Tier 2 and 3 Operators: Fighting for Relevance

It seems to me that “cooperation” should be the watchword of the day instead of “opposition.” To win in the wireless game you have to consider all of the options. With a spectrum shortage looming, this is not the time to fight. It is the time to make friends and form partnerships.

Spectrum is king! Network operators’ worth, income, and ability to attract customers are about having sufficient capacity on their networks and providing broadband services for their customers. Even the tier 1 operators with the most spectrum (AT&T, Verizon, and Sprint/Clearwire) know they will need more to compete going forward. On the other hand, tier 2 and 3 network operators lacking in spectrum know they must have more spectrum in order to survive.

The FCC is working to “find” more broadband spectrum for the commercial operators. In its Broadband Plan, submitted to Congress in 2011, it pledged to find 500 MHz of additional broadband spectrum within ten years, with 300 MHz of that spectrum being made available within five years. Since that time, much has happened to both hinder and help in the FCC’s effort to find and auction additional spectrum. The fight over the 700-MHz D Block (whether it should be given to Public Safety or auctioned) was because some network operators wanted it auctioned so they would have the spectrum to compete with AT&T and Verizon Wireless. The Public Safety side prevailed and part of the logic for handing it over to Public Safety was that it was not enough spectrum to provide a significant amount of additional commercial capacity, especially since the two portions of spectrum were next to each other. Even though they were 5 X 5 MHz each, the usable spectrum was only about 3.5 X 3.5 MHz for each since guard bands would have to have been inserted between a commercial and Public Safety network.

Next came the LightSquared play for a nationwide LTE network using its spectrum which, it turns out, was located too close to the GPS receiver spectrum. LightSquared filed for protection under the bankruptcy laws after it was proven during testing that a terrestrial network on the LightSquared satellite spectrum would have caused interference to many different types of GPS receivers.

This means that 30 MHz of spectrum is no longer available for broadband service in the United States and the smaller networks will have to bid on the next spectrum to come up for auction. Congress has again authorized auctions by the FCC and the first will be for AWS-2 and AWS-3 spectrum. Title VI of the Middle Class Tax Relief and Job Creation Act of 2012 states that the following spectrum will be made available for commercial use (auctioned): 1675-1710 MHz, 1915-1920 MHz, 2155-2180 MHz, and 15 MHz of spectrum identified by the FCC. This spectrum should provide some relief, but it appears at this point as though it can be bid on by any qualifying entity, including all existing commercial network operators as well as others that might want to enter into the wireless broadband business.

This spectrum will help but it is, as you can see, nowhere near the 300 MHz of spectrum the FCC said it would identify. The next to be auctioned will be more TV spectrum. The TV spectrum best suited for commercial broadband services is that on which TV channels 31-52 are located. Each channel was assigned 6 MHz of spectrum, so these channels occupy 572 to 704 MHz of spectrum or 132 MHz of prime spectrum. However, the way the incentive auctions will work does not require TV stations to relocate to a lower portion of the TV band. Rather, it gives them an option to sell their spectrum, receive part of the money from the auction, and then to relocate lower in the spectrum if they so desire.

Unfortunately, this type of auction is doomed to failure from the start. Among the reasons for this, the first is that giving up the spectrum is voluntary. Congress and the FCC believe that TV stations will jump at this approach because it will provide “found” money for them. However, in order for it to work and free up commercial spectrum, ALL TV stations on a given channel will have to agree to vacate the channel. In the United States today, on channel 48, for example, there are 32 TV stations licensed across the nation. Unless all 32 decide to vacate this spectrum (675-680 MHz), it will not be useful for commercial broadband service on a nationwide basis. Another channel of interest is channel 50, on which there are 34 stations nationwide. There are only 6 stations nationwide on channel 45, and channel 40 supports 15 stations nationwide.

