At this stage of bidding, there are few surprises,
except maybe who the actual bidders really are.

The FCC auction of 62 MHz of spectrum in the 700 MHz band is still going hot and heavy as this issue goes to press. Although anything can happen, we can draw some conclusions from the 26 rounds of bidding – and in some cases the lack of bidding – we have already seen.

Re-allocation of significant portions of the 700 MHz band for wireless services has been eagerly anticipated. The general feeling was that licenses would not go cheaply. However, the start of bidding just happened to coincide with rapidly accelerating concern about the health of the U.S. economy. Recently, there has been talk in the industry that this economic uncertainty might depress what enterprises would be willing to pay to build out new wireless networks.

But with the sum of “provisionally winning” bids already topping $18.5 billion, that does not appear to be the case. Or does it? We will probably never know how much money the auction would have brought in if the general economy was booming. The economy was doing well in 2006 when the AWS spectrum auction netted just under $14 billion for a total of 90 MHz.

APPLES VS. ORANGES
However, the general perception has been that 700 MHz spectrum is far more valuable because of its superior propagation and coverage characteristics compared to the 1700-2100 MHz AWS band. It might be interesting to see if bidding on specific licenses bears this out. In one AWS channel block of 20 MHz (two paired 10 MHz blocks), the total of winning bids for the eight Regional Economic Area Groupings (REAGs) that comprise all 50 states was about $4.17 billion, or around $209 million per megahertz. So far, the highest bid for a nationwide license for the 22 MHz C Block (two paired 11 MHz blocks) in the 700 MHz band is $4.71 billion, or around $214 million per megahertz. Not a lot of difference, but of course the bidding for the 700 MHz band is far from over.

Something else about bidding for the C Block has been very interesting. So far, there hasn’t been a single bid offered for any of the eight individual REAG licenses. Instead, the C Block auction battle is being waged on the alternative of bidding for a single nationwide license. A number of industry analysts believe that the two principal players in that contest are Google and Verizon Wireless. We can’t know for sure because for this auction the FCC has decided that bidders will remain anonymous. However, if Google wins, it will be in a position to become the fifth nationwide wireless services provider. All they would have to do is build a nationwide network, a process that will surely cost far more than the ultimately winning bid for the C Block license.

Lack of interest in individual REAG licenses may at least in part be a result of the new “open access” requirement for C Block networks. A carrier that might otherwise use a regional C Block license for expanding its existing network may find this restriction unappealing. Indeed, bidding has been brisk for licenses in other 700 MHz blocks that are partitioned in smaller areas and do not carry the open access restriction.

D BLOCK DISAPPOINTS
If there is a disappointment in the way the 700 MHz auction has gone so far, it has to be in the D Block, which is associated with the adjacent broadband public safety block. The only bid for the nationwide D Block license, $472 million, was placed in Round 1 of the auction. This is far below the FCC’s $1.33 billion reserve price. If the reserve is not met before the auction ends, the FCC will likely look at alternatives for matching the public safety spectrum with one or more commercial operators.

The apparent lack of interest in the D Block license was widely expected after the recent demise of Frontline Wireless, but it is nonetheless interesting to compare it with what’s going on in the C Block. Combined with the 12 MHz broadband public safety block, the D Block provides the same total 22 MHz of nationwide paired spectrum as the C Block, and the same open access requirements apply. The big difference, of course, is that the D Block operator will be compelled to work collaboratively with the Public Safety Spectrum Trust (PSST) in the design, deployment and operation of its network. The PSST has drafted a set of technical requirements it expects the network to meet, including a very aggressive buildout schedule.

That buildout schedule would significantly increase the risks associated with D Block network capital investments, and I suspect that, rather than the general requirement for cooperation with the public safety folks, is the main reason for lack of interest among existing and would-be nationwide commercial operators.

After all, the public safety sector also would provide a D Block operator with a huge, captive, and mostly price-insensitive customer base on Day 1. By contrast, a new nationwide C Block operator will probably have to get most of its customers by peeling them away from existing service providers one by one. That sounds pretty risky, too. Some of the deep-pocket players in the 700 MHz auction may be thinking the same thing, so I wouldn’t be surprised if we see a bid at the reserve amount for the D Block license just before the auction closes. In a high stakes poker game like this, anything can happen.

Drucker is president of Drucker Associates.
He may be contacted at edrucker@drucker-associates.com.