Original URL: https://www.theregister.com/2006/08/10/aws_auction/

Cellcos face challenge from satellite, cable cos in AWS auction

Top 10 bidders commit $4bn in upfront fees

By Faultline

Posted in Networks, 10th August 2006 11:11 GMT

Analysis One of the US's largest ever spectrum auctions kicks off this week, with 168 companies listed as applicants for a share of the AWS (Advanced Wireless Spectrum) band, which could support 3G or other broadband wireless services.

Auction 66 is for 1,122 regional licenses in the 1710-1755MHz and 2110-2155MHz bands. The seemingly endless and often highly technical bickering over the rules for bidding have finally been resolved, but continue to be at the forefront of discussions, as the FCC regulator starts to consider how far it needs to change a creaking system in time for the auctions of even more desirable former analog TV spectrum in 700MHz, due to take place in early 2008.

The bidders

The level of upfront payments is certainly a strong sign of interest and commitment and reveals the likely major bidders - and so the likely big winners. The top 10 bidders alone put up almost $4bn in deposits:

  1. DirecTV/Echostar/Liberty, $972m
  2. Sprint-Cable Co joint venture, $637m
  3. T-Mobile USA, $583m
  4. Cingular Wireless, $500m
  5. Verizon Wireless, $383m
  6. Leap Wireless, $255m
  7. MetroPCS, $200m
  8. Cablevision, $149m
  9. Nextwave Broadband, $142m
  10. US Cellular, $80m

Gone are the days when the cellular operators largely had to bid against each other - often through smaller regional proxies - for valuable mobile-suited bandwidth. Now they are facing competition from cable and satellite TV firms and many non-traditional operators, encouraged by the US technology neutral approach.

The FCC has already raised $4.3bn (out of an expected total netting of $15bn) in upfront payments that companies put down as a deposit to reserve the right to bid. The largest of these was almost $1bn and came from a consortium of the two US satellite TV broadcasters, News Corp unit DirecTV and EchoStar.

DirecTV is also understood to be close to completion of an agreement to use the broadband wireless network and spectrum of 2.5GHz operator Clearwire to add a broadband return path and potential quadruple play to its satellite services - a venture that could also incorporate EchoStar.

Success in the AWS auction might be an alternative to a partnership with Clearwire, but could equally well complement it, creating a larger total store of spectrum and faster roll-out opportunity for the satellite players, as they battle to match the mobile triple play ambitions of the cable operators and the large telcos. Both these major groups are also in the running for AWS spoils.

The telcos, which are building a quad play based on IP services delivered over a combination of fiber, DSL and mobile networks, are building up the spectrum arsenals of their mobile arms, although in this particular auction, Verizon Wireless is expected to be more aggressive than the mobile arm of AT&T BellSouth, Cingular Wireless.

T-Mobile USA is in bad need of an AWS win since it lags behind the other national players in terms of 3G spectrum, but its nearest challenger, Alltel, is sitting this one out, complaining about the quality of the frequencies on offer and reserving the cash pot it has set aside for such purchases for the 700MHz sale in over a year's time.

The cablecos, for their part, are also working in cahoots. Four majors - Comcast, Time Warner Cable, Cox and Advance Newhouse - already have a mutual joint venture to use Sprint Nextel's current and future wireless networks to deliver a mobile quadruple play.

The first three of these have also registered a joint bid for AWS, making a strong signal of commitment with a $638m down payment. Any spectrum they gain would likely be ploughed into the joint venture with Sprint, which will not bid in its own right, since it already faces the challenge of migrating the Nextel iDEN system in 800MHz to CDMA; rolling out the upgrade to its core 800MHz/1.9GHz CDMA offering, Rev A; and building its broadband wireless system in its 2.5GHz band.

The cable major that has stayed out of the collaborations, Cablevision, will bid in its own right. In what spectrum analysts Kagan Research call a "defining moment" for the US wireless business - bringing in a new set of competitors - it is still likely that the major cellcos will carry off the bulk of the winnings, since this spectrum is so central to their business plans.

A really dramatic shake-up of the operator landscape will wait for 700MHz, whose spectral efficiency and range makes it even more attractive for next generation moneyspinners such as mobile television.

So we do not see many WiMAX providers among the companies putting down the largest deposits - the exception being NextWave, which emerged from bankruptcy last year with only its 2.5GHz holdings intact (its cellular spectrum, acquired in an earlier auction and never built out, were mainly sold to Verizon as part of its turnaround plan). NextWave plans to create a WiMAX network using its own technology, but will need additional spectrum to have any impact beyond the local.

And while some internet players have filed applications, their failure to make hefty upfront payments suggests these are largely a way to test the water or snap up specific city rights, rather than a real onslaught on the US telecoms sector.