The next contribution to this doomed auction is that the TV industry has been smitten with its new-found ability to send live TV broadcasts to handheld devices, including smartphones and tablets, as long as these devices include a TV receiver chip in them or have plug-in TV receivers available for them.  Some TV stations (60 so far) are looking forward to sending their TV broadcasts over the air to mobile devices and these stations, at least, won’t want to give up their spectrum because they believe this new viewing audience will be important and bring in more income.

Finally, TV White Space, or the use of vacant TV channels for low-powered, Wi-Fi-like broadband services was recently approved by the FCC and is beginning to be rolled out in non-metro areas. However, if TV stations decide to sell and relocate lower in the band, the amount of vacant TV spectrum will shrink and TV White Space services won’t have enough spectrum in which to operate.

All of these factors indicate to me that Congress and the FCC have placed too much faith in the TV stations being greedy, taking a portion of the auction revenue and running. As a result, these auctions will not offer much if any “new” spectrum for commercial broadband services. After the failure of the incentive auctions, I believe that the FCC and NAB (National Association of Broadcasters) will square off as the FCC tries to force relocation of all TV stations above channel 30 or 31. This is one of the only ways I can see to release spectrum that is viable for commercial mobile broadband services. The spectrum below 500 MHz is not practical for mobile broadband because of the size of the antennas, filters, duplexers, and other devices that are needed, while above 3.0 GHz (3000 MHz) the number of cell sites required will greatly add to the cost for any network operator to build out.

Back to Today

So with little spectrum in the offing, at least in the near term, what are tier 2 and 3 operators to do to remain competitive and to be able to deploy LTE? The approach many have taken thus far is to be combative. For example, during the AT&T/T-Mobile merger due diligence by the feds, the smaller operators, along with Sprint, mounted what ended up being a successful fight to block the merger. T-Mobile came away with some additional AWS-1 spectrum and a few billion in cash from AT&T as a penalty for the failed merger. Then Verizon made a deal with a number of cable companies to acquire their spectrum (AWS-1 and 700 MHz) in exchange for cash as well as marketing agreements that would enable the cable companies to resell Verizon’s network. This is also being opposed by the smaller operators. Verizon countered by announcing that it will sell its 700-MHz spectrum in the lower portion of the 700-MHz band, which could be of value to the smaller operators. This week, Verizon issued a release stating that 36 companies are interested in purchasing this spectrum. I wonder how many of these companies are also filing comments against the Verizon/cable deal and are hedging their bets. Additionally, Verizon is preparing a licensing deal with a number of smaller operators for its nationwide spectrum in rural areas where it won’t be building out.

Most recently, Dish Network has asked the FCC for permission to use its 40 MHz of satellite spectrum to roll out an LTE network. Dish’s spectrum is in the 2-GHz portion of the spectrum and is ideal for broadband services—the FCC should grant this request. However, the smaller operators are fighting this move, too. They are suggesting that Dish be made to give up 20 MHz of its 40 MHz of spectrum in order to be able to build a network, or in some major markets, give up 30 MHz. I guess these operators feel that if this spectrum is put up for auction they could bid on it, but again, they would be bidding against the big guys and/or the likes of Google (deep pockets) and others. Instead of having one new competitor, they could end up with two or more. This does not make sense to me.

The LightSquared vision of being a wholesale network operator leasing spectrum to smaller companies that want to be in the wireless business makes some sense. However, I am not sure there is a business model for a company to build out a very extensive nationwide LTE network with 45,000-50,000 cell sites and then simply lease the network to others and take a smaller cut of the profits. Building out a new network on spectrum where there has never been one (greenfield spectrum) is an expensive proposition. Even AT&T and Verizon, which have existing networks up and operating, are spending $billions on their new LTE 700-MHz networks even though they already have tower sites and the back-end infrastructure to help keep costs down.

Again, building a new LTE network from the ground up is very expensive, even when co-locating on existing towers. Fiber and/or microwave links must be installed, towers must often be beefed up to accept the new antennas and feed lines, and the costs will still be high. In some places it is not possible or economical to run fiber, and in some major metro areas microwave channels are simply not available.

