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.