The 700MHz auction could be very different, partly because of the attractiveness of the spectrum and partly because new technology options such as the various mobile TV platforms and software defined radios will be more mature and cost effective by then. At this point, even more disruptive operators are likely to bid - including internet players like Google or PC giants like Intel and Microsoft - but many of the ground rules being laid down with AWS will impact on just how radical the change that 700MHz could bring is allowed to be.

For instance, there is still debate over whether any portion of the 700MHz spectrum to be allocated in 2008 will be license-exempt, and also whether the rules should favor the broadband wireless agenda - encouraging large, non-traditional providers offering innovative multimedia services - or the universal access agenda, weighting the terms in favor of rural carriers, which have their eye on the band as a potentially cost effective way, with its long range capabilities, to deliver services to sparsely populated areas.

Some of these rural players have applied to bid for AWS rights, but the smaller cell sizes, compared to 700MHz, still make it tough to arrive at a profit model in remote populations. The really rural players do not appear among the big hitters in terms of upfront payments for AWS, although some will only need to bid for small territories of course, but the urban-focused regional carriers are very enthusiastic.

Although the largest regional player, Alltel, is staying away, MetroPCS and Leap Wireless are both in the top 10 deposit payers. These are both low cost, flat rate operators mainly working in urban areas, and Leap in particular has seen strong growth in recent quarters (last year, analyst company Yankee Group urged Verizon Wireless to buy up MetroPCS or Leap in order to go after high volume, low income population groups and compete with the MVNOs, without compromising its core brand, an outcome that still seems likely in the medium term).

Leap offers service in 40 markets across the country and recently was the highest bidder for 13 licenses in the Federal Communications Commission's Auction 58. MetroPCS was the high bidder in six markets during the same auction, including a 10MHz license covering Los Angeles, and also acquired spectrum from NextWave's bankruptcy settlement. It is focused on California and the south east.

Number 10 in the upfront payment rankings, US Cellular, is the largest rural carrier to show interest. It has been expanding its spectrum holdings aggressively in the past year, perhaps with an eye on a possible acquisition bid from T-Mobile USA. Its holdings are mainly in the Midwest and far West.

Another interesting bidder, though not in the top 10 upfront spenders, is one of the two holders of current 700MHz licenses, Aloha Partners (the other is Qualcomm). This may be just as a financial investment, since Aloha is largely a spectrum trader, or could be designed to supplement its joint venture with satellite delivery company SES, Hi-Wire, which is creating a mobile TV network in the 700MHz band to compete with Qualcomm's MediaFLO and Crown Castle's Modeo.

Aloha pledged an upfront sum of $52m. Whatever its success in this auction, and whether or not it runs its television network as a business or sells it on to a larger entity, it will certainly be seeing the value of its national 700MHz license enhanced almost by the week as interest in this band heats up.

This increasing value, and the potential of 700MHz as a catalyst for major restructuring of US wireless services, will make the FCC's task in setting auction rules a delicate one. The regulator is currently examining the rules and considering a change in how spectrum is divided up, as well as renewal periods. It is required to begin auctioning licenses by January 28 2008, but the licenses that it will auction are currently set to expire in 2015—giving auction winners only a handful of years to operate their services.

Thus, the FCC is opening up the expiration date to comment from industry. It is also seeking "comment on the possibility of modifying the size of the geographic service areas and spectrum blocks, and on revising the performance requirements", as well as opinions on license terms, license-exempt allocations and power limits.

Specifically, it could change the licenses to align with cellular geographic marketing areas, or create smaller geographic areas to stimulate very rural build-out, rather than sticking to regional blocks based on the current Economic Areas.

"Smaller providers need a fighting chance to bid against the large national carriers for spectrum that is ideally suited for rural broadband applications," said FCC Commissioner Michael Copps - although this could diminish the commercial usefulness of the spectrum by fragmenting it among small players with little money to invest in new services, and play against the vision of a national next generation multimedia system as envisaged by Intel and others.

Again, this demonstrates how the two chief benefits that could be derived from 700MHz - greater rural access and a more rapid, profitable route to '4G' services, may be at odds with each other.

The FCC's difficult task will be to create a balance between the two.

In reworking the rules for the 700 MHz auction, the FCC will also consider whether it should reclaim spectrum not being used, something supported in particular by Commissioner Jonathan Adelstein.

He said: "I am particularly interested in reactions to the suggestion of a 'triggered keep what you use' rule, in which the FCC, rather than reclaiming unused spectrum after a period of time, would reclaim spectrum only in the event a party other than the licensee is interested in securing access to the spectrum in an unserved portion of the license area."

Other key questions include how large the block should be - 6MHz or 12MHz; implementation of E911; and consideration for the spectrum's use among Native American lands. "New rules are absolutely necessary ... for this beachfront spectrum," said Copps.

Copyright © 2006, Faultline

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