Huge stakes involved in FCC's spectrum auction rules

The FCC, in a vote scheduled for Thursday, plans to approve a set of rules in the 2016 auction of radio spectrum now controlled by U.S. television stations. One of the big debates is over a proposal that would likely prevent the two largest mobile carriers in the U.S. from bidding on a large chuck of spectrum available.

The conditions under which the FCC will set aside 30MHz of spectrum for bidding by smaller carriers have been the subject of an intense lobbying effort in recent months. The debate over the conditions that trigger the so-called spectrum reserve have pitted the nation's two largest mobile carriers, AT&T and Verizon Wireless, against several consumer groups and dozens of smaller carriers, including the not-so-small, foreign-backed Sprint and T-Mobile USA.

Consumer groups and smaller carriers have argued that the spectrum reserve is an important way to promote competition in the U.S. mobile industry. The 600MHz band TV spectrum is in a low band optimal for sending mobile broadband signals over long distances, meaning fewer expensive cell towers are needed, and Verizon and AT&T together control more than 70 percent of the low-band spectrum now available.

The stakes are huge. The FCC's most recent auction, of 65MHz in the less desirable AWS-3 1700MHz and 2100MHz bands, raised US$44.9 billion earlier this year.

The spectrum reserve is "incredibly important," said Evan Engstrom, policy director of Engine, an advocacy group for startups that has supported a spectrum set-aside for smaller bidders. "There aren't a lot of opportunities to increase broadband competition in either the wireless or wireline space, so it will be really concerning if the FCC fails to design the incentive auction in a manner that boosts competition."

Much of the U.S. tech industry's startup activity is focused on mobile products, and "virtually all startup growth depends on access to affordable, fast broadband," Engstrom added by email. "It's difficult to put a precise number on how much the tech sector will suffer if we don't start working on improving mobile broadband competition, but I'm confident that the value of the innovation we will lose will be multiples greater than what the auction brings in."

AT&T and Verizon have argued that it's unfair and unwise for the FCC to exclude them from bidding on all of the 600Mhz spectrum that would be made available by TV stations deciding to give up their spectrum. These TV stations would move to other channels or stop broadcasting over the air in exchange for a piece of the auction proceeds.

T-Mobile and allied consumer and trade groups called on the agency to reduce the number of conditions necessary before the spectrum reserve is triggered, but the FCC has already given smaller carriers a huge advantage simply by excluding AT&T and Verizon if those conditions are met, AT&T argued in a July 27 filing with the FCC.

Joan Marsh, AT&T's vice president for federal regulatory affairs, called the FCC's auction framework "unprecedented." The FCC proposal gives T-Mobile "special treatment" by letting the carrier purchase large amounts of 600MHz spectrum "free from auction competition at the expense of taxpayers," she wrote. In addition to T-Mobile rivals, taxpayers also stand to lose because the auction revenues will be lower, according to Marsh.

A T-Mobile proposal to remove a condition to trigger the spectrum reserve "seeks to further increase those windfalls," Marsh wrote.

Under the complicated current proposal from the FCC, the full 30MHz spectrum reserve would be set aside for smaller bidders only if the amount of spectrum given up by TV stations is at least 84MHz.

In addition, the FCC has set a low minimum bidding price in the top 40 U.S. markets, and it would require that the auction raise enough money to reimburse TV stations for their spectrum and pay for moving them to new channels.

But T-Mobile, digital rights group Public Knowledge and telecom trade group Comptel have argued that the TV relocation condition would allow Verizon and AT&T to game the auction by cherry-picking spectrum in select cities. In that scenario, the two large carriers would target spectrum in the most desirable U.S. cities and drive off competing bidders before the total bids reach the TV relocation trigger.

"You can get to very extreme prices that would force us out of those markets," said Steve Sharkey, T-Mobile's senior director for chief engineering and technology policy. The FCC's minimum spectrum price target is virtually "meaningless," because the spectrum clearing costs will be likely much higher, he said.

With the AWS-3 auction raising nearly $45 billion earlier this year, its almost certain that the auction revenues will pay for the TV stations' clearing costs, they argue.

The result would leave smaller carriers locked out of several large cities, those groups say. T-Mobile's proposal would create the spectrum reserve if the TV clearing costs are paid for, or if a minimum spectrum price is reached in top markets. The spectrum reserve would be triggered if either condition is met, "whichever comes first," not if both conditions are met, as is the case in the FCC proposal, Sharkey said.

But T-Mobile's proposal puts the auction at risk of not raising enough money to pay TV stations, Marsh said in her July 27 filing. Triggering the spectrum reserve early will drive down prices by excluding the two largest carriers, she argued.

T-Mobile's proposal could force competitors to "bid at above-market levels to cover both T-Mobile's now-increased subsidy and the auction's costs," she wrote.

"This auction is far too important to put a successful outcome at risk merely to give yet more unwarranted assistance to well-capitalized national competitors," she added.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's email address is grant_gross@idg.com.