Imagine you just spent a fortune on some excellent beachfront property, only to discover some termites in the basement. Now imagine that the only way to get rid of the termites involves some toxic chemicals that may arouse the ire of the environmentally conscious locals. What do you do? Learn to live with the termites, or spray and tell your green neighbors to deal?

Oddly, Verizon and AT&T now find themselves in a similar mess — if we substitute “wireless microphones” for “termites.” Verizon and AT&T (As well as a bunch of other folks) just spent a boatload of cash on licenses in the reclaimed analog television spectrum. The FCC has rules in place to migrate the broadcasters — both full power and low power. But — as far as I can tell — no one has plans to migrate the wireless microphone folks, who operate on vacant channels in the band. While in theory wireless microphones are a secondary licensed service and notifying the licensees that channels 52-69 are off limits after the digital conversion, the situation is a little more complicated. As comments filed in white spaces proceeding confirm, wireless microphones are bloody everywhere — with huge numbers of users buying and operating them without licenses.

The NAB and the FCC have turned a blind eye to proliferation of unlicensed wireless microphone use (despite the NAB's usually firm stand against unauthorized use of “their” spectrum), both because the wireless microphones don't actually cause any interference with television and because the “unauthorized wireless microphone user community” (which sounds so much better than “pirates”) includes megachurches, Broadway groups, and other warm cuddly folks able to gather political support. Indeed, so great is the political protectzia for the unauthorized wireless microphone user community that the FCC is, apparently, requiring that unlicensed devices in the white spaces have the ability to sense and protect these illegal wireless microphone users. (Hence Google's recent extension of an olive branch which NAB promptly grabbed and started thwaking Google over the head. D'oh!)

AT&T, Verizon, and the rest of the 700 MHZ auction winners therefore face a bit of a dilemma. They just dropped a bundle on the 700 MHZ, and damned if they want to set precedent by allowing a bunch of illegal squatters to use “their” spectrum. Heck, if they'd thought of it earlier, they'd probably have initiated a rulemaking to migrate the legal users.

In fact, under a fair reading of the rules, if the FCC does nothing, licensed wireless microphone systems may enjoy equal or superior rights to 700 MHz Auction winners. OTOH, no one involved is stupid about the politics, giving an incentive to maintain a low profile. If you don't mind telling shareholders that the NFL may have superior rights in the spectrum you just paid $16 Billion for.

Meanwhile, for those of us happy to see the NAB and the wireless microphone folks get their comeuppance, while not weeping overmuch for the incumbent wireless winners, one word: SCHWEET.

More below . . . .
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In yet another chapter of “Why Citizens Movements Are Citizen Driven,” I think Google has conceded too much too soon in its letter today to the FCC. Briefly, in an effort to try to head off the persistent claims that the white spaces prototypes have “failed” and to move out of the wireless microphone trap that opponents of white spaces have used so effectively, Google proposes a combination of “beaconing” (give users of wireless microphones a low power gadget that mimics a dtv signal, thus denying use of the vacant channel to any white spaces device (WSD) in the immediate vicinity, as the WSD will interpret the channel as “active”) combined with setting aside channels 36-38 for wireless microphones, and requiring geolocation and a “permission to activate” signal from higher power stationary devices.

For reasons discussed below, I am not happy . . . [Read More!]

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 . . . .

The FCC can certainly move fast when it wants to — and when it has had a few weeks to get used to the idea. The FCC just released a public notice that it will “de-link” the D Block from Auction 73, and will release the names of the winners as soon as the Commission collects the payments (ten days after it issues the official notice that the auction is over and that parties now need to file “long forms” and pay up).

Also of importance, Chairman Martin has referred the question of whether Cyren Call made all manner of demands of Frontline, and did this break any rules to the Office of the Inspector General. This extremely important detail was buried in this somewhat less than stellar Washington Post article about our letter to the FCC calling for an investigation. I say “less than stellar” because, in addition to “burying the lead” big time, the reporters did not trouble themselves to contact me despite that fact that (a) I broke this story in the first place (only narrowly beating out Dow Jones' Cory Boles); (b) I drafted the friggin' letter. I therefore recommend this far superior article in eWeek (i.e., it mentions me and links to the relevant blog entry — a clear mark of superior journalistic skills).

A bit more analysis below . . . [Read More!]

First, we at PISC have sent a letter to the FCC asking the FCC to sever the D Block issues, announce the winners of the rest of the auction, and thoroughly investigate the allegations around Cyren Call and its pre-auction discussion with Frontline. (Martin has apparently already circulated something that severs D Block, so they can announce results as soon as the other Commissioners vote and the wireless bureau finishes the necessary housekeeping.)

