The Lure of the LMDS Buck

Results of the FCC's recent LMDS auction were deemed "disappointing." Winning bids totaled just under $600 million, and more than 100 cities failed to lure the required minimum opening bid and will have to be re-auctioned.

Auctions were devised as a fairer means of distributing spectrum access rights. Proponents claim auctions are inherently fairer than comparative hearings, in which a small group of officials often must choose between several qualified candidates, or lotteries, which are based on chance. But when the federal government espied winning bids totaling $20 billion in the broadband PCS auctions, it began salivating. Congress pressured the FCC to perform more auction magic -- plucking money out of thin airwaves.

FCC officials may deny it, but the commission has become less interested in auctions as an equitable means of distribution and more interested in generating revenue for the U.S. Treasury. This was made clear last autumn at a Shorecliff Communications conference where FCC representatives warned there would be "no more giveaways" like the $1 St. Louis wireless communications service license. If the goal of auctions is to ensure fair distribution, then the FCC should be delighted by low winning bids.

Instead, the FCC decided to play hard ball, setting minimum opening bids for the LMDS auction. But just in case, it reserved the right to lower the minimum opening bids once auctions were under way. No doubt, the only reason it did not was fear of upsetting those already engaged in bidding. It is hard to see how the FCC will be able to sell the remaining licenses without lowering the minimum opening bid, however.

The FCC did do one smart thing in the LMDS auctions: It abandoned installment payments. This prevented participants from bidding what they could only hope to raise later.

MISSING THE POINT In its lust to create bidding wars, the FCC ignored technical and regulatory arguments favoring non-exclusive licenses, and allocated just one A-block license per geographic area. Had there been three non-exclusive A-block licenses per area and no minimum opening bid, total winning bids would probably have been lower. But what is the goal -- to maximize the take or engender a large, competitive LMDS industry?

The purpose of exclusive licenses is to prevent interference between competing operators and their subscribers. That made sense in the 800MHz cellular phone band, where bandwidth is limited and propagation chaotic. However, it does not make sense in the 28GHz LMDS band, where there is more bandwidth than anyone knows how to use, and radio transmitters behave like searchlights. Never has a wireless service been riper for a technical solution to spectrum sharing than LMDS -- like the radio etiquette used by a wireless LAN to prevent workstations from interfering with each other.

Most LMDS manufacturers admit their equipment is not capable of using anywhere near 1,150MHz of bandwidth on a single link. Nor has customer demand for such super-high-speed services yet been identified. But there is an advantage to sharing 1,150MHz of bandwidth: It would permit multiple operators to offer bandwidth-on-demand service. Operators could either coordinate frequency use or employ frequency-agile radios.

SAME PROBLEMS, DIFFERENT SERVICE Sure enough, when the FCC allocated a single, exclusive A-block license per geographic area, it guaranteed that all of the old arguments for limiting local exchange carrier (LEC) participation would be trotted out. And they were. The FCC restricted LECs' ability to participate in areas where they already offer wireline service. Thus, we have the spectacle of the FCC preventing the integration of LMDS and public telephone network infrastructure to "protect" consumers. What consumers needed to be protected against were exclusive licenses.

But the main damage caused by exclusive A-block licenses is that they eliminate any hope of competing LMDS operators. Proponents of exclusive licenses claim LMDS operators will have their hands full competing against LECs and cable TV carriers. The argument is shaky at best because no one really is sure what LMDS will be used for. Cable-based alternatives do nothing to ensure competition between LMDS infrastructure, subscriber terminal and service providers.

Although LMDS licenses look like bargains compared to A- and B-block PCS licenses, they seem like rip-offs when you consider that Teligent obtained 400MHz of spectrum nationwide for free. And unlike PCS, LMDS carries considerable risk.

The FCC bungled the LMDS rules. And in Congress' eyes, it bungled the LMDS auctions. But the crossover to wireless is so compelling, not even a series of bungles can stop it.