Econoklastic

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.

More below…

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Econoklastic

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:

more below…

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Tales of the Sausage Factory

700 MHz Auction Pre-Game: Just A Bit More Unseemly (and perhaps untimely) Gloating . . . .

So last summer, as we debated the rules for the upcoming 700 MHz Auction, one of the big questions we at PISC repeatedly kept getting asked was “so who is really going to show up to bid?” Especially on controversial issues like open access (and even its wussier cousin, device open access), block size (have big blocks and combinatorial bidding, or maximize smaller blocks), and anonymous bidding, the incumbents all kept repeating over and over again how any deviation from previous rules would keep people from bidding and the auction would be a failure and everyone would hate us forever. Commissioner McDowell reiterated these criticisms (at least with regard to the open device conditions on C Block) in his dissenting statement:

Curiously, however, in an effort to favor a specific business plan, the majority has fashioned a highly-tailored garment that may fit no one. It’s not what Silicon Valley wants; it’s not what smaller players have told me they want; and it’s not what rural companies want. To date, the Commission has received no assurances that any company is actually interested in bidding on the encumbered spectrum. Not one.

Because, of course, everyone knew Google wasn’t going to bid, the DBS companies weren’t going to be real players, and if anyone new was planning to show up, there was no sign of it. Even those most eager to see new competitors emerge (and who ultimately supported the PISC proposals) had their doubts and looked for as much reassurance as possible before taking a leap of faith that we were right.

Well, the FCC just released the list of applicants to bid in the upcoming 700 MHz auction. A total of 266 potential bidders filed (the bulk of the forms are “incomplete” due to procedural defects that will be corrected, but this is pretty standard). That’s more than the 252 potential applicants that showed up at this stage for the “wildly competitive” and “highly successful” AWS auction in August ’06. The list includes Google, Frontline, Echostar, and — as I kept insisting — a number of companies that could not possibly be predicted as bidders until bidding rules were actually determined and potential bidders got to assess whether they had a chance or not.

Towerstream is an excellent example of this last type of bidder. No one could possibly predict that they would show up, and many folks still can’t believe it. But Towerstream CEO Jeff Thompson cites the FCC “embracing the open access model supported by Google” as making the spectrum a “natural fit” for his entreprenurial wireless broadband company, and credits the FCC for making the auction amenable to new bidders. Nor is Thompson alone. A host of newcommers apears to have found the rules attractive enough to make it worthwhile to ante up for a chance to play.

We must still see what happens, of course. I can recall all the pre-game prediction for the AWS auction, where the most valuable licenses ended up in the hands of the usual suspects. In many ways, this is working out like my waiting to see if the Patriots complete a perfect season or if the Red Sox would win the World Series. There is lots of room still for things to go badly. But I can’t help but feel a happy, warm contented glow (and breathe a quiet sigh of relief) that I don’t have to answer the age old question “what if we throw a party and no one shows up?”

Stay tuned . . . .

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Tales of the Sausage Factory

The 700 MHz Auction Pre-Show: Live from the AT&T/Aloha Bowl!

The pre-game show for the 700 MHz auction has definitely gone into full swing. Lets ignore for the moment the purely regulatory shenanigans such as Verizon’s war of litigation and regulatory maneuver. Let’s pause for a moment to consider some of the player training and pre-game jockeying for position. Notably, today’s big announcement that AT&T will buy Aloha Partners 700 MHz licenses.

“Whoa!” I hear you cry. “How did Aloha Partners (or anyone else) get 700 MHz licenses? I thought the auction wasn’t until January!” Well, for reasons I will address below, the FCC actually auctioned some of these licenses back in 2002 and 2003. Aloha Partners won a fair number of them dirt cheap (since at the time no one knew if the broadcasters would ever finish the digital transition and get off the spectrum), and then began a steady stream of acquisitions, culminating in the purchase last month of Lin TV’s 700 MHz licenses, giving them a total of 270 licenses overall and healthy coverage in the major markets of the southwest, south, east coast, and portions of the midwest. (You can see and old map of the major coverage areas here.)

And now, in what has become the all too familiar paradigm for the telecom world, AT&T has turned around and swallowed Aloha Partners 700 MHz licenses. What does this mean? What impact for the auction? For other deals? Will this impact the regulatory end game?

My speculations are even wilder-ass than usual, given the utter lack of real data. But if you’re up for a walk through the entrails with me, see below . . . .

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Tales of the Sausage Factory

Assessing the 700 MHz Order Part IV: Lingering Doubts and Details

The Wireless Bureau has released its Public Notice (“PN”) for the 700 MHz auction. In addition to setting the date for the start of the auction as January 16, 2008, the PN also addresses a bunch of questions left over by the Order. The biggest of these are: (a) Setting rules for package bidding; and (b) setting reserve prices on a “per block” (rather than “per license” basis) for the auction.

What does that mean? Well, the Commission in the Order decided to protect itself politically from accusations that it had set the rules too aggressively and therefore killed the auction. The Commission therefore used its authority to create “reserve prices,” or minimum prices that bidders must meet before the Commission will award the licenses. The Commission has used reserve prices before, but generally on a license by license basis not on a “block by block” basis. Nor has the Commission ever guaranteed a reauction if a block of licenses fails to meet a set reserve price.

