Where's the spectrum?

As Joe Congressman, a representative from Anywhere, USA, closes his eyes to sleep, he racks his brain trying to find money in the budget that can be dedicated to his pet projects.

Raising taxes is out of the question--it would not pass and just mentioning the idea would jeopardize his re-election effort. Raising fees is more palatable, but the same problems exist. Selling a national asset could work, but what asset of any value could be sold without attracting the wrath of voters and colleagues?

If only an extra $100 billion could just drop from the sky!

Joe Congressman's dream may come true. As many analysts believe, a U.S. auction of unencumbered spectrum--which operators would use to offer third generation wireless services--could generate between $100 billion and $150 billion.

That's big money, even in the context of the national budget--especially for selling "air" that most of the public does not even know exists.

In other words, it's the perfect revenue-generating tool for politicians--and the reason that people on Capitol Hill who don't know the difference between GSM and CDMA suddenly are interested in spectrum management issues.

On the surface, the formula sounds simple: Carriers want to make money on 3G offerings, the public appears ready for the high-speed wireless functions that 3G promises and government officials appear to have every incentive to conduct an auction.

So why isn't the U.S. conducting a 3G auction that likely would attract bids eclipsing the combined totals realized in the ground-breaking auctions in the U.K. and Germany?

The answer is clear: Virtually no unencumbered spectrum is available. And the possible solutions to the problem are far from simple; in fact, many of them could require the government to take unprecedented actions to free the spectrum from its current users so auctions can generate the maximum amount of money.

Adding to the intrigue is the fact that spectrum management--like so many telecom-related issues--is no longer within just the jurisdiction of bureaucratic agencies such as the FCC but has instead become the focal point of political debates on Capitol Hill.

"The FCC used to be a sleepy little agency that just did routine things," says Rudy Baca, vice president and global strategist for The Precursor Group. "Now it regulates the companies that are the "engines of growth" for the economy. And when you put quotes around a statement like that, you get people's attention."

Indeed, spectrum management suddenly has the attention of Washington's political elite. In August, the FCC delayed the 700 MHz auction that deprived the U.S. Treasury of $2.6 billion at the behest of Congress--an unusual financial decision, even in an era of budget surpluses. And last month, President Clinton diverted his attention from war in the Middle East long enough to sign an executive order outlining a plan to secure spectrum for 3G.

"As the Internet migrates out of the personal computer and into wireless Web-enabled devices, spectrum management is becoming increasingly important," said FCC Chairman William E. Kennard after Clinton issued his memorandum. "Indeed, spectrum--or the absence of spectrum, in some cases--is emerging as a major factor for the new economy. That's why it's so important that we elevate spectrum management to a national priority."

How much money are we talking about?

The reason for all the commotion is money--lots of it. And the sums seem to be growing exponentially.

For instance, winning bids from all spectrum auctions conducted in the history of the U.S. total about $23 billion, about $15 billion of which actually has been deposited in the U.S. Treasury. Meanwhile, in estimating the value of next month's scheduled reauction of C and F Block spectrum, Merrill Lynch has pegged the cumulative price tag at more than $18 billion.

And because it is subject to the FCC's spectrum cap of 45 MHz per carrier, the reauction is not expected to have a great deal of impact on large carriers' 3G spectrum. Without a spectrum cap--and a change in U.S. auction guidelines that would allow foreign carriers to participate in auctions--bids for unencumbered bandwidth that can be used for 3G services in the U.S. could top $100 billion.

Perception of spectrum management changed dramatically this past spring when universal mobile telecommunications system auctions in the U.K. generated $35 billion for government coffers. The high-priced bids amazed industry observers, many of whom labeled the U.K. auction as irresponsible spending.

There seemed to be credence in this argument as the stock prices of U.K. auction winners began taking a beating amid numerous analyst reports that the high prices paid by licensees would cause operators' 3G business plans to unravel.

Meanwhile, a subsequent auction in The Netherlands proved to be a tremendous disappointment because bidders pooled their resources, leaving just five bidders to vie for four licenses. A quick pullout by one bidder resulted in the auction generating about $2.5 billion, much less than the $8 billion expected by the Dutch government.

The real litmus test came in August, when the German government expressed a desire to raise $20 billion by auctioning 60 MHz of spectrum. With only seven bidders for up to six licenses, a repeat of the Netherlands' disappointment seemed possible. But any concerns were laid to rest quickly. After two weeks of fierce bidding, the auction concluded with the winners committing to pay $45 billion to the German government.

While the German government was left with the pleasant dilemma of determining the best use of its $25 billion budgetary windfall, the impact of the auction was felt throughout Europe. The Spanish and Norwegian governments were criticized heavily for not auctioning the spectrum, instead awarding bandwidth at fixed prices to carriers subjectively judged as having the best business plans in so-called "beauty contests."

Meanwhile, the governments in the Netherlands and Italy--where a recent auction came to an abrupt end after raising just $10 billion, about half as much as expected--are investigating BT-led consortiums amid claims of collusion with other bidders.

