Wetmachine Blog: Econoklastic

The 700 MHz Band Auction, Part IIIc: The Big Guys and the Wild Cards

Finally, again let’s begin our analysis of strategic options for major actors in Auction 73, 700 MHz Band, with a look at the footprints established by many of those actors in two previous Lower 700 MHz auctions (Auction 44 and 49) and the AWS-1 auction (Auction 66):
Cellular Market Areas (CMA) Map for Auction 44
Economic Area Groupings (EAG) Map for Auction 44
Cellular Market Areas (CMA) Map for Auction 49
Economic Area Groupings (EAG) Map for Auction 49
Cellular Market Areas (CMA) Map for Auction 66
Economic Areas (EA) Map for Auction 66
Regional Economic Area Groupings (REAG) Map for Auction 66

The Big Guys

There are quite a few major actors who qualify as the genuine big guys in Auction 73. Their participation and fundamental interests in this spectrum ensure that the reserve prices will be met and likely exceeded on all blocks (with some caveats on D Block).

QUALCOMM makes the list of the big guys in the auction if for no other reason than it nearly scored national footprint (minus the Western EAG) in a Lower 700 MHz auction. The 700 MHz Band auction provides a source of spectrum entirely compatible with its acquisition for its MediaFLO datacasting enterprise. It may be a C Block contender, but it is more likely that QUALCOMM will concentrate on E Block to flesh out its national footprint and consolidate. This isn’t going to be a QUALCOMM versus the world auction; QUALCOMM will narrowly target specific licenses, go after them tenaciously, and then get out if it looks like the spectrum is going for higher prices than expected.

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The 700 MHz Band Auction, Part IIIb: More Mid-Range Competitors

Once again let’s begin our analysis of strategic options for major actors in Auction 73, 700 MHz Band, with a look at the footprints established by many of those actors in two previous Lower 700 MHz auctions (Auction 44 and 49) and the AWS-1 auction (Auction 66):
Cellular Market Areas (CMA) Map for Auction 44
Economic Area Groupings (EAG) Map for Auction 44
Cellular Market Areas (CMA) Map for Auction 49
Economic Area Groupings (EAG) Map for Auction 49
Cellular Market Areas (CMA) Map for Auction 66
Economic Areas (EA) Map for Auction 66
Regional Economic Area Groupings (REAG) Map for Auction 66

The Mid-Range Competitors (Continued)

Cablevision is bidding as CSC Spectrum Holdings LLC. In Auction 66 it bid as Dolan Family Holdings and got creamed by incumbent blocking bidding. Cablevision unsuccessfully bid on two EAs, AW-BEA010-B (NYC-Long Is. NY-NJ-CT-PA-MA-VT) and AW-BEA010-C (NYC-Long Is. NY-NJ-CT-PA-MA-VT), and the following CMAs: AW-CMA001-A (New York-Newark, NY-NJ), AW-CMA042-A (Bridgeport-Stamford-Danbury CT), AW-CMA062-A (New Brunswick-Perth Amboy NJ), AW-CMA070-A (Long Branch-Asbury Park NJ), AW-CMA144-A (Orange County NY), AW-CMA151-A (Poughkeepsie NY), AW-CMA551-A (Ocean NJ), and AW-CMA552-A (Sussex NJ). Cablevision unsuccessfully sought all three licenses for the Northest REAG: AW-REA001-D, AW-REA001-E, and AW-REA001-F. The pattern is straightforward: replicate the footprint of their cable service in the NY-CT-NJ region in the A and B Blocks and try for one of the Northeast REAGs. Cablevision didn’t get it in AWS-1 and it has to do well in Auction 73 or its triple play options are seriously curtailed. Anonymous bidding helps Cablevision only a bit, because the chief competitors know exactly where they have to bid and it is prime spectrum in the richest market in America.

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The 700 MHz Band Auction, Part IIIa: The Classic Pattern and the Mid-Range Competitors

To begin our analysis of strategic options for major actors in Auction 73, 700 MHz Band, it is useful to look at the footprints established by many of those actors in two previous Lower 700 MHz auctions (Auction 44 and 49) and the AWS-1 auction (Auction 66):*
Cellular Market Areas (CMA) Map for Auction 44
Economic Area Groupings (EAG) Map for Auction 44
Cellular Market Areas (CMA) Map for Auction 49
Economic Area Groupings (EAG) Map for Auction 49
Cellular Market Areas (CMA) Map for Auction 66
Economic Areas (EA) Map for Auction 66
Regional Economic Area Groupings (REAG) Map for Auction 66

