The Next Spectrum Auctions

Spectrum is the engine of the mobile wireless industry. The Federal Communications Commission (FCC) regularly runs auctions so carriers can retool with additional spectrum.  The exclusive right to use segments of the electromagnetic spectrum can be very costly, particularly since the bidding is done for specific frequencies in specific locales.

To illustrate the complexity, Carrier A may buy the 706-715 megahertz (MHz) block in metropolitan Tampa Florida and Carrier B may buy the 706-715 MHz block in Citrus County Florida.  Each uses the same frequencies, but the geographic separation and engineered dispersion should insulate them from interference.

Spectrum in low frequency bands, such as 800 MHz and below, propagates signals better/further than spectrum in high frequency bands, such as 2.5 gigahertz (GHz).  Low frequency spectrum goes far enough to be good for connecting mobile wireless cells together and higher frequency spectrum is well suited to serving handsets within a hexagonal cell.  There is more high frequency spectrum than there is low frequency.  The FCC intends to auction great swaths of spectrum in the 3.5 GHz and 5 GHz levels within a few years.  Those high frequencies will be essential for new Wi-Fi and 5G (5th generation) services and for coordinating the devices in the “Internet of Things.”

The four largest carriers (ATT, Verizon, T-Mobile and Sprint) offer similar services.  The depth and coverage of spectrum they place in service dictates the data speed they can offer and the frequency of dropped calls – in other words, the quality that their consumers experience.

The scale of carriers’ networks is often measured in its population coverage, i.e. the number of consumers living where services are available.  In its latest wireless competition report, released December 2015, the FCC reported that Verizon, AT&T, Sprint and T-Mobile to cover 308, 320, over 280 and 300 million people (respectively) in urban and rural areas, with 4G LTE offered to over 90% of this coverage.  Overall, the FCC data shows that most of the US population has access to four or more providers offering the latest mobile technology. Although the big four can reach almost everyone, the addition of more spectrum enables them to improve the speed and sophistication of their offerings, characteristics needed for the huge upgrades associated with 5G technology.

A spectrum auction is scheduled for late March 2016, with blocks of spectrum in the 600MHz band expected to draw total bids of about $35 billion. However, Verizon said last year it has enough spectrum and will not bid and ATT indicates it is unlikely to bid, if the FCC persists with its plans to give bidding discounts to “designated entities” (DE). Some speculate that the disinterest is feigned and an attempt get helpful concessions from the FCC. Without the largest players participating, the FCC might find reason to delay the auction, because ATT and Verizon are the forces that drive bids high.

T-Mobile is preparing with about $10 billion partly by borrowing from its parent, Deutsche Telekom. Sprint is attempting to collect $5 billion by mortgaging the spectrum it already owns. Other bidders will be smaller carriers, potentially innovative teams, and DEs.

DEs have caused friction for many years. These small business owned by minorities and women are incented with discounts to create diversity of ownership. The FCC requires DEs to have some small or minority ownership, but they can be joined by deep pocketed partners. Sometimes the DE rules are written with loopholes, as happened when Dish Satellite managed to “win” massive blocks of spectrum in the AWS auction through DEs that it seemed to control.   There is sentimental support for DEs but as a practical matter, they are unlikely to outshine the efficiency and innovation that the larger players deliver to consumers. Aside from DEs, the FCC occasionally restricts which competitors can bid and which cannot. Regulators enjoy wielding power. DE rules just make it appear more righteous.

FacebooktwitterredditlinkedinFacebooktwitterredditlinkedin