In explaining the difference in the auction results in the Germany and the Netherlands, Eric Kintz, analyst for Roland Berger & Partners, points to market size and strategic importance. "If you want to be a player in Europe, you have to be in Germany," Kintz says.

These developments did not go unnoticed in the U.S. If, as Kintz indicates, operators will bid through the roof for spectrum in prime wireless markets, the U.S.--the crown jewel of the world's economy--could expect extremely aggressive bidding. And if it received bids that were the same price per capita as made in the U.K. and German auctions, the U.S. treasury would receive $150 billion.

"From the government's point of view, they're seeing a cash cow," says Gene Michaelson, a partner with Arthur Andersen's technology, media and communications consulting practice. "We're in a whole new era of spectrum management."

Spectrum problems in the U.S.

But it's an era littered with challenges. At the World Radiocommunication Conference this summer in Istanbul, the International Telecommunication Union identified three bands--860 to 960 MHz, 1710 to 1885 MHz and 2500 to 2690 MHzÑto be used for 3G services worldwide. In the U.S., each of the bands is encumbered by existing licensed users.

"The bands that were identified at the World Radio Conference include our existing first and second generation cellular and PCS services," says Gregory Rohde, head of the National Telecommunications and Information Administration, or NTIA. "And one of the objectives that we've had is to allow for these first and second generation services to evolve into third generation services. We're already starting to see that happen."

But reallocating existing spectrum will not be enough for U.S. carriers to offer 3G services. Additional spectrum needs to be auctioned.

The U.S. has some unencumbered spectrum--the 1710 to 1755 MHz band and the 2110 to 2160 MHz band--that is scheduled for auction by September 2002. However, this represents barely half of the 160 MHz that the World Radiocommunication Conference recommends each country dedicate to 3G.

In most countries, this is not a problem. In the U.S., difficulties exist in large part because of the prosperity of the country's telecom industry. Economic success and innovation translates into more TV stations, radio stations, wireless carriers, satellite companies and other communications operators in the U.S.--all of which vie for slices of spectrum. In fact, one innovation designed to increase the efficiency of spectrum management--digital TV--instead is embroiled in the controversy to clear the 700 MHz spectrum for mobile wireless auction.

In addition to the commercial uses of bandwidth, U.S. spectrum issues are complicated by the fact that non-commercial uses are managed by different organizations--the FCC for non-governmental uses and the NTIA for governmental uses, including those involving the military.

"In most countries, you have one government entity that manages all spectrum," Baca says. "In the United States, you have two. It's an inherently complex system."

But Clinton last month signed an executive memorandum ordering governmental agencies with spectrum management powers to cooperate in an aggressive effort to identify and clear spectrum within the ITU bands for 3G uses.

"Time is of the essence," Clinton said in a prepared statement. "If the United States does not move quickly to allocate this spectrum, there is a danger that the U.S. could lose market share in the industries of the 21st century. If we do this right, it will help ensure continued economic growth, the creation of new high-tech jobs and the creation of exciting new Internet and telecommunications services."

Mobile wireless industry groups roundly applauded Clinton's intervention, while observers noted the need for some type of plan to revamp a U.S. 3G strategy that previously lacked direction.

"It will be a land grab and a power grab, and I don't know who will be the winners and who will be the losers," says Mitchell Brecher, a former FCC attorney and shareholder in the law firm of Greenberg Traurig in Washington. "But the sooner you start the process, the sooner you can reach a resolution and bring services to the market."

Still, cynics accused Clinton of using spectrum issues as a ploy to gain favor within the telecom industry--political points designed to translate into support for the presidential election of Al Gore. Indeed, the effectiveness of a presidential directive issued three weeks before a new president was elected is questionable; however, the fact that spectrum management is deemed worthy of presidential action is a sign of changing times.

"This is clearly politically motivated." I think this is a precursor of what a Gore policy would look like," Baca says. "But the good thing is that the administration is calling attention to this important matter." This certainly shows the importance of this issue."

Red tape, high tides

Getting elected officials in Washington to pay attention to the spectrum shortage has not been easy; in fact, it's still a challenge, says Rick Boucher, D-Va., who has penned several bills regarding spectrum issues.

"Most members of Congress are not tuned in to this at all," he says.

However, they are attuned to revenue streams, which is the argument Boucher says he used this summer to get his colleagues to ask the FCC to delay the 700 MHz auction scheduled for September--an auction that was budgeted to raise $2.6 billion for the U.S. government.

The 700 MHz spectrum is encumbered by about 150 TV broadcasters--primarily UHF stations--that will not have to vacate the bands for several more years. Without knowing whether the spectrum would be usable in a reasonable amount of time--or if they would have to pay the broadcasters to move--potential auction participants were not expected to bid the full value of spectrum.

"We were prepared to essentially give that [spectrum] away to realize $2.6 billion in the budget," Boucher says. "I was aghast."

