The D Block: Where Do We Go From Here?Thursday, March 20, 2008
By most measures, the 700-MHz auction was a huge success. According to my friends at RBC Capital, as of last Friday, March 14 (the auction finally closed on March 18), the price per Megahertz per population ($/MHz/POP) average for the A block is $1.17, the B block is $2.64, the C block is $0.76 and the E block (the single 6-MHz slice that is unpaired) is $0.75. For comparison purposes, each of these blocks covers between 282+ million people to about 287 million people (out of 303 million for total U.S. population), so it is fairly evenly stacked up.
We won't know who won what until the down payments are received by the FCC and the non-collusion is rescinded, which should be around the end of March (except that Verizon Wireless just issued a press release saying "The bids we won include a nationwide footprint covering 298M Pops, plus 102 licenses fo rindividual markets covering 171M Pops) and the FCC just released their own saying that they have "de-coupled" the D block and therefore would release the winners names). What we do know is that the D block (the shared public/private sector block) received only a single bid for $472+ million or $0.17/MHz/POP. This bid does not meet the reserve price ($1.3Billion) and while the FCC might be able to accept it, the most likely scenario is that the D block will go back to the FCC.
Why didn't the D block sell at auction? There are, as always, many theories. My theory goes like this: AT&T Wireless bought a lot of 700-MHz spectrum prior to the auction from Aloha networks and concentrated on the A, B and C block bidding. Verizon also spent its money on A and B block spectrum. After Google upped the C block to the $4.6 billion reserve price to assure whoever bought this block had to abide by the open access rules (any device to any content), the C block was bought by a single bidder for a couple $100 million more (and we now know this bidder is Verizon).
So neither Verizon nor AT&T Wireless was focused on the D block. Frontline, you might remember, made a lot of noise early on but dropped out because it could not obtain funding, so there were no other "big boys" left in the bidding that might want to take a shot at the D block. By the time the C block was won, many of the bidders had all but run out of bidders' credits and even if they had wanted to bid on the C block, they were not in a position to do so. I, for one, expected AT&T and Verizon to duke it out for the C block and for the loser to go after the D block. But it appears as though they are happy with what they won in the A and B block auctions. My guess is that Verizon will be the C block winner of record.
And there are other reasons for the lack of bidding. First, I think that if the FCC had removed the anti-collusion rules from this block we would have seen some companies come together and offer a combined bid for the spectrum. But after December 3, 2007, this type of conversation was forbidden by FCC rules. The next factor is that this network has to be built to public safety standards as outlined by the Public Safety Spectrum Trust (PSST). Abiding by the build document means this network will be more expensive to build than most commercial networks. Add to that the fact that in the United States there are about three million first responders (not counting the utility companies-see below) and there is no guarantee as to how many of them will join the network or when they will. New York City just completed its own very expensive wireless broadband network and D.C. is underway, as are others in other parts of the country. How do they justify joining the new network after spending all this money on their own networks?
The rules also state that public safety has top priority on this network and can pre-empt any of the commercial customers. This is good for public safety, but it is a down side for any network operator-especially a new entrant. Would you subscribe to a wireless service knowing that during an emergency, when you might really need your phone, you could be denied service? If you are an incumbent network operator, this might be reasonable since you have other spectrum available in all of the markets and even if you lost access to this network on a local or regional basis for a while, your customers would have access to the other parts of your network. In truth, I believe this network would be 80% available for commercial services almost all the time.
Given all of these reasons and more I have not mentioned, the bidding was dead in the water before it started. The theory of a public/private sector combined network that will help with first responder interoperability and be paid for by the commercial sector is good. The problem lies in the implementation.
What Happens Now?
If the FCC gets the D block back, and it certainly looks as though it will, the politicking will start all over again. I expect to see the rebirth of Frontline, the PSST has hired Cyren Call (Morgan O'Brien) to help out and I am sure they will all be busy proposing ideas to the FCC and Congress. All of the congressman running for re-election will have their own ideas about what to do with the spectrum and what they will see as a "failed" auction, and I expect the FCC to be swamped with petitions, ex parte filings and lobbying by all manner of people and organizations.
I see only three realistic options. Each has its own share of risks and rewards, and some would be more difficult (but not impossible) to implement and manage. Building this type of network, with its stringent build-out and coverage requirements, will not be easy, and it will be expensive.
Therefore, even if there is a single bidder, I believe partnerships need to go beyond the PSST and a network operator or a new single entrant. Some of my partnering suggestions include organizations that can help with backhaul, tower locations and those that want and need both public and private sector communications and broadband services.
So let's expand the number of partners-I know this might make it more difficult to manage, but I would rather worry about managing this type of network than not having it built at all. We should include all of the field service people for both first responders and commercial networks in the first responder category. If they had been given access to New Orleans right after the incident, they would have had communications problems for only a few days and not weeks. Because those who could fix the communications problems were kept out of the city, it was that much more dangerous for the first responders. Next, we might add the utility companies since in almost every type of disaster, electric, telephone, cable and gas services are often disrupted and restoring them is also a priority.
Other partners might be organizations that can help build the network and sell services on it. How about using this network to take care of Rural America's broadband needs?
One example of this type of organization is the NRTC (National Rural Telecommunications Cooperative). This organization has more than 1,400 co-op telephone and power companies as members. They are active in 47 states and if you look at a map of the areas covered by their member power companies, there is not much of the United States they don't touch. The telephone companies also have a fairly good footprint and seventeen of the phone companies already run wireless networks. More than a dozen members have AWS and 700-MHz spectrum and there will be more as a result of this auction. The NRTC is a not-for-profit organization and already works with its co-op members by hosting an MVNO (Telespire) and providing access to two-way radios for its direct members' use as well as access to DirecTV and two-way satellite for its members' customers.
