MOBILE AWAITS ANOTHER BAND BINGE

A recent FCC decision to allocate the so-called H-block spectrum to advanced wireless services, combined with encouraging news from Capitol Hill, could end the long-tolerated U.S. spectrum shortage for wireless providers within the next few years, potentially altering the landscape of the sector significantly.

The prospect of greater licensed spectrum availability during the next few years would be a tremendous relief to U.S. mobile wireless carriers, which have been limited in their offering of advanced wireless services in part because the FCC essentially has not awarded spectrum from an auction since 1997.

“It's like DeBeers loosening its hold on the diamond market,” Precursor wireless strategist Rudy Baca said. “Because without spectrum, you can't offer wireless services.”

Reversing the spectrum-shortage trend has been a priority of the FCC led by Chairman Michael Powell, according to FCC Chief of Staff Bryan Tramont.

“It fits into the chairman's broader agenda of pushing a third broadband pipe into the home” to complement the deployment of DSL and cable-modem technologies to most U.S. residences, Tramont said during an audioconference last week.

The process is expected to begin with Auction 58 in January, when the FCC is scheduled to accept bids for the disbursement of spectrum originally awarded controversially to NextWave Telecom. The 10 MHz swaths throughout much of the country — a notable exception being a New York license, one of which NextWave sold to Verizon Wireless for $930 million during a private auction in July — are expected to provide carriers with opportunities to fill spectrum gaps.

With Cingular Wireless addressing most of its spectrum needs via its $41 billion merger with AT&T Wireless, and Verizon Wireless augmenting its airwaves assets through deals with NextWave and Northcoast, smaller carriers may benefit most from the January bidding. In additional to regional operators, analysts project spectrum-hungry national carriers like T-Mobile and Nextel Communications will participate, while Sprint could be a factor in markets where it needs additional capacity.

There has been some speculation that the FCC might delay Auction 58, but Tramont said the agency is on track to maintain the January schedule.

Greater questions surround other potential auctions, beginning with the H-block and J-block spectrum the FCC allocated during its Sept. 7 meeting. Mobile carriers were particularly divided over interference concerns regarding the H-block pairing of swaths from 1915-1920 MHz and 1995-2000 MHz.

Sprint and wireless vendor Nokia told the commission that H-block operations could create interference for existing PCS licensees. Meanwhile, T-Mobile and Nextel filed ex partes claiming interference would not be a problem.

Ed Thomas, chief of the FCC's Office of Engineering and Technology, said his engineers' “conservative” finding indicates the H-block spectrum is viable.

“The devil is really in the assumptions,” Thomas said. “Based on how you make the assumptions, you could argue that this is a disaster that will never work, or that it's a chip shot and it's very easy.”

Some industry observers believe the split on the interference issue reflects competitive differences, claiming that spectrum-rich carriers such as Sprint, Verizon and Cingular simply do not want T-Mobile and Nextel to obtain the airwaves they need to compete effectively in the wireless broadband market.

While acknowledging “there is that element,” the H-block interference concerns are real for PCS operators, according to Ranjan Mishra, a principal in the wireless practice at Adventis. Meanwhile, he said “there is no downside” for Nextel, because it does not have any PCS spectrum.

Nextel also is expected to be a primary bidder for the H-block spectrum because the airwaves are adjacent to the 10 MHz it is scheduled to receive as part of the FCC's 800 MHz order. But Baca expressed doubt on whether the wireless carrier could afford to contribute at least $3.2 billion in cash for 800 MHz rebanding, bid enough to win the H-block auction and still pay billions for a high-speed data network using Flarion's OFDM solution that lacks the economies of scale offered by other traditional wireless technologies.

Prospects that H-block bidding will be fierce would be increased if the FCC decides to auction the airwaves as a national license, something Tramont said the agency “absolutely” is considering. Recent private spectrum sales generally have valued airwaves at a price of $1.50 to $2 per MHz per pop, and making the H block a nationwide license likely would result in bidders pushing the higher end of that range, according to Michelle Farquhar, a telecom attorney for Hogan and Hudson.

