Econoklastic

Auction 86 — All Over, But Rural America is Shafted Again.

Auction 86, the BRS auction, is over and all bids have cleared. There were no defaults. The auction netted a mere $19,426,600, rather less than most industry analysts speculated before the auction. However, it must be remembered that the BTA licenses up for auction were heavily encumbered with the need for interference agreements with P35 license holders and resembled more “white space” swiss-cheese spectrum than real BTA licenses.

The bidding ended after 24 rounds in four days on Oct. 30. However, it took until now to be certain that no winning bidder was going to default.

As expected, Clearwire took the overwhelming majority of licenses at offer, 42 of them for $11,177,000. Those licenses represent a deepening of Clearwire’s spectrum pool for national footprint and, in a few cases, even expanded it. Utopian Wireless and DigitalBridge Spectrum, companies which are concentrating on providing WiMax in areas where Clearwire is not deploying, acquired 4 and 2 licenses, respectively. As expected, Stratos Offshore Services and Trident Global Communications shared the three new Gulf of Mexico licenses, 2 and 1 respectively, for a little over $2.5 million, the third most expensive acquisitions. Vermont Telephone Company acquired three licenses in its current footprint for the second highest expenditure in the auction, $2.8 million.

The other successful bidders included James E. McCotter (3 licenses), Ztark Communications (2), Cellular South (1), and Twin Lakes Telephone Cooperative (1) — all reinforced existing license footprint. Broadcast Cable Bloomington, Chevron USA, Emery Telecom-Wireless, Gateway Telecom, N-1 Communications and Pulse Mobile all walked away with no wins.

More interesting still, 17 licenses failed to clear. These licenses were overwhelmingly in rural areas, continuing the pattern established by Clearwire and its cableco and telco partners of redlining a substantial portion of rural America for broadband service generally and WiMax in particular. If this pattern had been allowed to prevail in rural electrification, much of the West and the South would still not have electricity. It makes you wonder where FDR is when you really need him.

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Econoklastic

700 MHz: Breaking the C Block Package

I apologise for the hiatus between this and my last 700 MHz Auction update, but with 36,419 bids over 261 rounds, analysing the data set is taking a bit of time.

Among the several controversies arising the from now-completed auction has been ATT’s claim that bidders were deterred from bidding on C Block because of the open access rules imposed on the block. I can say with confidence that this is a bald-faced lie.

Twenty-six companies bid on C Block spectrum: Alltel Corporation, AST Telecom, LLC, AT&T Mobility Spectrum, LLC, Bluewater Wireless, L.P., Cellco Partnership d/b/a Verizon Wireless, Cellular South Licenses, Inc., CHEVRON USA INC., Choice Phone LLC, Club 42 CM Limited Partnership, Copper Valley Wireless, Inc., Cox Wireless, Inc., Cricket Licensee 2007, LLC, Google Airwaves Inc., King Street Wireless, L.P., Thomas K. Kurian, MetroPCS 700 MHz, LLC, NatTel, LLC, PTI Pacifica, Inc., Pulse Mobile LLC, QUALCOMM Incorporated, SAL Spectrum, LLC, SeaBytes, L.L.C., Small Ventures USA, L.P., Triad 700, LLC, Vulcan Spectrum LLC, and Xanadoo 700 MHz DE, LLC.

Note that the lying buggers at ATT bid on REAGs 2 and 4. They were deterred, but only by Verizon’s deeper pockets.

The interesting dynamic in C Block is the effect of combinatorial bidding on the outcome. Under the combinatorial bidding rules three packages of REAGs were available (the 50 state package, the Atlantic package, and the Pacific package) as well as the individual REAGs. The rules provided that so long as the bid on a package exceeded the total amount of the bids on all the individual REAGs in that package, the package bidder would win (assuming that the package bid reached the reserve price). If the total amount bid on the individual REAGs exceeded the package bid in a round, then the package was “broken” and the package bidder wouldn’t be required to take any REAGs if it couldn’t have the whole package (this was to prevent a bidder who wanted a national footprint from getting stuck with less if another bidder outbid on one or two crucial components of the package).