The Classic Pattern

The classic pattern for an RTC and for most CLECs and WISPs in these auctions is that of Agri-Valley: expansion through Auctions 44, 49 and 66 to attempt to match its landline footprint with CMA acquisitions. In Auction 66 Agri-Valley went for and failed to obtained consolidation in Flint, Lansing, Saginaw, Muskegon, Gogebic, Alger, Cheboygan, Roscommon, and Cass. Expect Agri-Valley to continue this pattern in Auction 73. The same holds true for Whidbey Telephone in Maine in Auction 49, for Hemingford Cooperative in Nebraska, Wyoming, and Colorado in Auction 66, Bluegrass Cellular In western Kentucky in Auction 44, Union Telephone in Wyoming and Colorado in Auction 44 and 66, East Kentucky Network in eastern Kentucky in Auction 44, Fidelity Communications in Missouri in Auction 66, KTC AWS in South Dakota in Auction 66, Public Service Wireless in Georgia in Auction 66, Redwood County Telephone Company in Wisconsin and Minnesota in Auction 44, 44, LL License Holdings in Iowa, North Dakota, South Dakota, Minnesota, and Nebraska in Auction 66, Grand River Communications in Iowa in Auction 44, and Iowa Telecommunications in Iowa in Auction 66. This pattern will continue to hold in Auction 73, and will hold for the vast majority of new entrants in Auction 73: their action will be in the CMAs and to a much lesser extent in the EAs.

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Breaking News: Frontline Bites the Dust

Frontline Wireless LLC, which submitted an incomplete application to participate in the FCC’s Auction 73 for the 700 MHz band as Licenseco LLC and which was expected to be a major competitor for the D Block nationwide commercial-public safety broadband license, has folded and is “closed for business.”

Industry rumours suggest that Frontline’s bidding entity, Licenseco LLC, failed to make a required upfront payment deadline on January 4.

Speculation focuses on several possible explanatory scenarios. Frontline has changed its business plan several times and, frankly, I was never completely convinced that it would bid when push came to shove. Verizon’s belated embrace of open attachment rules — the Carterfone condition which the FCC has imposed on Auction 73 — gave many of Frontline’s Silicon Valley backers what they wanted without having to hazard the auction or undertake the encumberance of deployment requirements if they prevailed at auction. The possibility that Google might bid the reserve price on C Block to force Verizon and AT&T to concentrate on battling it out for the C Block REAGs while Google seriously bid on the less expensive D Block to acquire a nationwide third broadband pipe and implement its nondiscriminatory, wholesale open access business model may have had something to do with Frontline’s decision to pull out. The possibility that AT&T may have been interested in D Block for national backhaul could have presaged a serious challenge has also been mooted as a factor in Frontline’s decision.

It’s likely that some of Frontline’s backers and associates — Fortress Investment Group’s Backline bidding entity and Cellular South in particular — will remain in the auction, but Frontline’s demise creates extremely interesting possibilities for D Block competition in the auction.

Part III of the 700 MHz series, Bidding Strategies of the Major Actors, coming soon…

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Part IIb — Who's Who in 700 MHz: the Experienced Actors

Now we turn our attention to the more experienced potential bidders in Auction 73 for the 700 MHz Band. All have participated in either one or more of the three Lower 700 MHz auctions (44, 49, or 60) or the AWS-1 auction (66).

The Big Guys

Cellco Partnership, Verizon Wireless’ bidding entity, spent a whopping $2,808,599,000 in the AWS-1 auction for 13 licenses and comes to Auction 73 well positioned to bid for the C Block REAGs and possibly the D Block nationwide license.

MetroPCS 700 MHz, LLC, is the bidding entity for cellular telco MetroPCS, which spent $1,391,410,000 in the AWS-1 auction for 8 licenses. MetroPCS appears to be looking to establish national footprint and will be a strong contender in C Block, and likely using A and B Blocks to fill in coverage gaps.

Cricket Licensee 2007, LLC, spent $710,214,000 for 99 licenses in AWS-1; Denali Spectrum License, LLC, spent $274,083,750 for one license in AWS-1. Both are owned by LEAP Wireless; if their AWS-1 pattern holds, expect them to be mainly active in A and B Blocks, pushing to achieve national footprint, although Cricket may be a C Block contender.