“Package bidding,” as discussed in previous posts, means allowing people to bid on a set “package” of licenses rather than requiring a bidder to bid on each license individually. This encourages people to bid because it means I won’t get stuck with licenses I don’t want if I fail to win one or two critical licenses that make it worthwhile (this is called the “exposure” problem). So if I only want the C Block licenses if I can get national coverage, I will still participate in the auction because I know if I lose any C Block licenses, I won’t get stuck paying bilions for the licenses I did win but now no longer want.

The use of this combination of factors, along with the failure of the Commission to adopt an “either/or” rule that would require a bidder to go after either the D Block license or C Block licenses, makes me uneasy. I can see scenarios where a bidder gets the D Block cheap, then chooses to enhance coverage by bidding aggressively for one or two C Block licenses. That’s not necessarily bad, except it may prevent the creation of a second national player because it deprives the second national player of licenses it needs to complete its package (I’m not postulating deliberate blocking, you understand, I’m looking at the potential interplay of circumstances frustrating the likelihood of new national entrants). OTOH, the ability to bid on both D block and C Block may encourage bidders to be more aggressive in both blocks, and may create a larger pool of bidders for these blocks over all.

But what really worries me is the reserve prices. Why? See below . . . .

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Tales of the Sausage Factory

Sprint Swaps Spectrum Co. for Google: Care To Guess Who Bids in 700 MHz Now?

As I repeatedly observed during the lead up to last Tuesday’s FCC meeting to decide the rules for the 700 MHz band, it is an extremely risky business to try to guess who will bid at this stage. Despite the much shorter time between announcing the rules for the AWS auction last year and the time bidders needed to get their forms in, numerous companies changed their positions, created new ventures, and generally did the unexpected.

Now, with everyone speculating whether whether or not Google will really bid or whether the cablecos will give the telcos a run for their money, comes a significant change. In the course of a week, Sprint has forged an alliance with Google, followed a few days later with a surprise request to exit the cableco consortium SpectrumCo. This comes on top of Sprint’s announcement two weeks ago that it will team with Clearwire to do nationwide WiMax.

And suddenly all those wise speculations about how Sprint won’t bid because it doesn’t have the cash and it has enough spectrum, Clearwire won’t bid because it’s too small to challenge the telcos, and Google won’t bid because they don’t have the expertise and don’t want to spend the money, need some serious recalculation. A Google/Sprint/Clearwire consortium (with possible help from Intel, which both owns a chunk of Clearwire and participated in the auction rulemaking as part of the “4G Coalition” with Google, Skype, and Yahoo!) looks like much more of a spectrum player than any of them alone. Sprint and Clearwire have the infrastructure and expertise, Google has the bucks and the need to expand into wireless. Further, depending on the nature of the partnership, Google could start testing and and marketing its wireless services now so that it does not have to wait until it has built and activated a network (which probably won’t be until 2010 at the earliest).

Meanwhile, what happens to SpectrumCo.? Granted the cablecos still have no plan for the licenses they got in the AWS auction (since, lets face it, the real reason to show up was to block DBS from getting a terrestrial broadband pipe), but to the extent they pretended to have a plan, they usually cited their ability to work with Sprint as a means of implementing it. So what happens now? Granted the cablecos still have tons of money to throw at this, but how will Wall St. treat their stocks if they look set to pour another couple of billion into a business without the benefit of an experienced partner with existing infrastructure? And besides, with the FCC adopting anonymous bidding, the cablecos will find it much harder (if not impossible) to target and block rivals without going all the way and actually winning the licenses. (Remember, blocking is usually cheap because you don’t usually have to spend the blocking premium, you just have to prove to the other guy that you are willing to spend the blocking premium. It’s like when tough guy walks in on shopkeeper and asks if shopkeeper would like to buy “insurance.” Tough guy doesn’t have to actually trash the store to get paid. As long as shopkeeper believes tough guy will break his legs, shopkeeper will pay to avoid testing the theory.)

So, a mere three days after the FCC announces rules, we find ourselves reexamining the conventional wisdom in light of changed events. McDowell rather relished the warning he gave Martin and the rest of the majority that it was “risky” to tailor the band plan to attract a single “white knight” who would become a new national broadband provider. Suddenly, Martin’s confidence that if you set the table folks will come to dinner seems a bit more justified.

But it’s still a few months until FCC forms to participate will be due, and anything can happen in between.

Stay tuned . . . . .

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Tales of the Sausage Factory

Open Access Gains Another Convert, AT&T Denies Poisition Change

A brief update on my recent post that AT&T recently conceded it might consider bidding on an open access license. Unsurprisingly, Frontline Wireless — the party pushing for the “E Block” public safety/open access network — filed a copy with the Commission stating that this proves that an E Block auction would attract bidders and that the business model is workable. In response, according to today’s (6/29) Communications Daily an AT&T spokesperson said: “Our position has not changed. As we’ve stated on the record at the FCC, mandated ‘open access’ conditions on licenses in the 700 MHz band should be rejected. We need to see the specific rules the FCC adopts for auction before determining our level of participation.”