Echostar was a strong proponent of combinatorial bidding, insisting that they wouldn’t show up and bid if the C Block did have a combinatorial bidding rule. Oddly enough, they got the rule and then their bidding entity, Frontier Wireless, didn’t even show in C Block bidding (they bid mainly in E Block without combinatorial bidding). But what they inadvertently did was screw at least one major bidder with the combinatorial bidding rules they insisted on.

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Tales of the Sausage Factory

700 MHz Aftermath: Assessing A Rather Complicated Result — But Not A Disaster As Some Maintain.

The intervention of the Jewish holiday of Purim, which is celebrated by getting drunk until you cannot tell the difference between Verizon winning the C Block and Google winning the C Block, kept me from posting sooner. I would have held off until I could give more details, but there are so many people rushing to call it a disaster that a few words need to be said here.

O.K., Google didn’t win, but Echostar did, giving me a .500 batting average in prophecy against the conventional wisdom. I’m not covinced that Echostar winning gives us a third pipe (Martin’s suggestions about combining this with other spectrum assets to the contrary). But even if not, it is important for keeping Echostar competitive with cable and with DIRECTV (which will have an advantage in programming assests). I shall try to do a more detailed analysis of Echostar and what the E Block does for them in a future post.

It is also interesting to note that some non-incumbents like Cavtel picked up licenses, although I am not as enthusaistic about this for competition as Martin was at the press release.

That said, I do not see how the rules could have been structured any better without barring Verizon and AT&T from playing. While we might have done better for new entrants after all with smalled licenses rather than REAGs, as demonstrted by Echostar doing an end run to assemble a near national footprint after they begged and pleaded to have the FCC offer a national license, I can’t say for sure (I’ll have a longer discussion on this later, and I expect Greg Rose will have some things to say on his blog once he has crunched the numbers). My preliminary conclusion is that Verizon (and to a lesser degree AT&T) was simply determined to get the spectrum it wanted and did not let anything stand in its why. The fact that Verizon paid $9 MHz/Pop for a B block license for Chicago, and that Verizon and AT&T spent over $16 billion of the approximately $19 billion raised should tell anyone who cares about the reality all they need to know. Verizon and AT&T were not “bargain hunting.” They were at each other’s throats and cutting out anyone who dared to get in their way. The only way to stop them was to keep them out entirely, and there was not a heck of a lot of support for that from the Hill or at the FCC beyond the Dems.

I think Commissioner Adelstein gives a fair assesment when he says we won on revenue and openness and lost on diversity and competition. But again, the only way we could have done any better was by adopting auction rules that banned Verizon and AT&T from playing and by using aggressive means to address minority and women ownership (as MAP requested as early as March 2006). Perhaps now Congressional Democrats will add their voices to those of Commissioners Adelstein and Copps on restoring the minority bidding credit and supporting incumbent exclusions or — at a minimum — restoring the spectrum cap.

As it was, thanks to anonymous bidding, Echostar was able to do an end run and acquire a national footprint — something previously denied to it in the AWS Auction in 2006. And, while AT&T and Verizon got most of the licenses, they had to pay through the nose to get them — rather than sopping them up dirt cheap as happened in the AWS auction (where licenses equivalent to the A & B block licenses went for 45 cents MHZ/pop not $9 MHZ/pop). This auction attracted more new bidders and more minority bidders than previous auctions, so the field was ripe for a success on these fronts. But they were simply outspent by Verizon and AT&T.

To conclude, unlike the utter failure of the AWS auction (which everyone else hailed as a success — despite the incumbents winning more licenses for less money), this auction produced some very positive results. But it also shows us the limit of what purely competitive auctions will do. Neither this auction nor freeing more spectrum for future auctions, on their own, will provide us with a third pipe or introduce new competitiors in wireless. The advanatges enjoyed by incumbents in a relatively mature industry (as opposed to back in the early/mid-1990s when the first auctions were conducted) are simply too great to overcome just by “leveling the playing field.”

