The first big decision by the new FCC chairman, Tom Wheeler, seems a negative one, delaying the much anticipated incentive auction of broadcast spectrum by a year. However, given the complexity and political sensitivity of the process, it seems sensible to reduce his agency’s chance of disaster. The biggest auction of new spectrum in the US since 2008’s 700MHz sale will now take place in mid-2015.
There are two main lessons to learn from the delay. The increasing complexity of auction processes is slowing 4G roll-out and there will be rising pressure to reform the approach in future years. And while the major cellcos welcomed the good sense of waiting until 2015, the postponement will still intensify the race to acquire spectrum from other sources. Both indicate that the classic auction will be less and less important in the spectrum balance of power in the future.
On the first point, Wheeler’s decision highlights how complicated spectrum allocation processes have become, and how the precise mechanism chosen can influence the outcome and the subsequent structure of the market.
The choice of process has been blamed for unexpected outcomes in many countries this year. In the UK, the long awaited LTE auction raised far less money than expected, which was partly blamed on the CCA (combinatorial clock auction) approach chosen by regulator Ofcom, which needed about 1,000 pages of documents to outline and was described as so complicated it was like “playing four-dimensional chess”.
Austria used CCA too, as did The Netherlands (where prices were well above expectations), Switzerland, Denmark and Ireland, plus Canada and Australia. CCA includes supplementary rounds where bidders bid on indivisible packages of spectrum, while prices are determined by a ‘second price rule’ ‘ based on competitors’ bids rather than necessarily on a winner’s own bid. Critics say that the mechanism is unnecessarily complicated and Reuters reported that T-Mobile Austria hired a game theoretician to help it prepare its bidding strategy during the six months before the spectrum sale.
Other approaches have their problems too. This month, Norway used a ‘first price sealed bid’ mechanism, which led to one of its established cellcos, Tele2, missing out on any spectrum (see separate item). And the Czech regulator halted its auction altogether, earlier this year, because the process was allowing prices to spiral upwards, and it feared this would lead to high prices for consumers or limited ability for carriers to invest in networks (the auction was held again last month).
One of the results of proposals to unify Europe’s regulatory system would be to create a more consistent and predictable set of auction rules. And 2014 is likely to see some soul-searching by regulators round the world about how auctions could be rationalized, or whether there is a better alternative, especially after some disasters such as the first Czech auction and the failed GSM re-auction in India, in which large swathes went unsold (though that was down to reserve price more than process).
There is also, of course, rising interest in more dynamic systems of allocating frequencies on an on-demand basis, to support a large number of service providers and applications, rather than tying airwaves to a few large carriers via long-lasting and expensive licences.
Despite these new ideas, many emanating from the web community, the auction will remain the central spectrum allocation tool in most countries for years to come, and regulators will come under increasing pressure to make sure it delivers the right results. Wheeler officially acknowledged on Friday that it was unrealistic to overcome all the challenges of the incentive auction in less than a year. The process will focus on 600MHz of spectrum currently held by broadcasters, but it will involve an untested and complicated series of reverse bids during whicht the current owners will agree to relinquish certain frequencies at certain prices. Once the precise frequencies and prices are known, the FCC will package them up and auction them in new blocks to carriers.
Well aware that this will be one of the most important, controversial and intensely analyzed events of his chairmanship,Wheeler wrote on the FCC blog: ‘As any responsible manager knows, managing a complex undertaking such as this also requires an ongoing commitment to continuously and honestly assess its readiness and its project plan. I believe we can conduct a successful auction in the middle of 2015.’
He added: “I have often defined the complexity of this multi-part simultaneous process as being like a Rubik’s cube. As part of our auction system development, we will check and recheck the auction software and system components against the auction requirements, and under a variety of scenarios replicating real life conditions. Only when our software and systems are technically ready, user friendly, and thoroughly tested, will we start the auction.”
Further details remain sparse for now but the FCC will provide more information on timescales, process and rules after its January meeting.
The second result of Wheeler’s delay will be to intensify the US operators’ race to acquire frequencies by other methods, especially when it comes to smaller or newer players ‘ the big three have enough spectrum to support their LTE and LTE-Advanced plans for several more years, and will be quite happy at a postponement which keeps new challengers at bay for a while longer. It is clearly in their interests to take part in a smooth process which will not subsequently be open to credible legal challenges.
Sprint said in a statement that Wheeler had ‘laid out a thoughtful and deliberate approach designed to assure that the FCC conducts a successful auction. The schedule acknowledges the complexity of choosing the best auction policies and procedures and the importance of taking the time necessary to develop an auction bidding system which will operate effectively.”
However, any new entrants and web players which may aim to acquire their own spectrum will be left for now with unlicensed bands, or offbeam options like mobile satellite spectrum. And all the participants will still be keen to stockpile any new frequencies that come along, if only to ensure rivals don’t get hold of them.
There will be some smaller spectrum allocations in 2014, notably in the PCS H Block, and the FCC is also keen to open up other airwaves for mobile broadband, including federal frequencies which could be shared with operators. But the main sources in 2014 will be acquisitions of assets from rivals or spectrum traders; increasing use of unlicensed options such as Wi-Fi and even TV white spaces; and adoption of airwaves originally intended for other services such as satellite.
