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The FCC's postponement of the 700 MHz spectrum auction to Sept. 12 from the planned March 6 opening dates gives wireless carriers who participated in the recent C- and F-block re-auction a chance to evaluate their finances before they bid again.
But instead of using the reprieve to calculate how much they will bid for the 700 MHz spectrum, carriers are evaluating whether they want it at all. Those sentiments are magnified by the lack of a clear resolution to when the spectrum, used for analog television channels, actually will be returned by broadcasters who right now have a legal right to it through 2006.
Several prospective bidders recently won blocks of spectrum in the reauction of personal communications services spectrum at 1900 MHz that closed Jan. 26 and raised about $17 billion. As a result, many are reassessing their spectrum needs.
Salmon PCS, a company formed by Crowley Digital Wireless and Cingular Wireless, paid more than $2.3 billion for licenses in 77 markets covering approximately 75 million POPs. According to George Crowley, Salmon PCS chairman, CEO & controlling shareholder, the company is focused on building out the networks for which it purchased spectrum during that auction and has made no plans for the 700 MHz auction. "We are always looking for other opportunities, and this delay will give us a little time," Crowley says.
SVC BidCo, a partnership formed between Sprint and AirGate Wireless, won PCS spectrum licenses covering five Basic Trading Area markets in the C and F block re-auction. Before the re-auction, Sprint and AT&T Wireless agreed to exchange PCS spectrum covering 18.5 million POPs, giving Sprint licenses in seven more BTAs. Sprint has stated that the additional spectrum gives the company adequate capacity for the next 10 years.
Nextel Communications, the national specialized mobile radio service that dropped out of the C and F block re-auction after the spectrum's high price tag became apparent, is "looking very seriously at the 700 MHz spectrum," says Bob Foosaner, Nextel senior vice president.
But the fact that broadcasters occupy the spectrum and will stay there for at least five more years is a big concern. Incumbent spectrum holders have until December 31, 2006, to clear the spectrum, or until 85 percent of U.S. households have access to digital TV (DTV) signals, whichever comes last. That has companies such as Nextel questioning the value of the spectrum. "I don't think anyone wants to put a lot of money into an investment that they can't start hoping to recoup until five years down the road," says Ben Banta, Nextel spokesperson.
But broadcasters--who got the spectrum free from the taxpayers in the first place--have made it clear that they would clear the spectrum sooner than that if the price is right. Incumbents hope to negotiate with spectrum winners to gain more value for the spectrum, with a variety of scenarios having been proposed in the past year to speed that process.
Carr Krueger, a partner at Arthur Andersen, says broadcasters effectively can hold the 700 MHz spectrum winners ransom by agreeing to move off the spectrum sooner than 2006 in exchange for compensation, a spectrum swap, or other incentives. "They can migrate quicker or slower, based on what their incentive is to get out of the spectrum," Krueger says. "The spectrum winners can either sit and wait until 2006, or more realistically they will work out spectrum clearing with the broadcasters, who then are in a position to negotiate harder terms."
Krueger notes that negotiating power is the reason behind many broadcasters' vocal opposition to the FCC's decision to delay the auction. The broadcasters eventually will be forced to vacate the channels, but if they can get other companies to buy it immediately the buyers end up with assets that have no value until 2006.
"My carrier clients have had various discussions with these broadcasters, and they have indicated that the broadcasters are a tough bunch," says Andrew Cole, Wireless Practice head at Adventis, a consulting firm that works with wireless carriers on build-out strategies. "At the end of the day, the broadcasters will negotiate a deal that is good for everybody, but they are tough negotiators."
Spectrum Exchange, an independent company acting as an intermediary between the broadcasters and incumbents, has devised a plan that could move broadcasters off the spectrum by May 2002. The company, which has been working with incumbent broadcasters and prospective bidders over the last 14 months, has proposed a separate auction linked to the FCC auction.
"The linked auction establishes a clearing fund, which then will be distributed to participating incumbent broadcasters to compensate them for turning over their rights to the channels and provide them with the funds to initiate DTV service," says Peter Cramton, Spectrum Exchange chairman.
When a bidder in the FCC auction places a bid, they simultaneously would place a bid in the linked auction. Bidders would bid a certain amount of money in the linked auction for every dollar they bid in the FCC auction, creating a clearing fund to be allocated among incumbent broadcasters according to the number of their POPs.
An executive at one carrier, who asked not to be identified, does not think the Spectrum Exchange idea will fly. Broadcasters don't have to move out until 85 percent of households have DTV signals. But one or two broadcasters alone own 15 percent of channels, so they have no reason to give their bargaining power to anyone else.
"The only way this idea would work is if each and every broadcaster agrees to it," the executive says. "Two parties have what I consider negative control, and either one of them can make it so nobody has to move."
Just as they are undecided on whether they want the 700 MHz spectrum, carriers also are unsure of how they would use it. "It could be that consumers want a single-band phone, and someone steps in a buys 30 MHz and offers a nationwide service and builds it all on 700 MHz," Cramton says. "700 MHz has excellent propagation characteristics for covering a lot of territory, so you can economically cover larger geographic areas."
Nextel's Banta says the company could go a couple different ways if it bids, including using the spectrum for third generation services or swapping it for 800 MHz and 900 MHz spectrum. Foosaner adds that if the spectrum were unencumbered, carriers could use it for anything from traditional cellular to 3G services.
"It could have any and every use," he says.
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