Finally, one last question remains: Why didn’t Qualcom drop their bid on D Block? Why did they tie up all that eligibility, instead of using it to go after more E Block licenses? For us spectrum geeks, this is the equivalent of asking Why did the Minbari surrender at the Battle of the Line (best answer from a friend of mine: “turns out Echostar bidders have Qualcom souls”). Did Qualcom hope they could keep the D Block for such a low price? Did they wish to avoid a penalty for dropped bids by the time they realized no one would bid on D Block? Hopefully, we will find out.

Stay tuned . . . .

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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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Tales of the Sausage Factory

We Interrupt This CES Convention For A Breaking 700 MHz News Item

I’m out here at the Consumer electronic Show with actual blogger credentials (primarily so I can get the free back pack and use the blogger lounge). So, of course, we get major 700 MHz Auction news today before I can even start to do CES blogging.

As reported by my fellow PISC-ER Gregory Rose and elsewhere, Frontline Wireless has dropped out of the bidding. That’s kind of a surprise, given how Frontline fought to get a designated entity credit and still pursue wholesale as a real business model. It’s also impossible to say (at the moment at least) why Frontline self-destructed at the last minute.

Leaving aside the Frontline specifics, the big question is “how will this impact the auction” and “will we see wholesale emerge at all as a model.” Unsurprisingly, most analysts are going conventional and saying (a) D block (which Frontline had targeted) may not attract bids to meet the reserve price, and (c) This makes it even less likely we will see a new entrant, let alone a wholesale new entrant.

Also as usual, I will play the contrarian here. D Block is still very attractive to the conventional carriers looking to get national footprint or others looking for national footprint and willing to work with public safety. If AT&T and Verizon are both serious about this auction (and indications are that they are), both may push hard for D Block — especially if C Block is competitive.

On the new entrant side, it still remains to be seen what Vulcan and Google will do. Even if — as I suspect — Google wants to win the network but not build out, it may find D Block attractive. As holder of D Block, Google could still negotiate with third pary carriers (such as Alltel, US Cellular or even Sprint or T-Mobile) to build the network on its terms and to the satisfaction of public safety. The much lower price of D Block would offset the the aggravation of working with public safety and ensuring that their needs come first.

Finally, there’s Towerstream and the other wild cards like Qualcom. Who knows what they intend, especially given the likely competitiveness for C Block.

So while I’m sorry to see Frontline go, I don’t think it hurts the odds for a very competitive auction or a new entrant. It does potentially make a wholesale network more of a stretch, because Frontline was really the only bidder gung-ho on the model (Google being traditionally in favor of wholesale but making no promises at this point beyond “open”). That’s a shame, but not devestating or fatal to a new entrant.

Stay tuned . . . .

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Econoklastic

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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Tales of the Sausage Factory

Quick Reaction to AT&T-BellSouth Merger

Not really a surprise. The government has made clear it will accept the vicious cycle of “the previous merger you approved means I now have to merge.”

Sadly, because the regulators till think of these primarily as monopoly voice markets, and long ago gave up hope the Bells will compete with each other, they don’t worry about the increased size of the national footprint as an indicator of market power in any of the relevant service markets. If anything, it’s regarded as a plus because under the logic of “convergence,” this makes AT&T a better video competitior to Comcast, TW and other incumbent cable companies, while doing no “damage” in voice markets.

The complexity of interelated markets, the nature of market power on “upstream” internet content and service providers, and question of what the mature market looks like aludes them.

Oddly, I am at a conference on municipal broadband right now. Soon, cities may be the only competitors. I hope they will realize that they need interconnection and net neutrality to make a real go of it. Or so I will try to persuade them tomorrow.

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