The incredulity expressed by some of the trade press over the application of tech company QUALCOMM,Inc., to participate in the 700 MHz auction seems odd given the fact that QUALCOMM achieved nearly-national footprint in a Lower 700 MHz auction by spending $38,036,000 for five EA licenses. QUALCOMM is positioned to flesh out national footprint in the A and B Blocks or to become a C Block contender.

Cincinnati Bell Wireless, LLC, is the wireless subsidiary of a regional CLEC which spent $37,071,000 for 9 licenses in AWS-1. Expect Cincinnati Bell Wireless to concentrate in the B Block CMAs to reinforce regional coverage.

Bluewater Wireless, L.P., is Aloha Partners’ Charles Townsend’s new stalking horse. Townsend and Aloha Partners spent $34,853,070 in the three Lower 700 MHz auctions amassing the largest bundle of spectrum in the auctions, which they have sold to AT&T for $2.5 billion. Bet on Townsend trying to recapitulate that coup, probably in the A and B Blocks, but Aloha Partners got completely frozen out in the AWS-1 auction, partly by blocking bidding by incumbents, partly because Townsend was unwilling to bid high enough where he wasn’t facing concerted blocking. Auction 73 is shaping up to be more costly than AWS-1, and I doubt that Bluewater Wireless is going to be able to pick up nearly as much spectrum on the cheap as it did in the Lower 700 MHz auctions.

Cellular South Licenses, Inc., the bidding entity for cellular telco Cellular South, spent $33,025,000 for 12 licenses in AWS-1. Look for Cellular South to continue to cover gaps in footprint in the A and B Bocks, although it may compete for some C Block REAGs.

Cavalier Wireless, LLC, spent $23,572,350 amassing 51 licenses in the Lower 700 MHz auctions and 30 licenses in AWS-1. Cavalier may try to establish national footprint or concentrate on firming up its regional dominance.

Vulcan Spectrum, LLC, spent $15,075,000 gaining 24 Lower 700 MHz licenses; Bend Cable Communications, LLC, spent $528,000 on 2 AWS-1 licenses. Both are investments of Microsoft co-founder Paul Allen. They concentrated on obtaining spectrum in the Washington-Oregon region of the Northwest in Lower 700 MHz and AWS-1, but Allen’s deep pockets make Vulcan in particular a potential C Block contender as well as aspiring for regional coverage consolidation in the A and B Blocks.

Cox Wireless, Inc., was part of the SpectrumCo coalition which gained 137 licenses for $2,377,609,000 in AWS-1, as was part of the Advance/Newhouse Partnership. However, the real powerhouses in SpectrumCo — Comcast, Time Warner, and Sprint/Nextel — decided to sit the 700 MHz auction out. However, Cox’s cable TV operations and Advance/Newhouse’s resources as a newspaper, magazine, and cable TV conglomerate position both of them to be significant bidders for the A, B, and C Blocks.

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Part IIa — Who's Who in 700 MHz: the New Entrants

Let’s start with a profile of the new entrants to the 700 MHz auction. Part IIb will profile the potential bidders who were active in the two Lower 700 MHz auctions and the AWS-1 auction.

The Big Guys

I sound a little crazy calling AT&T Mobility Spectrum, LLC, a new entrant, but this AT&T subsidiary technically didn’t exist during previous auctions, although it is essentially Cingular beefed up with AT&T’s Aloha Partners acquisitions from the Lower 700 MHz auctions. It comes to the table holding the most spectrum of any 700 MHz bidder. More detail on possible ATT plans in Part III, but it could range from support of rural telcos with whom it has existing roaming agreements in the A and B Blocks to major challenges for the C Block REAGs or the D Block nationwide license.

Alltel Corporation, the major U.S. cellular company, did extremely well in the PCS auctions, but sat out the AWS-1 and Lower 700 MHz auctions. It’s also a little odd to call Alltel a new entrant, but it’s been a while since it has participated in an auction and it qualifies under the definition of not participating in the run-up auctions to 700 MHz. Look for Alltel to have interests at play in A, B, C, and E Blocks, and I would not rule out the possibility of a try for the D Block nationwide license, although I consider this unlikely.

Licenseco, LLC, is the name under which Frontline is bidding. This is a major D block competitor.

Backline is the name under which Fortress Investments Group is bidding. It brings substantial financial clout to the table and may be a significant C Block actor, although it is unlikely to be a D Block competitor because of an agreement with Frontline.

Chevron USA Inc., the major energy company, automatically becomes a serious competitor because of its financial resources, but I think it will concentrate on Gulf of Mexico CMAs and EAs or the Gulf REAG to support its fields there, much in the way PetroCom License Corporation did in the AWS-1 auction.