Boucher says he quickly gathered support in Congress, releasing the FCC of its budgetary obligation by noting the high prices bid in the U.K. auction. If officials on Capitol Hill would wait until the spectrum could be unencumbered, the U.S. government could realize a much bigger payday in the future. "That's the way I pitched the issue to get the delay," Boucher says.

So the 700 MHz auction has been rescheduled until March, although more delays for the auction seem inevitable.

Battle of the bands

While the 700 MHz band is considered by some to be prime spectral real estate for 3G uses, it is not within any of the ITU bands. For this reason, the search for 3G spectrum is focused on two bands: the 1755 to 1850 MHz band currently used by the military and the 2500 to 2690 MHz band used by fixed wireless operators.

From a technical standpoint, the military spectrum is the better choice because it is adjacent to the PCS spectrum used by most major U.S. wireless carriers. However, clearing military spectrum--used to transmit national security-level communications via a satellite network that cost billions of government dollars and years to develop--may not be practical. In fact, some press reports indicate military officials believe it would take 30 years to clear the spectrum.

With this in mind, the Department of Defense publicly proposed that the 2500 MHz band be used for 3G services. This hard-line stance softened somewhat in the wake of Clinton's executive order. A Defense Department spokesman said the department would participate in the 3G spectrum search and "consider all options" but noted that "national security concerns must be protected."

While relocating the military to another band of spectrum may be difficult, there are other options for using the Defense Department bandwidth. "Options for sharing it and band segmentation will be considered, as opposed to just relocating use of that space," says Tom Kalil, special assistant to the president for economic policy.

Without Clinton's intervention, some question whether the military spectrum would have been considered seriously as a 3G option. "Certainly, the military spectrum has been looked at before, but this is the first time publicly that someone has asked the military to consider moving from its spectrum," Baca says.

If the military spectrum is not used, the 2500 to 2690 MHz band--the frequencies reserved for 3G uses in EuropeÑis the likely target to be cleared. Incumbent users of the bandwidth are two types of fixed wireless operators: commercial multichannel multipoint distribution service (MMDS) operators and instructional TV fixed service (ITFS) users.

MMDS operators own eight of the 31 channels in the band and lease some of the other 23 channels designated for ITFS use. Most notable of the MMDS operators are WorldCom and Sprint, which have spent billions of dollars to deploy the technology and have just started rolling it out in selected parts of the country.

Given this considerable investment of time and money, it's not surprising that MMDS operators are reluctant to relocate.

ITFS users--university and secondary educational institutions, as well as some religious organizations--also are wary of relinquishing their spectrum, which is used primarily for transmitting long-distance learning TV programs. Not blessed with the technical knowledge and financial strength of commercial carriers, relocating to another spot on the spectrum chart could be cumbersome to ITFS users.

Still, many industry observers note that the ITFS spectrum is relatively underused. Combined with the fact that its users probably have less lobbying power than the military, broadcasters and commercial carriers, most analysts believe the ITFS bandwidth will be the government's first choice to house 3G services providers.

Regardless of which spectrum is chosen, government officials stress that incumbent spectrum users will be reallocated new spectrum and "treated equitably" to compensate for relocation costs.

"We're not proposing to take away spectrum from any incumbent user and leave them with no spectrum at all. We're looking at ways that we can relocate them to other uses," Kalil says, noting that PCS spectrum was made available to mobile carriers by relocating microwave users. "I don't want there to be confusion here that we're going to pull the plug on any incumbent user, be it a defense use or a commercial use."

The big boon

The coordinated spectrum search effort reflects a significant change in U.S. spectrum direction. As recently as September 1999, a state department draft proposal stated the military and fixed wireless bands would not be available for U.S. 3G use.

If successful, the spectrum search should result in an auction that will net a huge payday for the U.S. government in 2002. As large as this potential auction windfall may be, the prices bid at such an auction are expected to pale in comparison to the potential overall impact 3G services could have on the U.S. economy. Long-term job creation and industry growth--all of which generate tax money for the government--are the real prizes.

And it's not just carriers and consumers that will benefit. A timely entrance by the U.S. into the 3G market will have a ripple effect throughout the wireless industry, including equipment manufacturers and software developers, says Martin Baily, chairman of the president's Council of Economic Advisors.

"We believe the delays in introducing 3G products and services could be costly--they delay the benefit to consumers and providers and they also delay the U.S. companies that are going to seek to provide complementary products and services," Baily says.

The NTIA's Rohde agrees, citing predictions that about two-thirds of all revenue in the wireless industry--currently a voice-dominated medium--will come from data and non-voice services within the next 10 years.

"In other words, what that means is the electronic commerce is strictly becoming mobile commerce, and the Internet is getting wings," Rohde says. "And the fact is, if the United States does not understand and come up to the plate with this trend, we will quickly fall behind and fall into a competitive disadvantage". That's why this is so important."