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How the future of US wireless service hangs on a government auction

The name of the game is spectrum, and the carriers are jockeying for rules that could determine the ultimate winners and losers of the wireless wars.

The US wireless carriers may not be able to stand in the same room together, but they can agree on one thing: the industry needs more spectrum.

Wireless spectrum -- it'll color the future for your smartphone service. James Martin/CNET

What is spectrum? It's the set of licensed radio airwaves that allow carriers to ferry cat videos and Instagram selfies wirelessly from the Internet to your smartphone. Getting more spectrum is absolutely critical to meeting that growing demand for data.

The industry gets a crack at a fresh swath early next year, when the Federal Communications Commission will take unused spectrum from TV broadcasters and resell it to the wireless operators in one of the biggest government auctions ever. The FCC is expected to vote on rules for the auction at its next meeting, in July. Details of its plan are expected later this week.

It's those rules where all of that solidarity breaks down. Smaller carriers such as T-Mobile and Sprint are advocating that the FCC set aside a special reserve of spectrum specifically for financially strapped companies. There's already a reserve in place, but the carriers want an even larger one.

Verizon and AT&T, which have deeper pockets and have shown a willingness to spend, would rather there not be a reserve at all. They say that requests to set aside even more spectrum for companies like T-Mobile and Sprint, which are backed by major multinational telecommunications companies, are an attempt to get a valuable resource on the cheap.

At stake in this debate is the ultimate outcome of the wireless auction, which most experts agree will shape the competitive landscape. The extra swath of spectrum could help T-Mobile and Sprint build legitimate national networks that hit both urban and rural areas, providing a credible alternative to Verizon and AT&T, by far the two largest wireless carriers in the nation. Or it could widen the coverage gap if the Big Two end up the winners of the next auction. How it shakes out could impact your options for wireless service over the next few years.

'Beachfront property'

The spectrum the FCC plans to sell in the next auction is especially important to wireless operators because it runs on a lower band and can be used to transmit signals over long distances and through obstacles like walls.

Are you happy with the speedy coverage in your building? You can thank the last major auction of low-band spectrum, in 2008, which allowed carriers like Verizon to kick-start their 4G LTE networks. AT&T Mobility and Enterprise CEO Ralph de la Vega once called that spectrum "beachfront property."

This auction will be different. The FCC will act as a matchmaker between TV broadcasters who want to sell and wireless operators who want to buy. Making the spectrum even more valuable is the fact that this may be the last auction of low-band licenses for many years.

Here's why it's a big deal: If spectrum is like an interstate highway system, it forms the network of roads and highways that connect mobile customers to the content and services they love. The cars and trucks traveling on those highways are the bits of data that make up your Netflix streaming videos and e-mails.

The more cars and trucks on the road, the more crowded the roadway gets, clogging up the traffic flow. During peak times, there may even be gridlock. You've probably experienced this when videos on your phone buffer.

If an operator can get its hands on more spectrum, it can add new lanes to its highway and even expand that highway so that it can reach consumers in new markets. Without access to more spectrum, an operator can't add more lanes to handle heavy congestion or build roads to new areas. Frustrated by traffic jams and a limited access roadway, consumers will likely switch to providers with wider roads that reach more places.

Without more spectrum, it's difficult for a wireless operator to survive long term.

"If you don't have enough spectrum, you can't get enough market share to survive," said former FCC Chairman Reed Hundt.

Reservations, please

This is where the FCC's rules for the auction come into play. The FCC is the arbiter of this public resource in the US, and since 1994 it has been holding auctions to divvy up licenses. How it sets the rules will help shape the outcome of the auction and ultimately the competitive landscape.

More smartphones, more traffic -- and thus the need for more spectrum. CNET

"The FCC gets the market structure right now, or it never gets it right," Hundt said.

Smaller operators such as T-Mobile say they can't go head-to-head with deep-pocketed competitors AT&T and Verizon, which have enough money to easily outspend anyone. The FCC recognizes this challenge, and it agreed last year to restrict the participation of AT&T and Verizon in the auction by setting aside some spectrum for T-Mobile and other smaller carriers to bid on.

It's not enough. T-Mobile and the rest of its coalition are asking the agency to increase the size of this reserve.

Without this increase, T-Mobile argues, AT&T and Verizon will dominate the auction and shut out competitors. T-Mobile executives say getting the FCC to increase the reserve of spectrum in the auction is not just important for T-Mobile and its customers, but for all wireless customers and industry competition.

