Spectrum Hold 'Em: FCC Updates Spectrum Holding Policies

Low-band spectrum gets special treatment in the upcoming “Incentive Auction” and in the FCC’s case-by-case analysis of secondary market transactions.

We hold these truths to be self-evident, that not all spectrum is created equal, that they are endowed by their Creator with certain unalienable-but-unequal attributes, that among these are frequency, wavelength, and the transmission of energy. That to secure rights to use spectrum, Government agencies are instituted among Men, deriving their just powers from the Communications Act . . .

That’s right. Not all spectrum is created equal. No need to feel bad for the spectrum. We doubt it cares. Spectrum is utilized for a countless number of applications including radio, television, wireless Internet, mobile telephony, even cooking your food. Certain spectrum bands are just better suited for some tasks than for others.

More specifically, for mobile telephony/broadband applications, low-band (i.e., below 1 GHz in frequency) spectrum offers better signal propagation for enhanced geographic coverage than high-band (i.e., above 1GHz) spectrum, but high-band is better at transmitting larger amounts of data (albeit over shorter distances). Low-band spectrum, which wireless carriers covet due to better coverage capabilities and lower deployment costs, is in shorter supply than high-band spectrum. As directed by Congress and the Communications Act, the FCC is responsible for allotting spectrum among various uses and users. According to the FCC, ensuring access to low-band spectrum by multiple carriers helps to enhance competition and is, therefore, desirable.

As demand rises – particularly for spectrum likely to become available in the impending incentive auctions – the FCC has been confronted with conflicting calls for that soon-to-be-available spectrum. And in a recent Report and Order, the Commission has announced its decision, based on key differences between low- and high-band spectrum and the implications these differences have for competition. The result: the FCC has updated its “spectrum screen” policies which serve as a gauge of acceptable levels of spectrum holdings (including treating low-band spectrum holdings as an “enhanced factor”) in connection with secondary market transactions; it has also established new spectrum holding policies for the upcoming low-band spectrum incentive auction. We’ll discuss each in turn, and we’ll also address how the FCC’s new screening process may affect the auction’s chances of success.

The Updated Spectrum Screen

For mobile telephony/broadband services, the FCC has utilized different rules and policies over the years to prevent any one entity from acquiring too much spectrum. Currently, the FCC applies an “initial screen” to gauge whether an entity’s spectrum holdings warrant scrutiny in a “case-by-case” review. This “spectrum screen” is triggered if a proposed transaction would result in an entity acquiring rights to approximately one-third or more of the total spectrum “suitable and available” for mobile telephony/broadband services in a particular market (e.g., a county). Applications that trigger the screen are subject to closer scrutiny and their applicants must demonstrate that the greater concentration of spectrum rights is still in the public interest.

The newly-updated spectrum screen retains the current threshold for triggering increased scrutiny (i.e., approximately one-third of total “suitable and available” spectrum in the market) but, importantly, it modifies the definition of what constitutes “suitable and available” spectrum for purposes of the screen. Changes in that definition are needed because mobile wireless operators are now incorporating different bands into their networks for mobile telephony/broadband services and certain bands previously included in the spectrum screen are no longer considered “suitable and available”.

Specifically, the Report and Order makes the following changes:

·         Added to the spectrum screen:

  • 40 megahertz of AWS-4;
  • 10 megahertz of H Block;
  • 65 megahertz of AWS-3, when it becomes available on a market-by-market basis;
  • 12 megahertz of BRS;
  • 89 megahertz of EBS; and
  • The total amount of 600 MHz spectrum auctioned in the “Incentive Auction”

·         Subtracted from the spectrum screen:

  • 12.5 megahertz of SMR; and
  • 10 megahertz that was the Upper 700 MHz D Block.

