As U.S. spectrum auction opens, questions linger

FCC's auction of valuable chunk of bandwidth has attracted big names such as Google, AT&T, and Verizon Wireless, but it's anyone's guess as to how the bidding will shake out

One of the major questions as the U.S. Federal Communications Commission kicks off a multibillion-dollar spectrum auction Thursday is whether the auction will produce a winning bidder that will challenge telecom and cable-based broadband providers with a national wireless broadband network.

Other questions will also be answered in coming weeks as the auctions, for 62MHz of long-range, high-speed spectrum, unfold. Will Google or another bidder buy enough spectrum to launch a "third pipe" broadband network? Will any bidders step forward and pledge to build a nationwide broadband and voice network for emergency response agencies?

The bids to watch in the 700MHz auctions are for the C block, a 22MHz band of spectrum broken up into 12 regional licenses, and the D block, 10MHz of auctioned spectrum paired with another 10MHz set aside for a combined national commercial/emergency response agency network. Startup Frontline Wireless, one of the primary backers of the public-private model for an emergency responder network, announced in December that it had ceased operations.

"The pull-out of Frontline leaves the whole D Block auction up in the air," analyst Jack Gold of J. Gold Associates said in an e-mail. "There is no way to know if a last-minute group will come on board. While the goal of establishing a universal network for public safety/security is a laudable goal, it is not the most lucrative area from a pure business perspective, so it is not clear how much demand there might be or who might step up to the plate to make this work."

The FCC may have made a mistake in adopting the plan by Frontline, a company with former FCC chairman Reed Hundt as its vice chairman, said Carlyn Taylor, a senior managing director in business consultancy FTI's corporate finance practice.

"I'm not sure how well [Frontline's plan] hung together from a financial standpoint," Taylor said. "I'm not sure anybody else is going to try to do what Frontline says they were going to do. There doesn't seem to be anybody else with a similar approach."

If any other company bids on the D block, it will be much less than the FCC would have received without the national public safety network build-out rules, Taylor said.

But the Public Safety Spectrum Trust (PSST), the nonprofit group of emergency response agency representatives that controls the public safety portion of the spectrum, said earlier this month it continues to support the FCC plan for the D block. The FCC should "do all that it can" to advance the public-private partnership meant to bring about the nationwide public safety broadband network, said Harlin McEwen, the PSST's chairman, in a statement. "While it would not be appropriate for the PSST to comment on any potential bidder’s strategy, we want to restate our enthusiasm for and commitment to what the FCC has done."

In the C block, the FCC required that winning bidders operate under open-access rules, meaning the winning bidder must allow any legal devices to connect to the network and allow customers to access any legal Web content of their choosing. Google, which pushed for the open-access rules, has pledged to bid at least $4.6 billion for the C block, and the FCC later set that figure as the minimum price it will accept.

FCC rules prohibit potential bidders such as Google from commenting on their spectrum plans in the run-up to the auction. Bidding is anonymous, but the FCC will release some information about the auctions at its auction Web page.

But several wireless industry observers have suggested that Google may not want to win the C block spectrum. Google, by getting the FCC to adopt the open-access rules and by pushing Verizon Wireless and AT&T to open up their current wireless networks to outside devices and applications, has already accomplished much of what it has wanted, Taylor said.

"I think it's fairly widely believed that [Google] doesn't really want to be the actual carrier," Taylor said. "That doesn't mean they still wouldn't buy spectrum and then work with somebody else who's a carrier."

A subcontracting arrangement with a wireless carrier would make sense for Google, she said.

Blair Levin, a telecom analyst with Stifel, Nicolaus & Co., also doubts Google will be a major player in the C block bidding. With the U.S. stock markets tanking in recent weeks, Google may not want to spend $10 billion to build a national network, he said, referring to the estimated cost.

Before the FCC set the auction rules in July, Google had also inquired about the legality of selling spectrum on a wholesale basis. The FCC ruled that such a plan would be legal.

In addition to the current wireless giants AT&T and Verizon Wireless, other companies to watch are the cable television providers, satellite TV providers and handset maker Qualcomm, Taylor said. Qualcomm and cable provider Cox were among the 214 bidders approved by the FCC this month.

Look for wireless carriers such as AT&T and Verizon to bid defensively, she said. "If the traditional mobile carriers really are the final winners of most of the spectrum, then nothing interesting happens," she said. "They don't want to see some major new entrant coming in."

Falling stock prices on Wall Street may discourage some competing bidders, with the auction coming at "precisely a bad time" for investment in a new nationwide network, Taylor said. But these auctions may be the last chance for a third nationwide broadband network, she added.

The 700MHz spectrum band carries wireless broadband signals three to four times farther than some higher spectrum bands, making it perfect for long-range broadband networks. "If you're going to build a green-field network from scratch, you want to build it at low megahertz like this," Taylor said. "If anybody was seriously considering launching a fully new competitor ... from scratch, this is the chance. There isn't going to be another one, probably."

Copyright © 2008 IDG Communications, Inc.

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