“You might get $5 billion, which — not surprisingly — is what Verizon said it would bid” for a nationwide 1.9 GHz license during the 800 MHz proceeding, Farquhar said.

Making the H block a nationwide license also would be ideal for deep-pocketed new entrants. Tramont, Farquhar and Mishra all said cable companies seeking a mobile component to compete with ILECs' bundled offering could find a nationwide license attractive. Baca said computer-related firms, such as software giant Microsoft, are potential bidders in an era of converged communications over IP platforms.

Most industry observers believe the H and J block auctions are at least a year away. A similar timetable could exist for 3G spectrum in the 1.7 GHz band. While some of this allocated spectrum is unencumbered, much of it would be donated by the Department of Defense.

Congress is considering a bill that would earmark a portion of auction proceeds to the DOD, as an incentive to encourage the military to free more spectrum. Currently, the bill would give the DOD 18 months to clear the spectrum, but Baca said those airwaves could be available earlier.

“I actually think we're going to see that pass this legislative session,” he said. “Hopefully, they'll also tweak the 18-month time lag, so the spectrum can get out sooner.”

Baca was much less optimistic about the prospects that broadcasters will be cleared from the 700 MHz band to make that spectrum available by the FCC goal of 2009. Valued by wireless providers for its propagation characteristics that would reduce the number of transmitters needed in wireless networks, these airwaves are considered ideal for technologies such as Wi-MAX, which many policy makers believe can play a key role in making broadband affordable to rural consumers.

FCC Media Bureau Chief Ken Ferree and Powell believe the 85% threshold needed to force broadcasters off the frequencies can be reached if cable and satellite subscribers are included. But Baca said that strategy is a “little too creative” and likely would be overturned in court, given the current law.

Some members of Congress are eager to free the spectrum, and have expressed support for accelerating the digital television transition, which was the subject of a recent Senate hearing. But Baca expressed doubt that there is enough support in Congress to fight the staunch broadcast lobby.

“Never underestimate the power of inertia in Washington,” he said, noting lawmakers fear opposing broadcasters will generate unfavorable news coverage to cost them future elections.

Even without the 700 MHz band being cleared, the prospect of 100 MHz of new spectrum hitting the wireless market will create a supply-and-demand impact of depressing spectrum prices — a welcome sight to investors that were burned when many European carriers drowned in debt after bidding recklessly on 3G spectrum in 2000.

“While it is a negative for existing licensees, because the value of their existing [spectrum] assets are diminished, it improves the ability for carriers to actually become profitable by offering these services,” Baca said.

Tramont said the FCC recognizes the value of spectrum-related transactional costs and their impact on the ability for wireless providers to deploy services in sustainable business models. By making more spectrum available, officials hope consumers will have greater broadband options, he said.

“Even if it's not an era of spectrum abundance, we want to make sure at least it's not a barrier to providing services to the American people,” Tramont said.

Auction 58

The storied spectrum, reclaimed from NextWave. No New York licenses available, but the 284 swaths of 10 MHz PCS airwaves could be ideal for spectrum-hungry carriers like Nextel and T-Mobile wanting to fill capacity gaps.
JANUARY 2005

H block

Allocated by the FCC earlier this month. If the FCC makes this a nationwide license, the price could skyrocket because such a swath would be perfect for deep-pocketed providers, including players from the computer and cable industries wanting to enter the market.
LATE 2005

Spectrum Alternatives

Near-term options for wireless providers wanting to secure spectrum

3G spectrum

If Congress can pass a law to divert auction proceeds to the military, this 90 MHz of spectrum could be popular for advanced wireless services.
Mid 2006

700 MHz spectrum

The decade-old question remains: Can incumbent broadcasters be cleared from the airwaves? If the powerful broadcasting lobby can be overcome, Wi-MAX providers and others are eager to bid on these prime airwaves.
2009, maybe sooner

Private deals

Still the quickest solution. NextWave already has sold large chunks of spectrum to Verizon and Cingular, whose pending merger with AT&T Wireless is largely a spectrum grab. Meanwhile, Sprint is augmenting its business plan by reselling its network to the likes of Virgin and AT&T.
NOW