Perhaps more importantly for the long run, we ask that the FCC take a hard look at whether to try to fix the public/private partnership or possibly do something else. The FCC has a lot of options here. And with the auction clearing over $19 Billion and the statutory requirement to start an auction before January 28, 2008 fulfilled, the money pressure and time pressure are off. We have time to have a public process and do it right.

Second, here is Kevin Martin's official statement explaining why the auction was a huge success (and, by implication, why he did a bang up job getting this done). Martin, sensitive to the grumblings from folks who say that different rules could have gotten more revenue, included this handy chart showing that, on a pure revenue basis, the 700 MHz auction is the most successful FCC auction ever.

(In the reading the tea leaves department, I note that the chart subtracts out the D Block bid. And indication the FCC won't just pass off the D Block to the lone low bidder? Maybe, but no surprise if that turns out to be the case.)

You can find Tate's statement here. I have not seen official statements from any of the other offices.

Stay tuned . . . .

At long last, the FCC went three rounds without any new bids and declared Auction 73 (better known as Battle 700 MHz) closed. You can see the final provisional winning bids on the FCC's Auction 73 page here.

Of course, we are all waiting to see who won what licenses, particularly C Block. But we have some preliminaries to go through first. Most importantly, the FCC has to make a decision on whether to sever the D Block from the Auction so that it can investigate what happened, especially the allegations around Cyren Call and Morgan O'Brien.

Even with the information available, Auction 73 has clearly succeeded on a number of key fronts. Unsurprisingly, I am inclined to credit anonymous bidding with the enormous surge in value for the licenses. Even if incumbents ended up walking away with the lion's share of the licenses, at least they paid market value for a change (as opposed to the AWs auction, where they picked them up dirt cheap). I also note that at the end of the day, the FCC has only 8 unclaimed licenses (compared with 35 for AWS). As Greg Rose observed previously on his blog, there is good reason to believe we saw a lot of new people bidding.

It remains to be seen, however, whether the auction brought in new competitors or if, as the conventional wisdom predicted, AT&T and Verizon walked off with the big prizes. In particular, we all wait with baited breath on who won C Block.

Finally, two points on D Block. First, even if the experiment failed, that did not make it a dumb move. Babe Ruth used to lead the league in home runs and strike outs, because you can't hit home runs unless you swing at a lot of pitches. With the FCC trying to satisfy the mandate of Congress to promote a national interoperable public safety network, but with insufficient spectrum allocated and with insufficient funds to build it. So the Commission tried to think outside the box and took a chance. turns out — for reasons still unknown — it did not work out.

Always punish innovators if things don't go exactly right and you run out of innovators damn quick. Anonymous bidding was also an innovation. So is the open device condition. Before folks rush out to buy stink bombs to lob at Martin and the other Commissioners over D Block, consider if we want the next FCC reduced to such political timidity that we always get the same auction rules again and again and again, because the price of innovating is too high.

Second point: the FCC has a silver lining here. With the auction over, the FCC has fulfilled its statutory obligation to hold an auction commencing by January 28. Not only can the FCC take the time it needs to consider what to do, it can also consider other solutions besides trying to fix up D Block or even auctioning it off the highest bidder. That could include non-exclusive licenses, real time auctions, or even an unlicensed commons — if that would best serve the public interest.

I'm not saying what the best solution for D Block is, because we don't know enough yet. It will depend on a lot of factors, such as who won the other licenses and how much stomach the FCC has to innovate. But I'm hoping that the FCC and others, when assessing Auction 73, will consider the successes as well as the D Block failure. Otherwise, they will vote to do the politically safest thing. Not a result I'd like to see.

stay tuned . . . .

UPDATE: On reflection, I've decided to modify the tone of this considerably. After all, when someone basically agrees with you (the incumbents have too much market power), slapping them around for relying on the press is a pretty stupid and counterproductive move. Besides, my real frustration is with the press for offering up speculation as if it were fact, not Pryor for reading the press and getting upset about the supposed failure of the auction to produce a new competitor. So with apologies to Pryor for needless snark the first time around, here we go again.

Senator Mark Pryor (D-Ark) is upset with reports that AT&T or Verizon probably won C Block. More specifically, he is angry that we don't have more wireless competition. That's good. But he accusses Kevin Martin of fixing the 700 MHz auction to benefit the telcos. That's where he goes wrong, in my opinion. As I've said before, I don't think Martin rigged this for the telcos, especially in light of Verizon's persistent efforts to get the C Block conditions “clarified” away and Martin's telling them to go take a hike. Further, adoption of the anonymous bidding rules means that we don't know yet who won the licenses. We may very well be surprised when we see the results.