Google Airwaves Inc., Google’s bidding entity, singlehandedly changed the nature of the 700 MHz auction by pushing for wireless Carterfone and open, nondiscriminatory wholesale network access conditions. They got the wireless Carterfone condition from the FCC and they insist that they will use an open, nondiscriminatory wholesale network business plan to put together a third broadband pipe. They will definitely be going for the C Block REAGs and possibly some complementary A, B, and E Block spectrum with deep pockets.

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700 MHz, Part I: How Do the Bidders Compare to AWS-1?

This is the first installment of a three-part essay on the upcoming 700 MHz auction which the FCC will be starting in January 2008. Part I looks at the aggregate data on potential bidders and compares them to bidders in the AWS-1 auction. Part II examines the new entrants and major actors in detail. Part III analyzes potential bidding strategy on the part of the most important actors in the auction.

It is difficult to understand why so much is being made of incomplete applications and the postponement of the final application and upfront payment deadline to January 4, 2008 for the FCC’s 700 MHz auction. This is FCC business as usual as far as auctions are concerned. Auction 44, the Lower 700 MHz auction, was postponed from June 2002 to January 2003, and of 153 original applicants only 125 qualified with upfront payments. The second Lower 700 MHz auction, Auction 49, was postponed to May 2003, and 56 of 60 applicants qualified. The AWS-1 auction, Auction 66, was postponed from June to August 2006 and had 171 incomplete applications (and 81 completed) as of July 2006; ultimately 168 bidders quaified and made upfront payments.

Looking at the applicant pool, the potential 700 MHz bidders differ somewhat from the AWS-1 bidders in the aggregate:

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Well, Yeah, Actually, I Am Gloating…

I try not to gloat, but it’s impossible not to take a certain amount of satisfaction in the Wall Street Journal‘s confirmation on Nov. 16 that Google intends to bid in the 700 MHz auction in January, regardless of whether it has partners in a bidding consortium. This confirms my prediction back on August 2 in Econoklastic that Chairman Martin’s refusal to impose a wholesale open access condition on the C block would not prevent Google from bidding, despite naysayers in the press and on Wall Street.

The underlying reality is that Google needs a third broadband pipe to escape imposition of monopoly rents by the wireline and cable carriers, since net neutrality provisions with real enforcement teeth are nowhere to be seen on the horizon: that means do it themselves or get someone to do it for them. That reality hasn’t changed, and the guys at Google clearly recognise this fact. I am equally heartened by assurances from Google counsel Rick Whitt at a conference in NYC week before last that Google still intends to implement its full wholesale open access business plan over any spectrum it obtains in the 700 MHz auction.

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The 77% Solution, or Even with Three Different Methods You Still Get a Take Rate Greater than 70%

There has long been reason to suspect the data which the cable industry provides to various reporting services like Warren Communications News, Kagan Research, and Nielsen Media Research for U.S. cable coverage and subscribers precisely because the cable industry has considerable incentive to lie about it. Specifically they have incentive to under-report both coverage and subscribers so as to avoid a finding that the 70/70 limit – that seventy percent of American homes are passed by cable and that seventy percent of homes subscribe to cable – has been reached, thus triggering additional FCC regulation of the industry. The numbers have danced around the mid- to upper-60% range reported in these sources since 2004, only tipping over in Warren Communications News’ Television and Cable Factbook, which recently reported a 71.4% take rate to the FCC.1 When it became clear that the FCC was prepared to take action to invoke the 70/70 rule on the basis of the Warren data, the managing editor of Warren Communications News’ Television and Cable Factbook immediately called its own data into question in an interview in Communications Daily:

The figures from the Television and Cable Factbook aren’t well suited to determining whether the threshold has been met, said Managing Editor Michael Taliaferro. Taliaferro said Factbook figures understate the number of homes passed by cable systems — and the number of subscribers — because not all operators participate in its survey. “More and operators are just not giving up” those numbers, he said. “We could go with two dozen footnotes when we start to report this data.” Cable operators participating in the Factbook survey said they passed 94.2 million homes and had 67.2 million subscribers.