The carefull reader will note that these statements are not inconsistent. Of course AT&T would prefer not to have open access, and — at the drop of a hat — will explain why open access is an unworkable awful idea and you should ignore all the evidence from Europe or from the U.S. until we abolished open access in 2005. But there is a huge difference between “we hate open access and think it’s a bad idea” and “we absolutely refuse to bid on a license with an open access condition and nobody else with any money would bid either.” Given that the most potent argument against open access from a political perspective is “don’t mess with the revenue” (as evidenced by the recent Op Ed in the Washington Post by two CTIA lobbyists wearing their “think tank” hats), proof that folks other than Frontline will even show up to bid (and folks with deep pockets at that) on an open access license is rather significant.

Meanwhile, open access for the 700 MHz auction continues to attract new supporters from different sectors of the industry. Northop Grumman, rather a heavy-weight in the equipment manufacture and public saftey/defense contracting world, filed this document supporting open access and explaining that yes, you really can construct a secure public safety network that shares spectrum with an open access commercial network. So much for “it will never work, it’s too hard, lets stick to what we’ve always done.”

In addition, the Frontline cover letter on the submission that introduced the “Well Connected” post with the AT&T interview stated that Citibank had made a presentation to the Commission “last week” explaining that open access is a workable business model. Annoyingly, I can find no record of this presentation in the record for Docket 06-150, but I may just be missing it (it is a pretty big docket). (UPDATE: My thanks to Susan Crawford for pointing me to the appropriate ex parte filing.)

But assuming that Frontline accurately describes a presentation that took place, we now have:

1) A statement by a major financial investor that open access is an attractive and workable model from a business perspective;

2) A statement by a major equipment manufacturer and network operator that commercial open access — even in the more complicated universe of a dual use public safety network — is technologically feasible;

3) A statement by a major incumbent that it would at least “look at” bidding on an open access license if the Commission adopts such a rule;

4) Statements by wireless equipment and wireless application providers that there is a desperate need for open access in the wireless world and in the provision of broadband services generally;

5) Over 250,000 individuals saying the status quo sucks and we want open networks and new providers.

On the other side, we have the entire incumbent industry and its usual cheer leading section chanting that everything is vibrantly competitive, we live in the best of all possible worlds, everything works perfectly and competitively, and even thinking “open access” too loudly will scare away bidders and reduce revenue to a fraction of the expected $10-15 billion. And besides, open access can’t possibly work either on the business side or the technical side.

And all the while, the clock ticks away, as everyone scrambles to get this done before the end of the summer.

Stay tuned . . . .

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Tales of the Sausage Factory

Dr. Rose Proves It Was Spectrum Co. In The Kitchen With the Candlestick . . .

My good friend Dr. Gregory Rose has released two studies on last summer’s AWS Auction. I just bloged about them at length over at the Public Knowledge policy blog. So rather than repeat myself, I will merely say:

I argued after the AWS auction that cable companies and wireless incumbents had used the auction to kill DBS as a competitor. Rose proves that in his first report,
How Incumbents Blocked New Entrants In The AWS-1 Auction: Lessons For The Future.

Rose’s second report, Tacit Collusion In The AWS Auction: The Signalling Problem, looks at the use of bids to communicate. Again, as I’ve argued before, only by adopting anonymous bidding rules can the FCC stop bidders from suing the auction process to signal each other.

For the rest of my commentary, check out my PK blog.

Stay tuned . . . .

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Tales of the Sausage Factory

Appears that Rose and Lloyd (and me) were right . . .

A month or so back, I reported that Greg Rose and Mark Lloyd had written a study for the Center for American Progress concluding that incumbent wireless providers used spectrum auctions to block the mergence of new competitors. Then came the AWS auction, with its legion of bidders. “A ha!” Declared the Wall St. Journal and others in the anti-net neutrality, anti-regulatory, pro-spectrum property camp. “Look at how the market-based policies create competition! No need for regulation here!”

Turns out, not so much . . . . Either for new spectrum entrants or for broadband competition.

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Tales of the Sausage Factory

Handicaping This Week’s Big Spectrum Auction

And what a long strange trip its been to get here! In 2004, Congress passed the Commercial Spectrum Enhancement Act (CSEA), which required government users to vacate some choice spectrum so the FCC can auction it. You can see the FCC’s official page for this auction here. You can see my recent general musings on this auction on the Public Knowledge policy blog here.

But none of this tells the whole story. After two controversial rulemakings, a pending legal challenge, and the appearance of a host of new bidders, FCC Auction 66: AWS-1 is ready to start this week on August 9. A look at the list of who has come to play signals an auction of unparalleled visciousness, determination, and probable manipulation by sophisticated bidders because the FCC wussed out and did not adopt anonymous bidding.

For those interested in my handicaping what a report from the Center for American Progress describes as a corrupt means by which incumbents keep out competitors and what I have called “a really wonky version of Worlds of Warcraft,” read on!

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