Tuesday, February 5, 2008

eBay for Billionaires

This month the FCC is winding down its auction of 700 MHz mobile radio spectrum. The auction that began on Jan. 24 was labeled by one industry columnist as “eBay for Billionaires”. As the IEEE Spectrum reported:

Observers have called 700 megahertz the last great band of spectrum to come up for auction in this age of ubiquitous wireless devices. By virtue of having a lower frequency than today's third-generation services—which all operate at 1700 MHz and above—its signals can travel farther and better push their way through apartment and office walls.
The auction of 62 MHz of spectrum is one of the largest since the FCC first began auctions in 1994. The FCC’s first major auctions allocated 90 MHz of mobile phone spectrum in auctions, first with the A-B block in 1994-1995 (raising $7 billion) and the C block 1995-1996 (nominally raising $10 billion). These auctions of 1.9 GHz spectrum increased the number of cellphone providers in each market from two to six or seven, fueling the competition, price cutting and demand stimulation that pushed US cellphone penetration from 24 million at the end of 1994 to more than 250 million today.

As with the original AMPS A- and B-block allocations (50 MHz total) of the 1970s and early 1980s, this spectrum is coming from UHF TV channels. The original 850 MHz AMPS spectrum (from UHF channels 70-83) was tied up by broadcaster lobbying and litigation for almost twenty years. This is one reason why AT&T invented the cell phone but was not the first in the world to deploy commercial service, as I described in my 2000 paper on the history of first generation cellphone systems in the US, Europe and Japan. (BTW, does anyone else remember the original TVs with UHF channel 83?)

This time around, the allocation of channels 52-69 is less contentious because these are NTSC channels being surrendered in exchange for HDTV spectrum already in use. Selling the spectrum (and thus being able to spend the money) is a major reason why Congress mandated that NTSC broadcasts be turned off 380 days from now.

Even as someone who’s written about mobile phones for more than a decade, the 700 MHz spectrum allocation is dizzyingly complex, with all the clever rules and allocations. I’ve found three good sources:

  • I got my first introduction by talking for 15 minutes with a FCC rep at the CTIA show last October, who also pointed me to the FCC website for “Auction 73” provides a plethora of information.
  • Even before that, industry veteran Om Malik did an exemplary job of boiling down the auctions in layman’s terms on his Gigaom blog.
  • The industry trade journal, RCR News, has the best ongoing coverage with a special web page tracking all the auction news.

Of the four major carriers, AT&T and Verizon are bidding and Sprint and T-Mobile are not. The identities of the bidders is not available, only their bidding amounts. AT&T is also buying up spectrum previously acquired by Aloha Spectrum Holdings, a transaction approved Tuesday by the FCC.

Overall, the auctions have been successful — raising approaching almost $19 billion, versus a predicted $10 billion. However, most of the attention has been not on the total amount but the two odd conditions imposed upon the auctions for the “C” and “D” blocks. Normally economists would expect conditions to reduce the prices, although economist Peter Cramton argued (on my blog) that open access would increase prices by challenging the mobile phone oligopoly.

The first special auction is the C block, a nationwide license with 22 MHz of bandwidth that would normally be the most desirable of the auction. However, it has the subset of “open access” conditions proposed by Google and loathed by AT&T and Verizon. If the bids had not met the $4.4 billion reserve price, the spectrum would be reauctioned without the conditions, but magically an unnamed bidder (everyone assumes it’s Google) bid the spectrum to $4.7 billion last Thursday — guaranteeing that the spectrum will be sold with open access conditions. Of course, this doesn’t tell us who will end up with the spectrum, only that it will have open access conditions.

However, the 10 MHz D block has proven more problematic. It came with an obligation to build a nationwide public safety radio nationwide — depressing the sale price it hopes of funding those radios with an off-budget expenditure. As predicted, the auction has failed with the death of Frontline Wireless, the politically connected startup that died two weeks just before Auction 73 started. The only bid of $472 million is far below the $1.3 billion reserve price.

If Congress really cares about safety radio, it will auction the spectrum without restrictions, take out the $1.3 billion that the feds hoped to clear, and send the rest of the proceeds to the local governments to build their own systems.