Two-Steppin’ With the FCC

The Federal Communications Commission
Friday went courting new wireless firms to bid in forthcoming wireless
spectrum auctions.

Federal regulators concluded that it is in the “public interest” to remove
the financial eligibility restrictions that kept smaller firms from
participating in the bidding process.

However, the FCC failed to go all the way and fully unleash the potential
of broadband wireless services in the U.S. by maintaining its current
spectrum cap restrictions. Under rules adopted in 1994, each company is
limited to 45 megahertz of bandwidth in each market.

The cap acts like a condom restricting larger firms from conceiving
localized monopolies. But it also works to prohibit the wireless industry
from fully propagating wire-free services.

In a statement about the policy shift, FCC Chairman William Kennard said
the revised rules would preserve opportunities for small businesses and
promote the rapid deployment of wireless services across the nation.

“These rules carefully balance the needs of both small and larger
entrepreneurs to acquire spectrum at a time when the Internet is moving to
portable wireless devices,” Kennard said. “The upcoming C and F block
auction presents a tremendous opportunity for companies to put previously
unused spectrum to these new, cutting edge uses for consumers.”

Companies like Verizon Corp., Nextel Communications Inc., and WorldCom Inc. laud nearly any
regulatory move to utilize available wireless spectrum, even though they
are not completely free to play in the market.

WorldCom just completed its first round of filing
applications for licensing authority to offer broadband fixed wireless
services in more than 60 U.S. markets after it failed to acquire Sprint Corp.’s expansive
wire-free network.

John Stupka, WorldCom Wireless Solutions president said that its
applications moves the firm closer to fulfilling the Commission’s vision of
using available wireless spectrum for broadband services.

“Our applications move us one step closer to market launch,” Stupka said.
“We’ll work with the FCC and other spectrum holders to make this a speedy
and smooth licensing process.”

Verizon’s wireless business division issued a statement
applauding the Commission’s revised rulemaking, noting that the changes are
an important first step capable of unleashing wireless broadband access in
the U.S.

“We applaud the FCC’s decision, to the extent that it removes the
eligibility restrictions on bidding for some of the PCS licenses,” the
statement read. “The FCC should not be discriminating among companies who
want to acquire spectrum by allowing some but not all into the auction room.”

Verizon also said that the FCC should have gone farther by opening up all
of the licenses to interested parties, and by removing the arbitrary and
outdated spectrum cap.

The FCC rejected Nextel’s proposal to allow wireless
operators to apply for available licenses through bulk bidding. The
Commission will continue to evaluate satisfaction of construction
requirements on a license-by-license, rather than on a system-wide basis.

In January the Wireless Telecommunications Bureau announced its 35th
auction of broadband PCS C and F block licenses. Immediately, companies
contested FCC limitations and several formal requests were made asking that
regulators waive or revise the C and F block auction restrictions so
companies other than entrepreneurs could participate in the auction.

As standard policy, the FCC issued public notices seeking comment on these
requests and other proposed changes to its eligibil

ity and bidding rules.
It was inundated with comments both in support and opposition to revising
entrepreneur eligibility rules.

In June, the FCC issued its intent to revise the rules and clarify what
firms could bid for C and F block spectrum licenses. Last week the
Commission released its revamped rulemaking on the issue.

Specifically, the FCC revised the service and auction rules for upcoming
auctions of C and F block PCS licenses including reconfiguring the size of
C block licenses, modifying auction eligibility restrictions for certain
licenses in both large and small markets, and retaining the spectrum cap.

Under the FCC’s prior eligibility rules, in order to bid on C or F block
licenses an applicant needed to be considered an “entrepreneur.” In order
to achieve “entrepreneur” status with the FCC, a wireless company must have
had gross revenues of less than $125 million in each of the last two years
and must have total assets of less than $500 million.

In effect, the Commission removed the entrepreneur auction eligibility
restrictions to establish open bidding for C and F block licenses. The
entrepreneur eligibility restrictions will not apply to the assignment or
transfer of control of C and F block licenses won in open bidding.

Furthermore, the FCC ruled that:

  • C Block reconfiguration in Auction 35 and all future PCS auctions will
    be broken down in each available 30 megahertz C block license to three 10
    megahertz C block licenses.
  • Basic Trading Areas will be broken down into two divisions based on the
    population of the market. Tier 1 BTAs are those areas with populations
    equal to or greater than 2.5 million, while all smaller BTAs will be
    considered Tier 2 markets.
  • Applicant’s filing under C block “Grandfather” exceptions were extended
    to the merging firms if each of the company’s individually held grandfather
    eligibility exceptions. When one or more of the combining companies is not
    individually eligible for the grandfather exception, the resulting firm
    would be eligible for the grandfather exception only so long as an
    originally eligible entity retains in control of the resulting entity.
  • The provision of the Commission’s rules that prohibited any applicant
    from winning more than 98 of the licenses available in the C and F blocks
    were eliminated. However, the FCC will continue to apply the spectrum cap
    to C and F block licenses, including those won in Auction No. 35.

The newly adopted modifications to the Commission’s rules will apply to all
current auctions. In order to provide additional time between the rule
changes and auction filing deadlines, the Wireless Bureau will announce new
expiration dates sometime this week.

The FCC hinges its hopes for nationwide ubiquitous wireless deployment on
smaller companies coming to market with broadband services. Several firms
have gone belly-up due in part to the financial burden of deploying
wireless systems and obtaining wireless licenses. The spectrum goes back
into the auction process when a company goes under. It remains to be seen
weather this cycle will be broken or repeated by the revised rulemaking.

For example, NextWave won 90 licenses in 1996 by bidding more than $4.8
billion in two government auctions, but was unable to raise the funds to
pay for the licenses and declared bankruptcy two years later.

The FCC moved to cancel the licenses because NextWave could not make timely
payments as required by the licensing agreements. A bankruptcy court
stepped in and ruled that NextWave could hold onto the licenses as assets,
finding that the federal agency payment requirement lacked a regulatory
purpose. But a federal appeals court overturned the lower court’s ruling
and the FCC has been taking steps to resell the licenses.

The 30 megahertz split may work to drive the price tag for

downward, but it may equally press prices skyward by introducing more
bidders to the auction process. Market forces are Darwinian in nature, only
the strongest wireless companies with the deepest pockets survive.

The few years will determine which force the new rules may have on the
wireless market. If failing firms simply recycle available spectrum
licenses back through the auction process, the FCC may have no choice about
eliminating spectrum caps because fewer firms may be operating in a
diminished arena.

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