But if it turns out that, as predicted, the incumbents did win the lion's share of the licenses, that doesn't make the outcome Martin's fault. Rather, Senator Pryor should direct his anger where it belongs — at the statutory requirement for the FCC to auction licenses for use of the public airwaves. As I explain below, and as many of us explained before the auction, incumbents enjoy real advantages even under the best of conditions because they don't have additional costs new entrants have — like building the network from scratch or pulling customers away from a service they already use. To make matters worse, Senator Pryor's Republican colleagues are constantly haranguing the FCC to “not pick winners” and objecting to any kind of mechanism that could neutralize these incumbent advantages.

We can't have it both ways, and Congress makes the call. Either Congress eliminates auctions, or allows the FCC to exclude incumbents from the auction, or gives up on auctions as a way of generating competition and goes back to regulating market power directly. But blaming Kevin Martin and the FCC for the fact that incumbents keep winning auctions makes as much sense as blaming Bud Selig for the fact that the Yankees and the Red Sox always make the playoffs and the Nationals haven't gotten to the World Series.

More below . . . . [Read More!]

With even Chairman Martin publically agreeing that D Block is unlikely to attract any new bids, the question logically arises — what now? Needless to say, folks have not been shy about voicing their suggestions — especially those who think we ought to focus on maximizing revenue. Instead, I have a novel suggestion. Why don't we actually investigate what the heck happened first?

More below . . . . [Read More!]

So here we are in the middle of the most intensely competitive auction ever. As you can tell looking at the recent postings by fellow Wetmachiner Greg Rose this auction has dramatically pushed up the amount of money paid by bidders for licenses and has created more intense competition for a broader group of licenses than previous auctions, strongly suggesting that — as Greg and I predicted when we first started pushing anonymous bidding in March 2006 — anonymous bidding eliminates all kinds of targeting, collusion and retaliation that typically held back smaller bidders and allowed larger bidders to pick up licenses for a song. An utter smashing success (at least from the perspective of those who favor using auctions for distribution of licenses), right? Who could have a bad word to say about it?

Answer: All the people who hate anonymous bidding BECAUSE it eliminates the ability to signal, retaliate, and collude and thus makes the auction more competitive. i.e. The incumbent wireless licensees (other than Verizon, which wanted anonymous bidding to avoid being targeted).

More below . . . . [Read More!]

Everyone remember how Clinton was dead after Iowa? Now who remembers two weeks ago, or even last week, when analysts wrote off the 700 MHz auction as doomed due to credit crunch? But, other than D Block's utter failure to move (and regular readers will know my opinion of why that happened), the auction has proven a success by every measure we can obtain so far. Sadly, however, the key measures are not yet in, and won't be until after the auction is over. Which is why, despite C Block exceeding it's reserve price, I caution folks that we are still at the equivalent of just after the New Hampshire primaries and that any speculation about the important points of the outcome remain unresolved.

Here's what we know for sure now:

1) The current take now stands at over $14 b. This not only exceeds the $10 b that the Congressional Budget Office (CBO) estimated, it will exceed the “wildly successful” 2006 AWS auction (which grossed about 13.9 b). A, B, and C blocks have all met their reserve prices, with the most contentious fighting in certain high value markets B block.

2) Because C Block has met its reserve price, it will not be reauctioned and the open device conditions will go into effect.

So the auction is clearly a success from Kevin Martin's perspective (again, with the exception of D Block, which is a special case). While those like Commissioner McDowell can argue that C block might have fetched more without conditions, $4.7 billion is nothing to sneeze at. And it is clear that the aggressive build out conditions did not scare bidders away from A and B block, so (assuming the FCC is serious about enforcement) we should see increased deployment of services into rural regions.

What we still don't know is whether the new auction rules gave new entrants a real chance to win spectrum, or (as the conventional wisdom had it) will incumbents Verizon and AT&T end up capturing the lion's share of the spectrum (albeit at higher prices, owing to the introduction of anonymous bidding). That we cannot know until after the anonymity lifts when the auction ends (which, if the FCC chooses to reauction D Block under the rules proposed for reauctioning the other blocks, might not be for several months yet). Much depends on the identity of the current C Block holder. Is it Google? Verizon? Some other deep pockets like AT&T or Echostar, or perhaps the mysterious Vavasi NexGen Inc.? And is C Block settled? If the package bidder in round 17 knocked off the previous high bidder, then the previous high bidder will need to respond fairly soon or it will start losing its eligibility (bidding chips) and no longer be able to challenge.

If it turns out the incumbents capture most of the spectrum, I will need to eat a huge plate of crow and tip my hat to Commissioner Adelstein and Publius at Obsidian Wings, both of whom fretted that only Verizon could win a huge block like C Block and that we would get more new entrants by slitting the spectrum up. OTOH, if the Great Google Prophecy comes true, I will become insufferably pleased with myself for at least a month.

But, rather than pull a Tweety Bird and start treating my own speculation in the absence of data as fact, I will simply say --

Stay tuned . . . .