As a result of these changes, there should be a total of 580.5 megahertz of “suitable and available” spectrum in most markets (not counting any of the 600 MHz spectrum expected to be available through the Incentive Auction process, since nobody knows yet precisely how much will become available). Thus, for most markets, proposed secondary market transactions that would leave one party with 194 megahertz, or approximately one-third, of the suitable and available spectrum would trigger the screen. The trigger would be adjusted for certain markets where AWS-1 or BRS/EBS spectrum are not available (and therefore can’t be counted for purposes of the spectrum screen), as well as the yet-to-be auctioned AWS-3 spectrum on a market-by-market basis (since the AWS-3 auction hasn’t occurred, the spectrum is not yet considered “suitable and available”).

While there is technically no separate screen for low-band (below 1 GHz) spectrum holdings, the FCC did forewarn that the extent of a party’s low-band holdings will be considered as an “enhanced factor” in the case-by-case review of secondary market transactions: any transaction that would result in an entity holding approximately one-third or more of “suitable and available” low-band spectrum will more likely be found to cause competitive harm. Transactions involving an entity that already holds one-third or more of low-band spectrum would cause the FCC even greater concern and, presumably, have an even lower chance at approval. (This warning is most likely targeted at Verizon and AT&T who, together, hold approximately 73 percent of the low-band spectrum in the U.S.)

Spectrum Holding Limits for Auctions

In the Report and Order the FCC adopts a new way of attempting to “shape” the distribution of spectrum among competitors. Historically, that shaping has occurred after the completion of each auction, as the Commission undertakes a case-by-case review of each winning bidder’s holdings to determine whether the spectrum acquired at auction would be consistent with the public interest. Under that regime, a successful bidder might find, post auction, that it could not in fact acquire the spectrum for which it had bid.

That case-by-case, post auction, approach has now been replaced by a “bright line” test intended to put bidders on notice, before the auction, of what spectrum they may obtain. The applicable limits will be determined separately for each auction. The underlying goal will be to identify spectrum acquisitions that “would potentially harm the public interest by reducing the likelihood that multiple service providers would have access to sufficient spectrum to compete robustly in the provision of mobile telephony/mobile broadband service.” In other words, the Commission wants to protect against undue aggregations of spectrum. The determination in each case will be based, in part, on “the extent to which competitors have opportunities to gain access to alternative bands that would serve the same purpose as the spectrum licenses at issue.”

The new pre-auction “bright line” approach will be used in the two auctions currently on the horizon, i.e., AWS-3 and the Incentive Auction for 600 MHz spectrum.

Because AWS-3 is high-band spectrum, and there is apparently sufficient availability of comparable high-band spectrum for multiple providers to utilize, the FCC declined to adopt any spectrum holding limits to the upcoming AWS-3 auction.

Conversely, the Incentive Auction involves low-band spectrum, which is in shorter supply and has unique characteristics (e.g., better signal propagation leading to enhanced coverage and lower deployment costs). Accordingly, the FCC has “reserved” up to (i.e., a maximum) 30 megahertz of 600 MHz band spectrum in each license area for entities that do not currently hold a significant amount of below 1 GHz spectrum.

What is a “significant amount”? In order to be eligible to bid on the reserved 30 megahertz, a bidder must, as of the auction’s short-form application deadline, hold “less than 45 megahertz, on a [county-by-county] population-weighted basis, of suitable and available below 1 GHz spectrum in a [Partial Economic Area].” All licensed spectrum as well as long-term leasing arrangements (attributed to both lessor and lessee) are included in the calculation of below 1 GHz spectrum holdings. Where did the 45 megahertz limit come from? It was arrived at by taking approximately one-third of the 134 megahertz of below 1 GHz spectrum (cellular, 700 MHz, and SMR) counted in the modified spectrum screen discussed earlier.

Generally, bidders exceeding this 45 megahertz low-band spectrum threshold will not be permitted to bid on reserved licenses. However, the threshold appears to apply only to the “nationwide” carriers (a universe defined by the FCC to consist of Verizon, AT&T, Sprint and T-Mobile). In other words, the FCC will still permit bidding on reserved licenses by “regional and local service providers in all PEAs, including those where such a provider [exceeds the 45 megahertz low-band threshold].” Why? Because these non-nationwide providers “enhance competitive choices for consumers in the mobile wireless marketplace, and help promote deployment in rural areas” and present a lower risk of denying access to low-band spectrum to competitors. In short, non-nationwide providers will be able to bid on all reserved spectrum while nationwide providers can bid on reserved spectrum only if they do not exceed the 45 megahertz threshold in the license area.

