AT&T, Verizon Score Late Win as FCC Approves Incentive Auction Rules

In the one late development of note, AT&T and Verizon won an important concession in the spectrum holdings order, offering them a shot at buying more spectrum than was proposed by Chairman Tom Wheeler. The change was made at the insistence of Commissioner Jessica Rosenworcel and led to an objection by Commissioner Mignon Clyburn (CD May 12 p2). The original proposal would have limited carriers with more than 45 MHZ of low-band spectrum in a market from buying more than 30 MHz if only 50 or 60 MHz is recovered from broadcasters. The revised order allows dominant carriers to buy 40 MHz under either scenario.

"This agency has two statutory mandates at play in the 600 MHz auction,” Wheeler said. “Every party has a right to bid and should be able to bid in every market and that’s what this rule accomplishes,” he said. Second, the FCC must “promote competition in public safety,” he said. “If there’s to be effective competition in rural America then wireless carriers must have access to 600 MHz. ... It has been a very complex issue."

Clyburn partially concurred on the mobile holdings order saying she preferred the original proposal from Wheeler. “By shifting to 40 MHz of unreserved spectrum in the 60 and 50 MHz recovery scenarios, we are encouraging the top two carriers in every local market to each acquire their coveted 20 MHz of spectrum without having to aggressively compete against each other,” Clyburn said. “This approach, I believe, fails to promote the most efficient allocation of spectrum. It will not, I fear, provide incentive for wireless carriers to bid higher, which in turn, would encourage more broadcasters to relinquish their spectrum in the reverse auction.” Though the order was tweaked to weaken bidding restrictions, the Republicans slammed both incentive auction orders.

"Although the bidding restrictions are embedded in the separate mobile spectrum holdings item that the commission also adopts today, these two orders are inextricably linked,” O'Rielly said of the auction rules. “Bifurcating them does not allow me to ignore congressional intent or my own principles. Establishing a spectrum set-aside for well capitalized companies is so fundamentally harmful that it taints the entire incentive auction process and I genuinely fear the auction may fail as a result.”

O'Rielly took on earlier comments by Wheeler on why the FCC should restrict bidding on the low-band spectrum. “What some call correcting a ‘historical accident,’ I call corporate welfare for certain multinational companies with large market capitalizations and access to global capital markets,” O'Rielly said. “There can be no justification for going down this path of picking winners and losers in the auction process.”

Pai said the auction rules are too complicated and favor some bidders over others. Pai said his office got the final version of the mobile holdings order at 11:50 p.m. Wednesday and it contained 3,268 revisions from the previous version. “Key elements of the rules had been changed,” he said. “The rationale for imposing bidding restrictions in the incentive auction had been substantially altered."

An auction “should be a market-based mechanism where prices are set through competitive bidding, not centralized planning, no matter how distinguished the planners might be,” Pai said. “Market forces are the more likely route to success.” Pai questioned whether the auction as structured will maximize revenue. “The item does attempt to raise money for FirstNet,” he said. “But what about deficit reduction? The deployment of next generation 911? Wireless public safety communications research and development? The unmistakable message of today’s item is that these priorities don’t matter.”

Pai also questioned why the auction order leaves so many decisions to FCC staff. Pai said he objected to at least 10 areas were authority is delegated to staff. “I don’t dispute that for the incentive auction to be a success, we must delegate certain tasks to the commission’s talented staff,” he said. “But today’s item moves too much responsibility away from the five commissioners who have been appointed by the president and confirmed by the Senate.” O'Rielly raised similar concerns.

Pai said Sprint and T-Mobile benefit the most from the spectrum bidding limits even though they sat out the 2008 700 MHz auction. “At the heart of the item is an enormous thumb the agency places on the scale of future secondary market transactions involving low-band spectrum and, most concerning, the upcoming broadcast incentive auction,” O'Rielly said.

But Rosenworcel said the FCC took a reasoned approach on mobile spectrum holdings. “We update our spectrum screen, the prism through which we review transactions,” she said. “In doing so, we acknowledge that carriers now use more spectrum than ever before to provide wireless broadband service. But we also acknowledge that transactions involving valuable low-frequency spectrum merit enhanced scrutiny. At the same time, we adopt policies to guide bidding in our upcoming auctions. Our new rules make sure that everyone is welcome to bid and everyone will have a fair shot.”

Simplicity is key for the incentive auction to be a success, Rosenworcel said. “Station owners that operate small-and medium-sized businesses should be able to understand their options without hiring high-priced auction experts,” she said. Broadcasters want certainty, she said. “Until the agency can provide broadcasters with a better sense of what price their spectrum might yield, including the tax consequences, broadcasters do not have the tools to make smart and dispassionate decisions about whether or not to participate,” she said. “This is not just a matter of fundamental fairness; this is a threshold matter that could very well determine whether or not these auctions achieve their lofty goals.” Spectrum sharing is important, “However, we know too little about the legal and business arrangements that are needed to put sharing into operation,” she said.

Auction Rules a ‘Rubik’s Cube'

Wheeler conceded that the auction is extremely complicated. “Not only is this a Rubik’s Cube that has three simultaneous moving parts in it, but nobody has ever asked that this kind of Rubik’s Cube be put together, let alone tried,” he said.

