The FCC’s 800MHz auction: Why it won’t work
On Dec. 15, 1995, the Federal Communications Commission released its decision on 800MHz auctions. Members of the commission said at the open meeting that the rulemaking had been contentious, but that they believed the agency’s decision within the rulemaking formed the best possible solution for regulation of this portion of the spectrum.
Commissioner James Quello said incumbent operators who opposed auctions were trying to “wind back the clock” to pre-auction days. Some other commissioners claimed that they still had concerns about the effect of mandatory relocation. All in all, the comments from the dais sounded much like a committee of baseball managers talking about releasing a favorite player. You could almost hear Tony La Russa saying, “The club has decided it’s going another direction and Gilkey just doesn’t fit into our plan.”
What is that plan? Will that plan work? Those are the questions one asks time and again while reading the voluminous Report and Order in Docket 93-144 and the Further Notice of Proposed Rulemaking that are the byproducts of the FCC’s action on Dec. 15. After more than a month of reading and analyzing those documents, objective analysts must agree that the plan will not reach the stated objectives within the
Report and Order .The stated objectives A patient reading of the Report and Order reveals the justifications given for mandatory relocation and those that support the size of channel blocks to be employed by Economic Area (EA) licensees. In sum, they are: * to create continuous blocks of spectrum at 800MHz that are sufficiently wide to enable EA licensees to employ wideband technologies, such as spread spectrum, in future uses. * to ease the administrative burden on the FCC that arises out of geographic-specific licensing, like the present system. * to create larger, more design-flexible systems to compete directly with cellular carriers and now, personal communications services (PCS) carriers in the marketplace. * to provide small business and rural telephone systems an opportunity to participate in auctions and the provision of competitive services across EAs. * to create regulatory parity, as between specialized mobile radio (SMR) system operators and cellular system operators and now, PCS system operators. * to fulfill the alleged mandate to employ auctions as a means of accomplishing the foregoing, thereby collecting revenue for the U.S. Treasury for use of the radio spectrum.
The six objectives appear again and again throughout the Report and Order, to justify variously, as the FCC deemed appropriate, each element of its decision. The list provided above is in no particular order of importance to the FCC as its decision reads. However, the question remains whether the FCC’s new regulatory regime will produce the stated objectives.
The prize If an entity is victorious at the 800MHz auction, it gets–what? Under the present decision in the Report and Order, the winner gets the right to operate across a large geographic area on a block of contiguous 800MHz spectrum, either 120 or 60 or 20 channels wide, provided that the winner can clear the spectrum of existing users by exchanging “comparable spectrum” with operators who hold licenses for auctioned spectrum within that area. Where such contiguous channels are not presently licensed, the winner gets them.
A review of the FCC’s license database would reveal that the chance of finding the oldest 200 SMR channels unlicensed across an entire EA is roughly equivalent to my chances of playing left field for the St. Louis Cardinals–zip. Therefore, the FCC is not really “auctioning” spectrum this time. What they are selling is a license to maybe use spectrum if you can come up with the comparable spectrum to relocate existing users. In the words of the bard, “Aye, there’s the rub.” Stated in a manner that is somewhat clearer than the FCC’s decision, you gotta have spectrum to give spectrum to get spectrum.
This condition to the creation of EA-wide SMR systems which employ contiguous spectrum blocks is a nagging problem undermining nearly all of the stated objectives. Yet, this problem is barely addressed in the FCC’s decision, except for the FCC’s statement that if an auction winner is not able to offer comparable spectrum, the winner forfeits its right to relocate existing users, thus forfeiting its right to operate across a contiguous block.
Contiguous blocks Reasonable people might disagree about whether the creation of contiguous blocks of spectrum is a necessary goal. As anyone familiar with trunking technology knows, a highly efficient system can be designed without any such requirement. Ask any 20-channel SMR trunked station operator whether its system is delivering efficient services to the public, and you are likely to hear a positive response. However, the FCC appears to be convinced that traditional trunking technology is just not good enough. Now it wants to push the envelope and demand that even greater efficiencies be produced by use of a wideband technology, or digital technology, which experiences difficulty with adjacent channel interference due to the production of “square-wave” signaling and other characteristics.