The FCC official who asked him for the cumulative figure didn’t say how it would be used, Taliaferro said. If he had known, he would have provided a list of caveats, he said. “It would have been a very lengthy email,” he said. Taliaferro said he did point out the shortcomings in a phone conversation with the FCC official but didn’t put it in writing because he wasn’t asked to. “I had no idea what they were doing with it.”2

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Lies, Damned Lies, and Understatements

The cable industry is running scared in the face of FCC Chairman Kevin Martin demanding a vote certifying that the cable industry has met the 70/70 test.  This test gives the FCC greater regulatory authority once cable is available to seventy percent of American households and seventy percent of those households subscribe to cable.  This is clear from the way the cable industry has pulled out all stops to avoid the finding, even persuading Warren Communications News to discredit its own Television and Cable Factbook, claiming that there are technical reasons for regarding it as unreliable.

It’s worth quoting the remarks of the managing editor of Warren Communications News’ Television and Cable Factbook to Communications Daily (also owned by Warren) on the subject:

‘The figures from the Television and Cable Factbook aren’t well suited to determining whether the threshold has been met, said Managing Editor Michael Taliaferro.  Taliaferro said Factbook figures understate the number of homes passed by cable systems — and the number of subscribers — because not all operators  participate in its survey.  “More and operators are just not giving up” those numbers, he said.  “We could go with two dozen footnotes when we start to report this data.”  Cable operators participating in the Factbook survey said they passed 94.2 million homes and had 67.2 million subscribers.

‘The FCC official who asked him for the cumulative figure didn’t say how it would be used, Taliaferro said.  If he had known, he would have provided a list of caveats, he said.  “It would have been a very lengthy email,” he said.  Taliaferro said he did point out the shortcomings in a phone conversation with the FCC official but didn’t put it in writing because he wasn’t asked to.  “I had no idea what they were doing with it.”’

Taliaferro, who relies on cable industry data to put out the Factbook, clearly came under a lot of pressure from the industry to badmouth his own data, but even then he didn’t get the job done.  If the problem is understating number of households passed and number of subscribers because cable operators refuse to provide the data, as Taliaferro suggests, then Warren’s Television and Cable Factbook must understate the number of households passed and subscribers.  This means that the real numbers — the numbers we’d have if all the cable providers coughed up the data — have as a matter of mathematical certainty to be greater than 70% coverage and 70% subscription.  Taliaferro, attempting to please the cablecos, has in fact given evidence that the Warren figure of 71.4 percent of homes having gotten cable as of October 10, 2007 has to be an understatement of the reality.

The only way the Warren data could fail to support invoking the 70/70 rule would be if cable providers systematically over-reported the number of households covered and number of subscribers.  And they’d have to be crazy to do that, since they want to avoid regulation at all costs.  I know from personal experience that the cablecos lie to avoid regulation.  It was patent from data submitted by Comcast and Time Warner in connection with the Comcast-Time Warner-Adelphia transaction that Comcast tried to circumvent the 30% cable ownership cap by submitting year-old data for some affected DMAs while Time Warner submitted current data. (You can see where I called them out on this in my expert submission on MAP’s Petition to Deny.)

This is why Warren is so desperate to sow confusion about its own data.  The Nielsen and Kagan numbers (which are lower than the Warren numbers) are estimates.  The cablecos don’t share nearly as much proprietary data with Nielsen and Kagan as they do with Warren, which is regarded as a safe, cable-friendly trade press outlet.  When Warren shared the data with the FCC, the footnote they neglected to provide with it should have read: “Don’t use this data for regulatory purposes because it will make the people who gave it to us very cranky.”  Hence the attempt on Warren’s part to cover up the embarrassing bits like a stripper at a police raid — by misdirection.

It’s also significant that two Republican FCC Commissioners, Deborah Tate and Robert McDowell, have made a huge  deal out of this non-story by writing to Taliaferro that “We wanted to take this opportunity to ensure that at least these two Commissioners are indeed seeking the trustworthiness, truthfulness, and viability of the data in question.”  Either they don’t understand what the mathematical meaning of the understatement by cable operators is, or they’ve decided to play cableco sock-puppets.  I’m hoping for the former, but I’m betting on the latter, athough I’d like to give them the benefit of the doubt.

In addition to voting the 70/70 finding on a 3-2 with Chairman Martin and the two Democrats forming a majority for real regulation of the cable industry, Chairman Martin should put forward a regulation requiring that the cablecos provide detailed coverage and subscription data publicly to the FCC on an annual basis, certified by the CEOs of the cablecos under penalty of perjury.  If Tate and McDowell vote for a rule like that with real teeth to keep the cablecos honest and provide the necessary data to the American people, then they really are concerned with the accuracy of data.

If they don’t, we need to ask whose hand is up the puppets’ arses.

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