AT&T expressed general support for the auction orders. “On the 600 MHz auction, the FCC adopted eligibility rules that will foster a more competitive bidding process while ensuring a multiplicity of licensees in the new 600 MHz band,” said Jim Cicconi, AT&T senior executive vice president (http://bit.ly/1lvywKk). “We are pleased that today’s order aligns the FCC’s spectrum screen with current marketplace realities,” said Verizon Senior Vice President-Public Policy Craig Silliman. “For far too long, the screen has been woefully under-inclusive."

"While we would have preferred the FCC to reserve more spectrum for competitive carriers, we are hopeful the auction rules will enhance competition and benefit consumers,” said T-Mobile Vice President-Federal Regulatory Kathleen Ham. Dish Network, the Competitive Carriers Association, U.S. Cellular and C Spire were among the players to express general support for the auction orders.

"This is another important moment for American consumers who are tethered to their smartphones and tablets,” said Grant Seiffert, president of the Telecommunications Industry Association. “The FCC is setting out the rules under which spectrum being voluntarily relinquished by television broadcasters will be made available for mobile broadband use. This spectrum is essential for industry to keep pace with exploding demand and with the rapid pace of innovation in the mobile ... marketplace."

'Now It’s Up to Broadcasters'

"Now, it’s up to broadcasters to work with the FCC and industry stakeholders to ensure that the auction is a success,” said CEA President Gary Shapiro. “We're facing a nationwide spectrum shortfall and the number of American homes that watch over-the-air programming remains at all-time lows. The spectrum auction presents a tremendous opportunity to free up this much-needed resource.”

"Our coalition is very grateful that this summer the FCC will begin providing TV stations with guidance about the range of initial prices they can expect to see and with information on the timeline for the auction process,” said Preston Padden, executive director of the Expanding Opportunities For Broadcasters Coalition. “This information will be critical to broadcaster participation.”

The FCC released a seven-page fact sheet (http://fcc.us/1jznfai) on the rules for the auction. The document offered few surprises, since the FCC has offered numerous briefings on the rules (CD April 4 p1). The uplink portion of the Band will begin at Channel 51 (698 MHz), expand downward, followed by a duplex gap and then the downlink portion of the band, the FCC said. The band plan will allow for 14-28 MHz of duplex gap spectrum depending on how much spectrum broadcasters offer for sale. Many holes, such as final rules for unlicensed, remain to be filled in and the FCC is to ask for additional comment in numerous areas, agency officials said.

Over numerous broadcaster objections, the auction Report and Order doesn’t limit the FCC’s repacking effort to what can be covered by the $1.75 billion reimbursement fund, said incentive auction staff at the meeting. Pai, the NAB and several broadcast attorneys characterized this as creating uncertainty for broadcasters that elect not to participate in the auction. “The FCC cavalierly concluded that broadcasters forced into a shrunken TV band won’t be guaranteed full compensation for this disruptive move -- as was the express intent of Congress,” said NAB. Wheeler and FCC incentive auction staff told us the amount needed for reimbursement is not expected to exceed the $1.75 billion in the fund. The reimbursement fund isn’t being used as an upper limit to preserve “flexibility,” Wheeler said.

The FCC will use TVStudy software to conduct the auction rather than the previous OET-69 software, said an FCC release. NAB had asked the commission not to commit to TVStudy in this order. “It’s necessary for conducting the auction,” said Epstein. Using the software could mean the FCC is out of compliance with the spectrum act, said Pai. Though he said he agrees with many of the rationales for using the newer software, the added convenience “will be all for naught if a court postpones or invalidates the incentive auction having found those changes are unlawful."

Broadcasters will be reimbursed before incurring their auction costs, said an FCC release. The FCC will issue broadcasters and MVPDs affected by the repacking “an initial allocation of funds” to cover “the majority of estimated costs.” Additional money will be given out for eligible expenses within the 39-month deadline for reimbursements, the release said. The Media Bureau will determine the list of eligible expenses and the amount of allocations, the release said. “I am concerned about the extent to which the order delegates authority to various bureaus to make important decisions to implement the statute,” said O'Rielly.

Though the auction order doesn’t indicate what prices broadcasters can expect to be paid, it does say participating stations will be scored, said incentive auction staff. Though the actual scoring criteria are being deferred to a later rulemaking, FCC staff is especially concerned about interference, and it’s likely to play a part in how scores are calculated, said an FCC official. “Scoring based on interference is appropriate, scoring based on the enterprise value of the station and population covered by the station is not,” said Padden in an email.

In a separate order, the FCC also expanded Part 74 license eligibility to include sound companies and performance venues that routinely use 50 or more wireless microphones, as “an integral part” of “major productions or events.” The FCC “concluded that these users generally have the same need for interference protection as existing Part 74 licensees and the sophisticated knowledge and capability to manage use and coordination of a large number of wireless microphones,” said an FCC release. Users of fewer than 50 mics will continue to operate as unlicensed users, the release said. The auction order also addressed wireless mics, allowing them to operate in the spectrum of unused channels in the TV band, in the guard bands and on Channel 37 where it isn’t being used by others. Wireless mics used by broadcast and cable programming can operate in the duplex gap, “on a licensed basis” said an FCC release (http://fcc.us/T85slB). ,