considered the last bit of beachfront wireless real estate left in the air. The spectrum, which is being vacated by the switch to digital TV in 2009, is considered valuable because of inherent properties that allow it to propagate over long distances and penetrate walls. Some experts believe the spectrum is ideal for offering robust, affordable wireless broadband services.

The spectrum auction attracted a broad range of companies, including nontraditional players such as Internet search giant Google and wireless technology provider Qualcomm. Traditional phone companies Verizon Wireless and AT&T were also interested in getting their hands on the spectrum.

Trying a new approach
As part of its rule making for this auction, the FCC tried something new. It set specific rules for two of the five blocks of wireless spectrum. For the C block, it established rules that require license winners to build a network allowing any device to operate on it. The C block reached its threshold of $4.6 billion in only 17 rounds of bidding, triggering this open-access rule. But the D block, set aside to build a nationwide public-safety network, did not meet its reserve price.

Google, which had pushed for open-access rules for some of the spectrum, was bidding on the open-access C-block licenses. But Rebecca Arbogast, a principal telecommunications analyst with Stifel Nicolaus, said she wouldn't be surprised if Verizon Wireless, and not open-access proponent Google, takes home that slice of spectrum. (Google had committed to bidding up to $4.6 billion, but the final price for that block was $4.75 billion, according to FCC figures released Wednesday.)

"When it finally came time to go into the auction, I think they (Google) were pretty firm about wanting to enforce the open-access conditions as much as it could be enforced, but also being firm on not really being interested in becoming a network operator," she said. "I think they were a willing loser."

Why open access matters
The open-access requirement is significant because today, U.S. wireless operators have tight control over which devices can be used on their networks and which applications can be used on those handsets. Google and other companies, such as Skype, have complained that this is too restrictive.

Verizon, which has traditionally been the most strict operator in the U.S. about what it lets on its network, recently said it would allow non-certified devices on its network. On Wednesday, the company is hosting a developer conference in New York where it's expected to reveal details of the first version of specifications for these new open-access devices for its network.

If Verizon Wireless is the winner of the C-block licenses, it will likely include this spectrum in its open-access plans. But until details about the actual service plan are revealed, it's difficult to say just how serious Verizon is about open access. If the service is priced too high or customers find that buying their own handsets is too expensive, the whole notion of an open-access network could be moot.

Still, Chairman Martin said on the conference call with reporters Tuesday evening that he was pleased the auction had prompted the open-access rules to take effect.

"With the open-platform requirements on one-third of the spectrum, consumers will be able to use the wireless device of their choice on those networks and download whatever software or applications they want on it," he said. "The open platform will help foster innovation on the edge of the network, while creating more choices and greater freedom for consumers to use the wireless devices and applications of their choice."

Another slice of the spectrum called the D block was set aside to build a nationwide network for public-safety operators. But that segment didn't attract the FCC's $1.3 billion reserve price. In fact, it didn't attract any bids beyond the $472 million opening bid.

Stifel Nicolaus's Arbogast said she thought a combination of factors caused the lackluster bidding on the D block, including lack of certainty over what was expected of the public-safety network that had to be built, and general tightening of capital markets.

Frontline Wireless, an entity that hoped to build a national network for emergency responders, was expected to be the big winner of the D-block spectrum licenses. But the company, which was headed by former FCC Chairman Reed Hundt, folded at the beginning of January just before the bidding got under way.

Now it looks like the FCC will re-auction the D-block spectrum separately later this year. FCC Chairman Martin would not say specifically when the new D-block auction would take place, but he said the commission hoped to expedite the process so the spectrum was available in plenty of time before the February 2009 digital TV conversion deadline. He also reiterated his hope that the spectrum could be used toward building a nationwide public safety network.

Representative Edward J. Markey (D-Mass.), chairman of the House Subcommittee on Telecommunications and the Internet, will hold a hearing to decide what to do with the D-block spectrum.

"I believe that any new auction for the 'D block' should be consistent with an overarching policy goal of advancing public safety objectives and ultimately achieving a state-of-the-art, broadband infrastructure for first responders," he said in a statement. "In developing a plan for a re-auction of the 'D block,' the FCC should also take into account the auction results to gauge the level of new competition achieved. Policymakers should also analyze whether a need for a high reserve price continues to exist."

The identities of the auction bidders are still a secret. To prevent anti-competitive behavior, the FCC kept the bidding anonymous. Martin said the names of the auction winners would not be revealed until the commission voted on separating the D block from the rest of the auction. Since the FCC won't be able to get this item on its agenda for at least three weeks, the names of the winners won't likely be revealed until April.