Conspicuously missing in the FCC’s decision is any requirement that EA auction winners actually employ these vaunted technologies. You can read the decisions again and again, and you will not find any requirement that auction winners must employ digital technology, nor a requirement to use wideband technology. Absent such a requirement, it’s anybody’s guess, including the FCC’s, whether the effort to create contiguous spectrum blocks will ever net the desired result.
To produce these contiguous blocks, the FCC has decided on mandatory relocation of existing operators’ frequency use to the lower 800MHz channels, thus allowing for a clearing of the channels for the EA auction winner. Stated in its simplest form, this idea has many problems related to fundamental fairness to relocated operators who are being asked to accommodate this new regulatory paradigm without any perceivable benefit to them. What is most disturbing is that the plan simply cannot be depended on to reach the objective.
An EA is roughly the size of a Metropolitan Trading Area (MTA), which is the present geographic standard being employed for the auction of 900MHz SMR channels. For example, the Los Angeles MTA takes in most of Southern California and parts of Arizona and Nevada, including Las Vegas. The point is, EAs are no small chunk of real estate. If Nextel Communications or some other wide-area enhanced SMR (ESMR) hasn’t already bought or applied for every frequency in the area, the size of an EA would easily accommodate a number of existing geographically specific SMR systems.
A distinct problem arises for each and every auction winner. Not only must the winner have an inventory of spectrum within the EA to swap channels, but the winner must have that inventory within the same area served by the incumbent that the winner wishes to relocate. This requirement, borne of necessity, is particularly important when one realizes that the authority the auction winner gets does not include 800MHz channels below the coveted top 200. In other words, the winner doesn’t get the “comparable spectrum” it needs to complete the task of relocation.
Who has such an inventory now? Very few operators possess the inventory of spectrum necessary to make exchanges with existing operators. Only through ESMR waivers could an operator have gained sufficient spectrum to accommodate the exchanges needed to create the systems envisioned by the FCC’s decision. Even among ESMR operators the field is narrowed, because much of the past procedure for system licensing had nothing to do with the geographic boundaries of an EA.
The complexities in resolving this problem are enormous, whether you are trying to clear 120, 60 or 20 channels across an EA. Yet, the FCC decision simply sweeps away concerns by offering only two, equally undesirable, solutions: 1. No relocation will take place where such inventory cannot be demonstrated by the EA auction winner, or 2. Parties can enter into private deals to resolve this problem.
The first solution is not a solution. It is an admission that the results of the auction will not successfully reach the stated objectives in many instances. The second solution is hardly worthy of rulemaking. The government does not need to create rules that state that parties can enter into mutually beneficial contractual relationships. We knew that.The FCC’s approach might have been slightly more palatable if it had stated outright that as a prerequisite for participation in the auction, an entity must possess an ESMR license within the EA that covers a substantial portion of the proposed service area for operation of the new system, including a sufficient number of channels below the top 200 that are equivalent to the number of channels within the block for which the auction participant intends to bid. If the commission had stated clearly that this condition was precedent (which it is, by necessity if not by design), then perhaps it would have choked on the remainder of its decision and never issued it.
Administrative burden The FCC avers that market-based licensing of radio systems is easier. It probably is. However, the path to market-based licensing of 800MHz channels is far from easy. Nothing contained in the FCC’s Report and Order suggests that the road to realizing the FCC’s stated objectives will be anything other than difficult, complex, contentious and in many instances, impossible. The FCC has not decided to eliminate the existing geographically designated systems, so it really hasn’t eliminated the administrative burden of the licensing of those systems. It is highly doubtful that the FCC’s stated objective, to reduce the administrative burden, will be lessened at all.
To justify its need to lessen its administrative burden, the FCC offered as proof the recent fiasco in 800MHz licensing–the years of backlog, the piles of applications, the protests, the litigation, and the speculation spawned by the present system. What the FCC has ignored about this particular burden is that the commission itself created the problem. First, the FCC did not follow the dictates of the now famous Fleet Call waiver, thereby creating an invitation for literally thousands of applications which were unsupported by engineering or loading justification.