The NRTC member co-ops owns thousands of miles of electric distribution, big, tall towers that carry the wires, other poles and facilities, backhaul and fleets of vehicles that are used to make "truck rolls" not only for its own services but for services it sells to its customers. I have to believe that a 4G technology such as LTE or UMB properly built out in rural America to serve commercial and first responder services could easily be used for broadband to homes and businesses. Most of the time, this would not even require a truck roll. A simple desktop wireless modem drop-shipped to a home, five minutes worth of software installation and the customer leaves the world of dial-up behind forever. Perhaps because our government is talking about broadband to Rural America, this part of the network could be funded with some of the money earmarked for rural telecommunications services and other grants.
I see this network as an opportunity to serve our first responders and to help them with some of the interoperability issues (not all, but some). It is also a way to finally get broadband into rural America in what might be the only truly economical way.
I See Three Choices for Bidding
Assumption: All three options would include the partners defined above as potential customers and/or partners in the build-out and operation of the network.
1) Single bidder, single license; incumbent or new network provider. Frontline (funded), AT&T Wireless or Verizon Wireless. In this scenario, the bidder would build and operate the network.
2) Divide the network into regions, perhaps twelve as with the C band. This would require the FCC to do something it never does and to which I am generally opposed. It would require a specific technology for network consistency. The issues are how to connect and work out interop agreements, how the PSST would deal with twelve potential operators instead of one, and how the twelve operators would work together for the betterment of the network and the first responders.
My final idea is my favorite but it is also the most difficult to pull off. It requires a great deal of cooperation and a lot of oversight and management, but it would be the best in my view because the cost and risk of the network would be shared among and between the Federal Government and multiple network operators. Again, this would require a common technology, but since we are heading for what looks like an all-LTE fourth generation, that should not be too difficult a problem to surmount.
So option 3 is this: Each tier 1, tier 2 and perhaps even tier 3 network would build its own portion of the network. There would be a single bidder, which would be the management company that would be responsible for making it all happen. This could be a Qualcomm, Lockheed Martin, Northrop Grumman or other company that would bid on and then manage the build-out, day-to-day operation and interconnectivity options.
Each network operator that signed on (ahead of the bidding) would build out specific segments of the network, which would mean a faster build-out, and each would gain access to the spectrum. Admittedly, there are many issues with this including how you decide who builds out what, who gets access to the spectrum and on what priority level. This would be a complex undertaking with many issues to be worked out. Perhaps it has no chance of succeeding, but I believe it could work if everyone agreed to the rules ahead of time.
For build-out and operation, one idea I have had is that we would look at the entire build-out area and measure that against the spectrum holdings of the network operators. The network with the smallest holdings in a given area would then build out the network in that area and be the first (secondary) tenant on the network. Network operators that already own other 700-MHz spectrum would add this spectrum to their devices. Spectrum would be managed by a spectrum manager and would be available on an as-needed basis for every network operator.
As an incentive, each network operator that joined this venture and agreed to build out a portion of the network would be given tax credits by the Federal Government, and the more they agreed to build out, the more tax credits they would receive. The management company would be responsible for several things including the overall operation of the network on a day-to-day basis, along with the back-end management system, and it would be the key interface with the PSST. There could possibly be some spectrum made available for local or regional data MVNOs (to start) and, again, organizations such as the NRTC could play an active role in the network.
Yes, this a major undertaking and yes, there are a lot of politics to deal with. There are technology issues, but not many with an all-IP-based network. There are costs and risks, but they will be spread out among a number of companies. If there are any profits, they would be divvied up in proportion to the build. This does not provide for this spectrum showing up on network operators' books as an asset, but perhaps there might be a way to do that. This is important because if you look at the 10Ks of most network operators, you will see that they are carrying their spectrum assets on the books and it helps with the valuation of their companies, which, in turn, helps them on Wall Street.
What is required from the Federal Government is tax credits, payment for Federal units on the network, and a working relationship with the network management company and the PSST. Once again, this is not about the technology capabilities and whether it can be done from that aspect. It can. The real issues here have to do with politics-who is boss, will it be a round table or a square table, who sits at the table, who has the votes, who controls what and how all of this is resolved. The only thing I can say is that this won't work unless we get past all of that, and unless the companies making money or hoping to make money in wireless understand that they need to give back in some way and that this combined network is an ideal opportunity to give back. But it can work, and I am ready to help with any of these options or others that might be proposed that make sense.
One final note: Very little has been said about first and second responder devices for this network, but I believe there is a consensus that there should be a single device standard that many companies can build to. The standard should include this broadband network, all of the first responder 700 and 800-MHz spectrum now available and the technologies in use including narrowband FM and P25, and there should be two types of radios including a mobile mount and on-the-person version. One final point about the devices is that they should be able to be set to the proper channel or channels over the air so when various agencies are responding to the same event, the radios can be set up to operate at the incident on the channels assigned for that incident.
Wireless companies are in business to make money. That is why they invest in networks in the first place. Their stockholders expect a decent return on their investment and their customers expect a certain level of service. But the time has come to give back a little by helping the first responder community do its job better and more efficiently. I don't believe a single network operator should have to stand up and be counted; I believe that all of those who make money in wireless should look at the needs of the first responder community and find a way to make it happen.
Andrew M. Seybold