Reality Check: Why May 15 matters to telecom

Editor’s Note: Welcome to our weekly Reality Check column where C-level executives and advisory firms from across the mobile industry share unique insights and experiences.
There are few larger convergence points between broadcasters, wireless service providers, public safety providers and Internet businesses than the Federal Communications Commission. We have talked extensively in this column about the FCC’s role in determining rules about access to content and how it flows from host server to end user.
Another very important role of the FCC is to manage and conduct spectrum auctions. In 2015, it is expected that the FCC, in conjunction with broadcasters, will auction off approximately 50 megahertz to 120 megahertz of spectrum in the 600 MHz band. This auction will likely determine whether a third mobile network can compete with network parity against Verizon Wireless and AT&T Mobility.
In order to have a successful auction, the FCC has to have three parties actively participate:
1. Broadcasters who currently own the spectrum.
2. Wireless service providers who need the spectrum to deliver bandwidth to consumers.
3. Interested parties (like Google) who want to ensure there are opportunities for unlicensed spectrum use in the 600 MHz band (note: Google is not the only constituency, but is an example of third parties that will get a seat at the decision-making table. See their March filing with the FCC).
On May 15, the FCC is scheduled to hold an open meeting, with three of the four topics being critical to the parts of the telecommunications industry that we cover.
1. Protecting and promoting the “open” Internet.
2. Expanding the economic and innovation opportunities of spectrum through incentive auctions.
3. Policies regarding mobile spectrum holdings.
Just having one of these topics on the May 15 agenda would be significant. But all three topics make for a landmark meeting. Distinguishing between neutral accessibility and equal performance will have the greatest impact on the current landscape. We have written (and there have been numerous side bar e-mail communications) on the difference between accessibility and performance, and there is a lack of trust that any regulation established will be able to be effectively monitored and maintained. The goal to foster innovation is clear, but whether this innovation applies both to software (the next Facebook) and network (the next Comcast) ecosystems has not achieved consensus within the communications community. With the establishment of limited “high-occupancy vehicle” lanes for the Internet, broader and faster developments will be possible, and the risk inherent in overbuilding today’s duopoly will go down, especially in more populous areas.
There continues to be a lot of skepticism that Comcast, AT&T and others will reinvest Internet access revenues into their networks. This skepticism drives the desire for additional suppliers, which is the point of proposed rules surrounding the 600 MHz bidding process.
Over the past several months the FCC has been designing the auction framework. In mid-April, Re/Code published an article describing the latest developments in the process:
1. Partial economic areas will be created from spectrum provided by the broadcasters. The FCC will be in charge of packaging individual broadcaster licenses.
2. Wireless service providers will bid on PEA licenses.
3. After the bidding hits a prescribed (market price) level (precise level and metric to-be-determined), the FCC will divide the bidding into “reserved” and “unreserved” bidding.
4. A portion of the PEA (not to exceed 30 megahertz) will be reserved for smaller carriers (smaller defined as carriers who do not hold 33% or more of the low-band (sub-1 GHz) spectrum in the market).
5. A wireless carrier who qualifies as “reserved” can bid on both “reserved” and “unreserved” spectrum.
6. The auction will continue, and licenses will be awarded to both unreserved and reserved bidders.
7. Winning bidders will be required to interoperate with other 600 MHz bands.
8. Additional build out and transferability rules also apply (many of these rules are TBD, but, judging from Verizon Communications’ comments on the “perverse and unjust” rules being established, it appears that the ability to sell spectrum won in the reserve auction will be limited).
Determining the rules of any auction is critical, but this one is especially important because it will drive the quantity of broadcast spectrum to be repackaged. For example, if 70 megahertz is the target auction level for Los Angeles PEAs and 30 megahertz of this is to be reserved, some broadcasters might hold off on participating (thinking that the reserved bidders will end up paying less for 43% of the spectrum). If, however, only 20 megahertz was the target level to be reserved, the probability of reaching the target auction level would be higher. This is one example of the clarifications that the FCC will need to provide to maximize the value of the auction.
Needless to say, both AT&T and Verizon are not excited about cordoning off spectrum that could create a lower cost structure for a potential competitor. They argue that at a minimum, two 10-megahertz bands are needed for an LTE deployment. Failing to provide at least 40 megahertz for two unreserved deployments would render the auction useless for either AT&T or Verizon (and, per AT&T’s understanding of the rules, they would not be eligible for the reserve auction in approximately 70% of the country. AT&T also implied that, without rules changes, they would need to reconsider their participation in the auction, but have since walked back those comments). As discussed above, Verizon’s recent comments have been much sharper.
Could a dark horse spectrum buyer emerge from the reserve process, perhaps led by John Malone, Craig McCaw or another experienced industry pioneer? Will the maximum limitation of the reserve spectrum (30 megahertz) be enough to facilitate pairing with unreserved spectrum? Will the addition of spectrum cap rules cause broadcasters to be so discouraged that many of them decide to forego this round of auctions? The answers to these questions should be answered at Thursday’s meeting.
Finally, the entire issue of mobile spectrum holdings (also called “spectrum caps”) is on the May 15 agenda. This issue is clearly aimed at Sprint and their often rumored merger with T-Mobile US. As background, Sprint holds 120 megahertz of 2.5 GHz spectrum in 90% of the top 100 markets as a result of their Clearwire acquisition. This holding allows Sprint to deploy their Spark network across the country.
The FCC has proposed changing the spectrum cap rule to include all of Sprint’s 2.5 GHz spectrum in any future market concentration considerations (note: this would not affect Sprint’s ability to participate as a reserve bidder in the 600 MHz auctions). According to documents released by Sprint and shared with the FCC, the proposed rules would actually place Sprint under spectrum caps today for 25% of the counties in America representing 206 million people. AT&T and Verizon, in contrast, would fall under no restrictions.

Sprint proposed a weighted average proposal that calculates spectrum above 2.2 GHz (the predominance of all of Sprint’s holdings) is only one-third as valuable as low-band (below 1 GHz) alternatives. While it is highly likely that any 600 MHz wins would be grandfathered into any calculations, without significant changes to the FCC’s proposal, a merger with T-Mobile US would be impossible.
The FCC’s May 15 meeting will bring a lot of certainty to Internet prioritization, the diversity and quantity of additional low-band spectrum and the industry’s ability to create a stronger third player in the market. It also clearly shows how important and intertwined government policy is with industry profitability and sustainability.
Jim Patterson is CEO of Patterson Advisory Group, a tactical consulting and advisory services firm dedicated to the telecommunications industry. Previously, he was EVP – Business Development for Infotel Broadband Services Ltd., the 4G service provider for Reliance Industries Ltd. Patterson also co-founded Mobile Symmetry, an identity-focused applications platform for wireless broadband carriers that was acquired by Infotel in 2011. Prior to Mobile Symmetry, Patterson was President – Wholesale Services for Sprint and has a career that spans over twenty years in telecom and technology. Patterson welcomes your comments at jim@pattersonadvice.com and you can follow him on Twitter @pattersonadvice.