Second, the FCC did not curtail the abuses of its processes by application mills and the speculators they represented. Third, the FCC created the freeze, which did nothing to stop the flow of ESMR applications, while frustrating all other operators. If the FCC is suffering from an enormous administrative burden, it must blame itself. “Joe SMR Operator” in Peoria didn’t cause it. It is unreasonable to make “Joe” pay to clean up the mess that the agency has created for itself.
Joe’s concerns aside, will the FCC’s unraveling of the tapestry of SMR licensing and subsequent reweaving process net administrative efficiencies for the agency? The answer is probably no. Particularly if the agency does the right thing and makes itself responsible for dispute resolution between incumbent operators and EA auctions winner, which it has yet to do.
Competitive systems The FCC has stated that its decision is pro-competition, but it narrowly defines the viable competitors as the largest carriers and entities. Nothing contained within the decision would make Joe in Peoria more competitive. His system, which has continued to compete successfully against the local cellular carrier, is ignored. By regulatory fiat, the vital competitive energies of Joe’s system in Joe’s market providing Joe’s services at Joe’s prices, is found wanting.
The FCC has decided that Joe simply cannot compete or that his contribution to competition is unimportant. This is news to Joe. This is news to anyone who is involved in the SMR industry. What the FCC is really saying is that Joe cannot compete across the entire EA employing the latest technology to provide a service that is akin to cellular service. The FCC’s decision is equivalent to declaring that a local UHF-TV system is a nullity if it cannot provide a signal beyond a limited geographic area. The FCC never explains why it deems it important to provide facilities for locally produced broadcasts (dependent only on the advertising revenue that can be gleaned from their individual markets), but it is not important to have local two-way carriers.
Even if an EA auction winner obtains authority for all 200 channels, the delay and cost of relocation of incumbent systems, combined with the cost of building the system, then marketing it against entrenched competition such as cellular, places that operator at such a disadvantage in the marketplace that the chances of operating a profitable system are non-existent. Joe of Peoria’s system is presently competitive and profitable. The EA winner’s system is bigger, snazzier and politically correct, but it’s a lousy investment for anyone who likes to see positive earnings.
So what kind of competition for cellular carriers and PCS permittees has the FCC created? At best, it is extremely weak competition in the form of EA licensees. Worst of all, the agency is curtailing or destroying the most effective competition that cellular carriers have to face: the local SMR operator who provides good, cost-effective dispatch service to a grateful public.
Small business In its decision, the FCC trotted out the now-standard breaks for small business: bidding credits and easy-pay plans that are better than those you can get at any bank or used car lot. Those benefits are pretty attractive, and enticed some small businesses to participate in the 900MHz auction, but the FCC has not considered the real cost of participation that arises out of the relocation process. Small businesses (those with less than $3 million in gross revenue) simply cannot afford the cost to relocate other operators. (In the past, they also could not afford the cost of licensing and constructing an ESMR system for the purpose of warehousing spectrum to use in the future.) They cannot afford to buy out their neighboring systems to gain the spectrum. They cannot afford to bully anyone off of the channels so that they can use them. In sum, they simply cannot afford to play.
The FCC decision does not recognize this fact. It concentrates solely on the cost of auction participation and not on the cost of being positioned to use what might be acquired. The FCC’s approach is like giving great discounts on automobiles for anyone under the age of 10. Creating greater economic access to the auction process is a wonderful idea, but just giving small business an alleged bargain from government is not a realistic appreciation of the economic dynamics of the market. Therefore, the FCC’s objectives regarding small business simply cannot be met.
Regulatory parity The mantra “regulatory parity” has been echoing through the halls of the FCC for about three years. When Commissioner Quello stated during the Dec. 15, 1995, opening meeting that SMR operators in opposition were trying to “wind back the clock,” he was really saying that the demands of regulatory parity require that the commission move forward toward market-based licensing for SMR systems.
In its simplest form, regulatory parity requires that the FCC take steps to level the regulatory playing field between like operators. So, if the FCC gives a break to cellular operators, they are supposed to give a break to PCS operators and so on. Employing these magical words, regulatory parity, Nextel Communications has forwarded its agenda to promote 800MHz auctions, saying in effect, “We are more like a cellular system, so we should be treated like a cellular system.”