The amount of spectrum actually reserved, up to a maximum of 30 megahertz, will vary depending on a several factors, including: the amount of spectrum licensed in the initial stage; the amount of spectrum that reserve-eligible bidders demand at the end of a previous stage of bidding; and the amount of spectrum demanded by reserve-eligible bidders when the auction reaches a trigger. Until the trigger is met, all bidders will compete for generic licenses. (The FCC gives this as an example: “[I]f the spectrum reserve trigger is met in a stage with a maximum of 30 megahertz of reserved spectrum, if reserve-eligible bidders demand only 20 megahertz in a given PEA at those prices when the trigger is met, then 20 megahertz will be reserved.”) The FCC intends to clarify (after an opportunity for the public to comment) that reserve-eligible bidders can’t acquire more than 20 megahertz of reserved spectrum in a market unless there is another reserve-eligible bidder in that market.

Finally, the Report and Order also adopts secondary market restrictions on 600 MHz licenses for a period of six years (to match the interim buildout period) post-auction. In the FCC’s view, these restrictions are necessary to ensure that its goals of facilitating access to 600 MHz band licenses and preventing excessive concentration of low-band spectrum are not undermined. For reserved spectrum, entities will not be able to transfer, assign or enter into long-term leases regarding those licenses with entities that were not reserve-eligible bidders in the Incentive Auction. Moreover, for six years, no 600 MHz band licenses (reserved or un-reserved) can be transferred, assigned, or leased (long-term) if such a transaction would result in the acquiring entity holding approximately one-third or more of low-band spectrum in a market.

The FCC’s decision drew sharp dissents from Commissioners Pai and O’Rielly. Both were highly critical of the Commission’s apparent effort to put “an enormous thumb . . . on the scale of future secondary market transactions” (O’Rielly’s phrase) by, in effect, “pick[ing] winners and losers” (that one’s from Pai). Both seem to see the new limitations as an attempt by the Commission to keep AT&T and Verizon – the apparent targets of the new limitations – from taking maximum advantage of their available resources.

The dissenters raise a troublesome point. AT&T and Verizon will be most constrained by the new rules when it comes to bidding on 600 MHz spectrum in the Incentive Auction. But the ultimate success of that auction depends largely on maximizing the proceeds from the “forward auction” component. Those proceeds will have to pay for the First Responder Network Authority, the Next Generation 911 program and federal deficit reduction (all as required by Congress) while also paying off broadcasters in the “reverse auction”. That last element is particularly important because the amount of spectrum available for the “forward auction” may depend to a significant degree on how much spectrum broadcasters opt to make available in the “reverse auction”. And, obviously, the financial incentive for broadcasters to do so may be seriously compromised if the returns from the “forward auction” will be artificially depressed by the partial exclusion of the two deepest pocketed bidders.

The FCC Wants to Know: How Much Spectrum Is Too Much Spectrum?

FCC opens inquiry into whether, and how, and how much, wireless spectrum holdings should be limited.

It’s undeniable that a small handful of carriers control an overwhelming amount of mobile spectrum in the U.S. Many observers of the communications landscape believe that that intense concentration has reached alarming proportions. Unfortunately, to date federal regulators have not tended to be among those hand-wringers.

As a result, Verizon and AT&T, and to a lesser extent Sprint and T-Mobile, have increasingly gobbled up huge chunks of spectrum both through auctions and in secondary market transactions, leaving only the crumbs for smaller carriers to squabble over. Often the FCC auctions the spectrum in increments covering huge territories – Regional Economic Area Groupings (REAG) or Major Economic Areas (EA) – that span as many as ten states. Such vast areas are too big for a small or medium sized carrier to handle and usually more than even the largest carriers can hope to build out in a reasonable timeframe.   So a considerable amount of spectrum lies moldering in the larders of the largest carriers for a rainy day while smaller carriers cannot fulfill their customers’ basic needs.