What Would I Do?

If I were a smaller operator or the RCA (Rural Cellular Association) representing smaller operators, I would be proactive instead of simply fighting all spectrum moves in the hopes that the FCC will deny the deals, leaving the spectrum available for re-auction or to be sold to them. Let’s take a look at the Verizon/cable company deals first. The history here is that the cable companies worked with Sprint on at least three separate occasions as partners, first in 1996 when Sprint and the cable operators bought 1900-MHz PCS at auction. Back then the idea was to build out the network using the cable operators’ existing infrastructure (cable) for backhaul and then mount small cells on telephone poles for service. That deal never happened because of the costs involved. Next, the cable operators worked with Sprint on reseller agreements but were not successful, and finally, many of the cable companies ended up buying spectrum during the AWS-1 and 700-MHz spectrum auctions.

Many of the larger cable operators including Comcast, Cox, and others had visions of building out their own wireless networks. They hired wireless experts and staffed up a group to design and build the networks, but nothing ended up being built. The reality of the costs involved and the amount of marketing dollars needed to make the networks successful quashed most of the cable operators’ appetites for their own wireless services. For the most part, the spectrum sat idle until Verizon made a deal with multiple cable companies. That deal is pending before the FCC and it is being opposed by many of the tier 2 and 3 network operators. One has to wonder what they have been doing all this time. They could have purchased the spectrum or entered into an agreement with the cable operators to build out this spectrum together in some kind of revenue-sharing plan, but as far as I know, none of them have chosen to do so.

Now Dish Networks is trying to win FCC approval for its 40 MHz of spectrum for an LTE system. Once again, the smaller operators (and T-Mobile) are in opposition. As mentioned, some of them have proposed that 20 MHz or more of the Dish spectrum should be returned to the FCC and put out to bid. I have to wonder why they are not working with Dish to provide existing sites and infrastructure, and to build out a joint network that would benefit all. As I have said before, building out a greenfield network is very expensive, but partnering with companies that already have cell towers and other assets would make the network less expensive, time to operation shorter, and a robust LTE network a reality for both Dish and the smaller operators.

Instead, they seem to be fighting any and all spectrum moves. Even if they were to win one of these battles, the spectrum would simply be put up for auction and they would have to bid against larger, more financially-capable companies. The chances that the smaller operators would be successful in these auctions are slim to none. I don’t understand this rationale. Joint network construction and operation is alive and well in Europe, Canada, and other places. Until the Cingular AT&T merger, AT&T and T-Mobile were sharing a 1900-MHz (PCS band) network in California. It has been done before and has resulted in lower start-up and operational costs as well as faster time to market.

Spectrum is king in the wireless world—everyone needs it. Those who don’t have enough need more, while those who have it need more for LTE deployment. Those supporting 2 or 3 networks now or LTE in the future want to move everyone to LTE to gain the spectral advantages. Those such as Dish that have spectrum licensed for another purpose are trying to convince the FCC to approve turning it into terrestrial LTE spectrum. As the demand for wireless broadband data services continues to grow, more than doubling each year, spectrum is becoming more scarce and, therefore, more expensive. I believe that the next round of auctions will set price-per-megaHertz records, and that the auctions will attract not only the customary bidders but perhaps companies such as Google, Apple, or others that might want to build their own network or use the spectrum as currency with the wireless operators.

It is difficult to understand why the smaller network operators’ business model seems to be to try to deny others from combining spectrum assets, trading spectrum, or building new systems. If Dish is successful, for example, it could easily become the fifth nationwide network operator as measured by spectrum holdings. It seems to me that “cooperation” should be the watchword of the day instead of “opposition.” To win in the wireless game you have to consider all of the options. With a spectrum shortage looming, this is not the time to fight. It is the time to make friends and form partnerships.

Andrew M. Seybold