"Every consumer in America loses," CEO John Legere wrote in a recent blog post. "You'll face higher bills, stifled innovation, crappy customer service -- all the usual AT&T and Verizon treatment! It would be a nightmare for American wireless consumers!"

Those supporting a larger reserve point to AT&T and Verizon's existing dominant position in the market. If these companies have the opportunity, they will buy spectrum just to keep it away from competitors, according to critics.

"Plain and simple -- AT&T and Verizon have the market power and resources to prevent smaller carriers from accessing additional spectrum," said Steve Berry, head of the Competitive Carrier Association, a trade group that represents smaller, local players. "The Big Two wireless carriers already own 73 percent of low-band spectrum, and to promote competition and give consumers choice, competitive carriers must have an opportunity to acquire additional low-band spectrum."

Who's really in need?

While it's true that Verizon and AT&T together hold more than 70 percent of the low-band spectrum licenses in the US, they also serve three quarters of wireless subscribers. Because of this, AT&T and Verizon are actually the most spectrum-constrained operators, said Roger Entner, an analyst at Recon Analytics.

"Would it help T-Mobile to have low-band spectrum?" he said. "Yes. But why should the government subsidize that for them and give a multibillion-dollar company what's tantamount to corporate welfare?"

There is no evidence that either AT&T or Verizon is willing to spend billions of dollars just to keep the resource away from competitors, Entner said. On the contrary, these companies have been buying spectrum on the secondary market, and deploying it as quickly as they can. The small amount of low-band spectrum that T-Mobile already owns resulted from a spectrum swap with Verizon.

"It certainly seems odd for a company supposedly willing to spend billions to keep others out of 600MHz spectrum to happily sell T-Mobile 700MHz spectrum," Doug Brake, an analyst with the Information Technology and Innovation Foundation, wrote in a blog post discussing the upcoming auction.

Not in the game

In a recent blog post from Verizon, the company points out that neither T-Mobile nor Sprint participated in an auction of low-band spectrum in 2008.

"The last time large swaths of low-band spectrum came to auction in 2007, for example, T-Mobile could have participated," the company wrote. "It chose not to."

But 2008 was a different time. T-Mobile had just purchased spectrum in an earlier auction, and parent Deutsche Telekom was reluctant to invest again. Sprint, meanwhile, was focusing on fixing its network and reversing its customer defections, and lacked the financial resources to participate. The data explosion was just getting started.

AT&T's vice president of federal regulatory affairs, Joan Marsh, has likewise criticized T-Mobile for simply being unwilling to spend for growth.

"You can't win if you don't bring capital and stand prepared to use it," she said in a blog post. The post discussed the results of the FCC's most recent auction in which T-Mobile participated but curtailed its spending.

T-Mobile's Legere called that auction, which raised more than $40 billion in revenue, a "disaster for American wireless consumers" because AT&T, which spent $18.2 billion, and Verizon Wireless, which spent $10.4 billion, won the majority of the licenses.

But Marsh argued that T-Mobile, which spent $1.77 billion in the auction, pulled back when the prices began to rise. She said an analysis of the bidding showed that T-Mobile had as much as $3.5 billion in capital to spend, but as valuations rose in the auction it looked like T-Mobile "decided to take some of its capital off the table, which was certainly its prerogative to do." Still, it's unfair for T-Mobile to cry foul now, she said. "You can't withdraw capital from the auction then complain that you didn't win."

Indeed, another company, satellite TV provider Dish Network, did continue bidding. The company spent a total of $10 billion, after taking a $3.3 billion bidding discount by working with so-called "designated entities," or small businesses that under the FCC auction rules can earn discounts on spectrum licenses. Now Dish is reportedly interested in acquiring T-Mobile.

Fred Campbell, former head of the wireless bureau at the FCC under Republican chairman Kevin Martin, pointed to the success of Dish in winning licenses as proof that other companies can bid against AT&T and Verizon and win licenses.

"Everyone who runs a company would love to have government help if they could get it," he said. "But do they require the government help? The answer is usually no."

Still, he said the government bears a certain amount of responsibility to ensure there are limits on how much spectrum any company can own. But he added that knowing where to draw the line in terms of how much the FCC intervenes is not cut and dry.

FCC Chairman Tom Wheeler said in a blog post last week that the agency is wrapping up its new rules. He promised the outcome will be fair. But he acknowledged that "no single party will be happy with everything" the agency has done in crafting an auction that has "more moving parts than a Swiss watch."

In the end, he said, "Hard decisions in difficult situations mean that no stakeholder will get exactly what it wants."