Now the FCC has decided to take a fresh look at its policy on mobile spectrum holdings. In a Notice of Proposed Rulemaking released in September (and published in the Federal Register in early October) , the FCC has opened a far-ranging and much needed inquiry into all aspects of the spectrum accumulation issue.

As telecom veterans know, the FCC has historically tried to impose hard and fast, “bright line” limits on the amount of spectrum that can be held by wireless carriers either nationally or in a given market. In ancient times, for example, mobile communications spectrum was divided between wireline cellular carriers with one block on one side of an impenetrable wall and non-wirelines with another block on the other side. And never the twain could meet. 

Such efforts to artificially restrain spectrum agglomerations have always ultimately fallen by the wayside, victim to various pressures that overcame the agency’s misgivings about spectrum concentration, For example, the pressure to allow operators to take advantage of economies of scale, or the pressure to let market forces function without interference (Of course, those market forces often promote consolidation, since smaller carriers can’t seem to resist the temptation to sell out to bigger carriers offering large amounts of money.).

The most recent iteration of the FCC’s attempt to control, or at least impede, wireless spectrum concentration is the so-called “spectrum screen.” Under the screen, the FCC raises its regulatory eyebrow if a single carrier proposes to control more than a third of the total mobile terrestrial spectrum available for licensing. The limit is not really a limit – it only calls for heightened scrutiny by the agency – but it is intended to serve as a sort of soft and spongy line that could normally be crossed only for good cause. 

The quantum of spectrum included in the screen process has necessarily been adjusted over the years as new spectrum resources (AWS, BRS, 700 MHz) have been added into the mobile mix. So while the screen offers some guidance, potential spectrum acquirers may still not know what the applicable limit really is. And as we are taught in Economics 101, markets hate uncertainty. The uncertainty is especially troubling in the auction context because an auction winner who crosses the invisible line by successfully bidding on too much spectrum would theoretically be subject to post-auction penalties disqualifying it from acquiring the licenses on the block. This can only discourage auction participation by the big money players most likely to be affected.

Accordingly, the FCC is considering whether it should return to a “bright line” spectrum limit so everyone might know up front what level of spectrum concentration is or is not acceptable. There’s certainly something to be said for that, but the hard part is actually drawing the lines. Once the FCC decides it wants to move to a “bright line” process (which is not a foregone conclusion. although the FCC seems to be leaning in that direction), it will have to decide the following:

  • What spectrum bands should be included in the analysis? The regular cellular, PCS and AWS bands are easy, but what about mobile satellite spectrum? What about BRS which is not generally available everywhere? What about EBS, which is supposed to be primarily educational but is widely used for commercial broadband?   What about WCS, which will probably be used for broadband but has never been put into commercial operation? The larger the amount of spectrum that is put into the denominator of the spectrum fraction, the greater the numerator holding of any individual carrier can be without exceeding the permissible limit. So clear identification of the universe of included spectrum is important.
  • What geographic market should be used to measure the holdings? Should spectrum concentration be considered on a national basis or a local one? And if local, should the relevant market be Cellular Market Areas (usually a few contiguous counties) or MEAs or EAs that embrace larger areas?
  • What quantum of spectrum should be deemed OK?   Is the current limit – a third of the available spectrum in a given market – the right amount? Some observers feel that one-fourth or even one-fifth of the available spectrum would better preserve the ability of multiple carriers to compete.
  • Are all spectrum bands created equal? Many objectors to recent high profile mergers or acquisitions have argued that spectrum below 2 GHz or 1 GHz is inherently more useful for mobile applications due to its propagation characteristics. If that’s the case, shouldn’t the Commission “weight” those holdings more heavily in assessing how much spectrum is too much?
  • Should leased spectrum be treated differently from owned spectrum?

It should be noted that the FCC does not propose to re-visit spectrum acquisitions that have already occurred, so current spectrum holders can breathe easy.   In the meantime, interested parties have until November 28, 2012 to submit comments on the important issues presented; reply comments can be submitted through January 7, 2013.