D Block auction picture gets murkier

An unexpected, last-minute decision by Frontline Wireless to close its doors before the start of the 700 MHz auction has left many analysts questioning whether the FCC plan for a public/private partnership to build a nationwide broadband wireless network on the spectrum will be realized.

As of Jan. 29, the 214 approved participants during the first 12 rounds of the auction had submitted high bids totaling $8.659 billion for available spectrum in the 700 MHz band. However, there had been only one bid for the 10 MHz D Block, which the FCC envisioned being paired with public safety’s 10 MHz of broadband spectrum to provide the foundation for a nationwide broadband network that would serve first-responder agencies and the winning bidder’s commercial interests.

The one D Block bid was for $472 million, well below the $1.3 billion reserve price the FCC established for the 10 MHz swath. FCC rules prohibit the release of the names of bidders for specific licenses, but mobile wireless consultant Andrew Seybold said he believes U.S. wireless giants AT&T Mobility and Verizon Wireless are interested in the D Block, although he questioned whether either would be willing to reach the reserve-price threshold.

Indeed, some analysts were surprised that the D Block received a bid at all.

“In a way, it could be a signal to the FCC that there’s somebody interested in this … but [the reserve price] is too high,” said Roger Entner, senior vice president of communications for IAG Research.

While the FCC is obligated to issue license rights to the top D Block bidder if the $1.3 billion reserve price is met, it is unclear whether the agency would accept a bid for the spectrum that does not meet the reserve price.

“Basically, the FCC can do whatever it wants to — it can retroactively change the rules,” Entner said.

Seybold said he also has been told that the FCC has the flexibility to accept less-than-reserve-price bids, if it chooses. “I have two clients that are ancillary to the 700 MHz auction whose attorneys say that the way they read it is that the FCC has two choices: to pull the spectrum back or to let it go for the bid price,” he said.

Indeed, the FCC’s July 31, 2007, order regarding the D Block does not appear to require the agency to summarily reject a high bid that does not meet the reserve price.

One bidder that was expected to participate in the D Block auction was Frontline Wireless, a startup that last year proposed the spectrum arrangement for the shared-network concept that the FCC eventually adopted. Led by a politically connected board that included former FCC Chairman Reed Hundt, Frontline Wireless repeatedly expressed interest in building a nationwide broadband wireless network that would be shared with public safety entities.

In addition to getting the D Block spectrum arranged as it proposed, Frontline Wireless was buoyed by FCC rulings permitting the company’s wholesale business model to be used on those frequencies and allowing it to bid 25% less than existing wireless operators and still win the auction.

But these factors apparently were not enough. On Jan. 4 — the day potential bidders were required to submit upfront payments to secure their participation in the 700 MHz auction — Frontline Wireless employees were informed that the fledgling company was closing. The news became public a few days later.

“Frontline Wireless is closed for business at this time,” Frontline Wireless spokesperson Mary Greczyn said, reading a statement to MRT.

Inclusion of the “at this time” phrase led some industry observers to believe that Licenseco, the bidding name for Frontline Wireless submitted to the FCC in preliminary filings, might participate in the auction and that Frontline Wireless would re-emerge if spectrum was secured. But these hopes were dashed officially on Jan. 14, when Licenseco was not on the FCC’s list of approved auction bidders.

Although Frontline Wireless declined to offer any explanation for its closure, multiple media reports and industry sources indicated that the startup was unable to secure the funds necessary to participate in the D Block auction and build a public safety — grade broadband network, which most analysts project to cost $15 billion to $20 billion.

While raising such funding can be challenging even in the best of circumstances, it became especially difficult during the past several months, when financial markets tightened amid a perceived credit crunch and speculation of a recession. In this environment, the uncertainties surrounding Frontline Wireless — a company with no existing revenue stream and an unproven business model that would have to work in an unprecedented partnership to deliver a public safety — grade network — were not attractive to investors, sources said.

For the most part, public safety officials publicly had expressed support for any entity willing to bid on the D Block spectrum. Privately, however, some representatives expressed concern that the first nationwide broadband network for first responders could be built by a startup with no existing revenue streams, spectrum assets or infrastructure.

This was not expected to be an issue, as few industry observers believed that deep-pocketed, nationwide carriers such as AT&T Mobility and Verizon Wireless would be outbid by a startup representing new competition — a situation that also may have discouraged potential investors in Frontline Wireless.

While Frontline Wireless was not expected to win the auction, many considered the company’s willingness to make an initial qualifying bid of $1.3 billion on the spectrum critical because that action would ensure that the FCC rules governing the shared-network concept would become effective.

Without Frontline Wireless or another entity making such a bid, some analysts believe existing carriers such as AT&T and Verizon Wireless — companies that initially questioned the economic viability of a commercial entity sharing a network with public safety — would decline to bid on the D Block in this auction. If the D Block receives no bids in this auction, the FCC could reauction the D Block, probably with different rules.

Despite the demise of Frontline Wireless, public safety representatives continued to express support for the FCC’s shared-network plan.

“We’re still very optimistic there will be other viable bidders,” said Willis Carter, president of the Association of Public-Safety Communications Officials, prior to the start of the auction. “I don’t think there will be 20 bidders, but I think there will be bids, and I think all of the subsequent processes work out.”

Many industry observers offered a much different opinion prior to the start of the auction. Seybold said the likelihood of a bidder emerging was “too close to call.” IAG Research’s Entner was much more blunt when asked if there would be a D Block bidder in the aftermath of Frontline Wireless closing.

“No,” he said.

Entner said the problem is the cost of the network, which the FCC has mandated will cover 99.3% of the U.S. population by 2019. In addition to this unprecedented coverage level, the network is expected to deliver public safety — grade performance and reliability outlined by the Public Safety Spectrum Trust (PSST) — licensee for public safety’s broadband spectrum — in its bidders’ information document.

The D Block would be more enticing to a startup, which could ask the FCC for leniency in deploying the network in rural areas during the latter stages of the buildout — expenditures that are expected to provide little return on investment — with the political support of urban officials whose public safety agencies already benefit from the buildout, Entner said. Carriers with deep pockets are less likely to receive such leniency, so the rural buildout would simply represent a poor investment.

“[AT&T and Verizon] won’t bid, because they are big enough that the FCC will hold them to the buildout requirements,” Entner said.