What Nextel and the FCC seem to be ignoring is that the regulatory regimen put forth by the recent decision bears no resemblance to the one that created market-based cellular licensing. The existence of licensed operators on the relevant spectrum whose livelihoods depend on the use of that spectrum creates public interestconsiderations that were not present in the cellular licensing plan. Those existing operators thus deserve their own brand of regulatory parity, if they are to be made to accommodate Nextel’s demand for parity with other large operators.
It makes no sense to suggest, as the FCC has, that to provide regulatory parity to EA auction winners equates to regulatory parity for existing operators. If the goal of regulatory parity is to level the regulatory playing field among like competitors, then such leveling should have begun long ago in the SMR field, preventing the creation of the spectrum warehouses known as ESMRs. Because the FCC did not then act to curb the voracious appetites of ESMR operators as they speculated and warehoused literally thousands of channels across the country, it is incumbent on the FCC to correct its past error of omitted regulation before giving additional benefits to the entities and persons who created this inequity via speculative licensing.
To provide true regulatory parity, the FCC should first unload the spectrum warehouses, then consider an auction scheme that does not directly reward the entities that operated those warehouses. If that suggestion is “winding back the clock,” then so be it. When the agency has made repeated mistakes that have caused great harm to a vital, competitive industry, it should demonstrate fidelity to its duty and correct those harms to the best of its ability. It should not say, in effect, “What’s done is done,” without apology or explanation. This rulemaking was an opportunity to make amends. Instead, the FCC is excusing and ignoring its past failures. The least that the FCC might do is admit that the objective of regulatory parity is not met for all SMR operators–only for the very, very few.
Auction mandate This final objective is the least likely to be realized. As shown above, few entities are positioned to reap any benefit from participation in the auction. The post-win costs are so high, and the assembling of contiguous spectrum through relocation is so complex, that the amount of revenue to be realized from this auction cannot possibly justify the agency’s bothering to begin the bidding.
The FCC has stated that this objective is the one with the lowest priority. In a hint of logic, the commission has stated that the raising of revenue for the U.S. Treasury is not the motivating factor in these proceedings. This is understandable, considering that many persons are predicting that it is unlikely that most channel blocks, particularly the largest, will have more than one bidder–Nextel. It is then likely that the commission will simply award the auctioned authority to Nextel without further delay or farce. Even assuming that the regulatory regimen created by the FCC’s decision might be left standing, following reconsideration and likely court challenge, one cannot help but wonder why the FCC seems to believe that awards of licenses must be by auction. There is nothing within the Communications Act that removes the FCC’s ability to employ comparative hearings, lotteries, first-come-first-served, or any number of other methods for selection among applicants.
Conspicuously missing in the FCC’s auction participation criteria is any preference for existing operators. One might think that a small business that has demonstrated its commitment to a particular market through construction and operation of SMR facilities might be rewarded by some preference. The FCC did not see it that way.
The commission’s compulsion in employing auctions as its method of selection is therefore, mystifying. It admits that it doesn’t expect to make much money. It even admits that it does not expect to receive competing bids for all (or most) EA channel blocks. These admissions alone suggest that the FCC knows what the rest of the industry knows. The stated objectives of the FCC’s decision cannot be met because the FCC has not created a level playing field among potential participants in the auction.
In the spirit of this election year (and to preserve our tradition of “one man, one vote–one really bad reason for closing bars”) I have decided to bring democracy to our industry. Therefore, I humbly declare my candidacy for the position of chairman of the Federal Communications Commission. [Insert loud cheers from adoring crowds here.]
Yes, I know spoilsports out there will rush to point out that the job isn’t gained by election. I have to be nominated by a crack team of political personnel managers that will submit my name to the President, who will then reply “Who?” But, since that system doesn’t seem to be working too well, I thought we should try this. Besides, I haven’t got a snowball’s chance in Hades in getting the job the other way. My resume doesn’t qualify me for a nomination by the closed-door-smoky-room crowd. I have never served on the campaign trail for any candidate that won office. I have never contributed more than ten dollars to any political party. I have never taken a job from the federal government. I won’t follow any political agenda that requires logic more convoluted than the game “Twister.” Also, I have never written a book that seeks to expose the seamy underbelly of politics–I prefer to do that here.
