Politics

ISPCON: The 700 MHz Auction

A multitalented group of presenters described how the auction for this spectrum will work.

by Alex Goldman ISP-Planet Managing Editor [November 19, 2007]

The FCC is holding its seminar on the 700 MHz auction today but there's still time to get involved if you're interested. The initial paperwork is due on December 3, 2007 and the first payments are due on December 28, 2007. The auction itself will be held on January 24, 2007, and a mock auction will be held on January 18, 2007 to get bidders accustomed to the system whether they're going to be bidding online or in person.

The January 24, 2007 auction is called Auction 73. If any spectrum fails to raise enough money, it will be offered in a section auction at a later date, and that auction will be called Auction 76.

Oddly enough, although Auction 76 has not been scheduled, it appears to be open only to bidders who participate in Auction 73. Of course, if the first auction fails to meet the reserve price, the section auction should be open to new bidders.

So when I attended the ISPCON session in October, all of this seemed remote, but the date is approaching fast.

It's good spectrum, but
George Harris, senior vice president at Denver, Colo.-based investment bank Falkenberg Capital Corporation, said that it's good spectrum, but there's no equipment for it yet. So you have to bid on it before knowing exactly what you'll be able to do with it.

Since it's relatively low frequency bandwidth, there's a smaller potential throughput per unit of spectrum. Harris said he's seeing higher potential valuations for this spectrum in rural areas where customer density is lower and the propagation characteristics are a real advantage.

In contrast, in urban areas, a base station that can reach far will not necessarily have an advantage because the base station could not handle all of the available customers. In such a situation, higher bandwidth that can reach a shorter distance but with better throughput should prevail.

In rural areas, Harris said, the 700 MHz spectrum allows you to construct fewer towers and you expect lower bandwidth usage, both of which are ideal. 700 MHz spectrum does go through trees (but not mountains, he noted).

Harris said there are about 15 operators providing fixed wireless broadband using 700 MHz spectrum already auctioned off by the FCC in previous auctions. Currently, operators have a choice of equipment from four vendors, he said: Airspan (using PPMA: pre-emptive polling multiple access), Arris (using DOCSIS), WaveIP (using OFDM/WiMAX), and Soma (using WiMAX). Harris said that Soma gear will have the most expensive base station but the cheapest CPE.

Predicting a price
Obviously, it's impossible to predict the actual price that spectrum will sell at because the price will be set by a competitive auction.

Nevertheless, Harris said that previous auctions can be used as a guide. He said that the coverage areas are similar to PCS coverage areas but that PCS spectrum was more valuable to cellular companies. So he suggested that PCS prices can be used as a starting point and that ISPs can expect 700 MHz spectrum to sell at a discount to the PCS spectrum.

So how do you price spectrum? The value of spectrum is measured in dollars per MHz-pop. So if you purchased 10 MHz of spectrum in an area covering 10,000 people, and paid $0.10 per MHz-pop, that would be $0.10 x 10 MHz x 200,000 people = $200,000.

PCS auctions valued spectrum at prices ranging from $0.33 for rural areas to $1.00 in densely populated areas. Speculators made money, as transactions after the auction priced the most valuable spectrum at up to $2.70 per MHZ-pop.

Because there is a history of auctions selling spectrum at prices lower than the market is willing to pay and because spectrum owners have a history of obtaining additional rights to spectrum and perpetual renewals of spectrum leases (see Related articles, below), the auction may attract speculators hoping to buy the spectrum and then sell it at a higher price and it may also attract incumbents who hope to lock up the spectrum to prevent competition.

Loopholes and wrinkles
The FCC has rules that require the spectrum to be used, preventing the lockup of auctioned spectrum; as far as we know it is encouraging speculators to participate.

In my opinion, the buildout requirements are lenient and could be manipulated to allow spectrum owners to redline their buildout—the rules could even reward redlining.

The rules say that the spectrum is to be vacated by broadcasters on February 17, 2009. However, noted Stephen Coran, a partner at the Washington, D.C.-based law firm Rini Coran, this is a politicized process and broadcasters may not vacate the spectrum on the expected date, so it is possible that the spectrum will not be available when scheduled.

Therefore, the rules about building out service do not have fixed dates; they are based on fixed amounts time from the date (still somewhat uncertain) at which the spectrum becomes available to auction winners.

The rules [.pdf] differ depending on the geographic area of the license. There are three sizes of geographic area. The smallest is called Cellular Market Area (CMA), the mid-sized grouping is called Economic Area (EA), and the largest is the Regional Economic Area Grouping (REAG). Maps of each are available at the Auction 73 page on the FCC website. There are 12 REAGs, about 175 EAs, and about 734 CMAs (the number of licenses gives you an indication of the size of each area, and the maps show you the size of the area).

Those with EA and CMA licenses are required to cover 35 percent of the geographic area of the license within four years and 70 percent of the area by the end of the license term. Those with REAGs are required to cover 40 percent of the population within four years and 75 percent of the population by the end of the license term. If they fail to meet their four year benchmark, the term of the license is reduced from 10 years to 8 years.

The loophole is this: if they fail to meet the final benchmark, the FCC repossesses the area not covered and re-auctions it. In effect, in my opinion, a builder who chooses to serve wealthy areas only and does not wish to serve poor areas simply has to give the FCC the right to auction the right to serve the poor area, a negligible penalty.

Another twist is that in order to prevent collusion on the bidding, the FCC will inform you of the other bidders for the licenses you're interested in and forbid you to communicate with them. This is valuable information.

Finally, Harris said that if you're intersted in a specific license, you might want to use the FCC website to see who has bid on that coverage area before, because they might try to lock up the spectrum you're interested in.

—End