The rounds of horse trading which can be anticipated will continue a process which has dominated the US mobile market in the past few years and led to some significant deals (and some failed ones, such as AT&T’s plan to buy T-Mobile USA). Verizon augmented its holdings with major purchases of AWS spectrum from five cablecos and Leap Wireless; AT&T is buying Leap itself and has also acquired 30MHz of 2.3GHz WCS frequencies, mainly from NextWave, and Qualcomm’s lower 700MHz D and E Blocks, which it will use for LTE Broadcast. The company additionally bought the Lower 700MHz B Block frequencies which Verizon divested as a condition of its cableco pact, and both the leaders have engaged in a string of purchases from smaller, often rural players. Sprint, flush with cash from Softbank taking an 80% stake, has gained full control of Clearwire with its plentiful swathes of 2.5GHz TDD spectrum, and is already rolling out triband LTE in selected markets, using PCS, iDEN and Clearwire bands.
T-Mobile merged with MetroPCS and will repurpose the latter’s CDMA spectrum for LTE. It has also started deploying 2x20MHz LTE in some urban areas. It is mainly using the AWS spectrum it originally harnessed, idiosyncratically, for 3G, but it wants more low frequency airwaves to improve coverage and rural quality. Verizon may be one source, since it is trying to sell its Lower 700MHz A Block holdings. The larger operator indicated recently that it would be open to a spectrum swap rather than cash payment, which could make it easier for TMo to bid, although the firm did raise over $3bn in financing in the past month, some of it expected to be earmarked for spectrum purchases. However, there is speculation that AT&T might also pursue the Verizon A Block, sparking a bidding war.
While the big four trade frequencies, it will be interesting to see how Dish Network, which is sworn to become a major mobile player itself, will play its next hand. Although it owns spectrum in the S-band originally dedicated to mobile satellite ‘ and has received FCC clearance to run LTE there – its chairman Charlie Ergen has acknowledged that it will need further airwaves (and a network partner) to make the economics work. So far, he has been thwarted in his bolder moves ‘ bids to take a controlling stake in Sprint and/or Clearwire failed and now Ergen seems to have been outmanoeuvered in his bid to take over bankrupt LightSquared, with its plentiful but problematic mobile satellite frequencies.
Centerbridge Partners has reached a deal to buy LightSquared out of bankruptcy protection, according to The Wall Street Journal, in a plan also involving existing owner Harbinger Capital. LightSquared, backed by Philip Falcone’s Harbinger, had an ambitious plan to build a wholesale-only LTE network in underused L-band mobile satellite spectrum, but ran aground on hostility from the GPS industry, which claimed the services would interfere with its equipment.
There has been a mini-bidding war for the company from investors interested in its spectrum assets. Existing LightSquared investor Fortress Investment Group reportedly planned to make an offer, but withdrew it on Wednesday and now backs Centerbridge. However, the loser will be Dish, though it is still possible Dish could buy the spectrum from its new owner in future.
Ergen’s investment vehicle, with Dish at its front, bid $2.2bn earlier this year, as a stalking horse offer to kick off a bankruptcy auction process, scheduled for December 11. However, that was cancelled at the last minute with LightSquared saying in a filing that it was now ‘pursuing and negotiating an alternative transaction … other than the ad hoc secured group’ [ie Ergen and associated lenders]. Ergen had already privately acquired about $1.1bn of LightSquared debt and proposed a reorganization plan.
However, LightSquared has been in dispute with the ad hoc lenders’ group since the beginning of its Chapter 11 case, leading Ergen to complain that Dish was being blocked from having a ‘fair shake’. On Tuesday, he lost an attempt to end a lawsuit alleging he acted improperly in buying LightSquared debt. LightSquared and Harbinger allege that Ergen formed a ‘secret special purpose vehicle,’ SP Special Opportunities, to buy the debt because this process was ‘improper’, given that Dish and Ergen’s other company, Echostar, compete with LightSquared (a clause in the latter’s credit agreement bars rivals from owning its debt).
Dish plans to build its own LTE-Advanced network in its mobile satellite frequencies, which are at a safer distance from GPS than LightSquared’s, but has been hovering around the failed start-up on the basis that various remedies would make its spectrum usable in future. Leaving some of the frequencies fallow, or funding new filters, are some of the ways LightSquared has argued it could operate while alleviating the GPS providers’ fears. Presumably Centerbridge has the same confidence. Tim Farrar, satellite analyst and head of TMF Associates, told the WSJ: ‘It would be really fascinating to know what Centerbridge heard from the FCC that gave them enough comfort to finalize a $3.3bn bid today.’
According to the reports, Centerbridge is offering about $3.3bn for the bankrupt venture as well as taking on about $1.7bn in liabilities. It seems that Harbinger, and possibly Fortress, will also have stakes and Falcone will remain as chairman, pushing ahead with his vision of creating a national wholesale network despite being embroiled recently in his own allegations of improper actions, which led to his being banned for five years from the securities sector by the SEC.
So 2014 could see the two mobile satellite spectrum holders back in action, and attempting to disrupt the LTE-Advanced landscape, though the more the big four expand their networks and consolidate their spectrum holdings, the less worried they will be. However, there are still interesting options ‘ Dish would, initially at least, use its mobile network largely for its own quad play, but could also support partner service providers; while LightSquared might be a suitable vehicle for Google to test out its theories of dynamic spectrum/network allocation and universal access.