On the other hand, I think I’d make a pretty good chairman. To help you decide whether I should get this job, here is my campaign platform. [Band begins drum roll.] Mind you, This platform is a little shaky–maybe only I should stand on it.
Spectrum Spectrum is neat stuff–like land. It can be used to create bucolic settings where people are free to roam, like a park. It can be used for teeming highways of commerce, where neat rows of shops are built, one next to the other, each serving the public’s need. It can be a chaotic slum, swarming with bad guys and drive-by shootings. It also can be left fallow, producing nothing and sheltering the taxes of the rich–with high fences to keep the public out.
The granting of a license is the offering of a public trust. The government should be saying, in effect, “Here is some of the radio spectrum. We entrust it to you with the understanding that you will actually use it to provide a viable service to the public. If you don’t, we want it back. No fair just hanging onto it as a corporate asset. That’s not what it’s for.”
With that in mind, I’d vote to give channels only to people who are really going to use them, not just leverage them. You will build systems that serve the public–or I’ll take your channels back. What else should you do with a company that violates our trust?
Auctions I am opposed to rampant use of auctions. Auctions are replacing the FCC’s job of regulating the radio spectrum to assure the delivery of service to the public. The net result is that more companies are turning from service-based profits to Wall Street profits, and over-concentration of spectrum is increasing. For all of the token concessions being offered to small business, the truth is small business simply cannot keep up in a race to throw money at the federal government.
Auction money builds spectrum warehouses, filled with inventory that is kept from the productive ends of the nation’s economy. The money raised is a drug for politicians, who use it to go on a temporary high, only to be faced with the long hangover of reduced competition, unemployment and instability throughout the industry. Like addicts, the politicians crave more and more, selling everything of value to feed the habit, only to be left with nothing.
Used properly, auctions can be a good medicine for the U.S. economy. But right now, the country (and our industry) is suffering from an overdose–and there doesn’t appear to be a rehab clinic in sight.
Emerging technology I thank every inventor, manufacturer and distributor of any new technology that produces a product or service the public wants. We will get to your new ideas as soon as we figure out how to properly regulate the one’s we’ve got. Right now, the FCC doesn’t have the political will to enforce its rules regulating crystal sets, much less the newest microwave RF link circuits. So, be patient. As soon as we develop enforcement capacities that work, we’ll get to your ideas.
By the way, could you inventor types do the FCC and the American public a favor? Stop coming up with stuff we don’t want or need, like HDTV or radiodetermination satellite systems or bad AM stereo designs. As chairman, I won’t be giving any spectrum away for these types of boondoggles. Broadcasters: either build HDTV quickly or give back the spectrum. Your collective justifications, ranging from First Amendment rights to making sure the American public still gets free TV, are bull. You know it. We know it–and Congress should have known it when it passed Telecommunications Deform Bill. [Spontaneous air-horn blasts from the balcony.]
Small Business It’s time to shift the FCC’s focus from giveaways for the richest companies to helping small business. As chairman, I will approve no regulatory plan that shafts the small operator. Small businesses are the biggest employers, pay more taxes and contribute more productivity per person than any segment of large business in the economy. Why is the FCC ignoring this vital source in favor of the downsizing, over-concentrating, spectrum-warehousing, financial-wheeling big boys? Beats me. In my administration, I’m going to revitalize the entrepreneurial spirit in this industry. Okay, that will put some people out of work, but the economy can get along fine without a few lobbyists, blue-sky artists and big-picture guys. Maybe they could get jobs working as techs? After all, this industry is increasingly short of people who really work for a living.
Vote early and often Well, that’s my platform. I might add that the FCC would be run in accord with its rules, rather than unwritten policies. I’d also call for commission meetings where the public gets to participate, not just watch. The commission also wouldn’t act so doggone offended every time somebody disagrees with it or points out a mistake. A little humility would be a great thing at the commission. If you want to vote for me, great! Just tear out this column and send it to President Clinton with a note that says, “I’m tired of business as usual–give us Robert!” [Release the balloons.]
If you want to make a campaign contribution, send it to an association that represents your interests, and that would be …oh, never mind. Just keep the dough. The way the commission’s been going lately, you’re going to need it.