United States: FCC Votes to Ease Spectrum Crunch for Mobile Communications

Since the late 1990s, America’s wireless economy has faced a serious credit crunch, digital style, due to a series of regulatory impasses that have reduced the flow of new radio spectrum to a trickle. That has placed rising burdens on existing mobile communications networks and led many carriers to postpone next generation, multi-media services.

On November 7, however, the nation’s top "spectrum banker," the Federal Communications Commission (FCC), began to provide some relief by allocating 90 MHz of new spectrum for so-called Third Generation (3G) advanced wireless services. The FCC’s action reflects a historic band-clearing agreement with the Department of Defense and, with the prior reallocation of several UHF TV channels, might lead to the sale in 2003-2005 of over three times the amount of mobile radio spectrum now licensed for cellular telephone service. See Figure 1.

The release of large blocks of new spectrum may have far reaching consequences. On the one hand, it is likely to provide a much needed stimulus to a maturing mobile communications industry. Just as the Internet boom of the mid-1990s was underpinned by ever cheaper fiber optic transmission networks, falling spectrum prices could help to jump-start a mass market for unwired Internet services from handheld games and instant messaging, to streaming music and portable video entertainment. On the other hand, the sale of new spectrum is likely to devalue the frequency portfolios of existing players and thus provide a further impetus for industry consolidation.

To better understand the implications of the FCC’s new "monetary expansion" and why it has been so long in coming, some history is helpful.

The bulk of the spectrum now used for public mobile radio services — approximately 195 MHz — has been licensed in two tranches. In the early 1980s, the FCC awarded licenses for 50 MHz of spectrum in the 800 MHz band (just above the UHF TV channels) for two competing types of cellular telephone operators: one for existing local exchange carriers (today Verizon, BellSouth, etc.) and one for new entrants (e.g., McCaw Cellular, now AT&T Wireless). The latter licenses were primarily assigned by lottery, allowing many speculators to quickly resell their rights for millions of dollars but adding nothing to the U.S. Treasury.

About a decade later, the FCC allocated another 120 MHz of spectrum in the 1800-1900 MHz band for a new (second-generation) mobile service known as PCS (Personal Communications Service). This time, at the direction of Congress, the FCC auctioned off licenses for the new spectrum to the highest bidder, beginning in 1995. With mobile handset prices falling rapidly and the economy booming, the price for each successive block of PCS spectrum was bid higher and higher. Several winning bidders — including most notably NextWave Communications, which bid $4.8 billion for licenses — later filed for bankruptcy and defaulted on their spectrum payments to the government. That led the FCC to cancel their licenses and re-auction the frequencies. The largest spectrum re-auction, in January 2001, generated over $16.5 billion, but NextWave sued to prevent the FCC from implementing the results. The matter is now before the Supreme Court with a decision expected by mid-2003. Pending the Court’s decision, though, about 25% of the original PCS spectrum remains "in the bank."

While the U.S. was preoccupied with PCS spectrum auctions, the global wireless industry began to move ahead with ambitious plans for third generation (3G) of multimedia mobile services. And, in the late 1990s, governments in Europe and Asia scrambled to allocate and license spectrum for these new 3G services. By the end of 2001, over $100 billion had been paid for 3G licenses in Western Europe alone, leaving many winning carriers with more spectrum than their U.S. counterparts (155 MHz was allocated to 3G in most countries) but also with potentially crippling new debt.

A similar scenario might have played itself out in the U.S. but for the inability of the FCC and private industry to agree on how much spectrum should be allocated to 3G, and which frequency bands should be cleared to accommodate the new services. The Clinton Administration initially pledged to resolve the impasse before it left office so that 3G spectrum could be auctioned by October 2002. But it was not until July 2002 that a working consensus was finally reached by the mobile radio industry and the Executive Branch on a 3G allocation of 90 MHz in the 1700 MHz and 2100 MHz bands. And, as noted above, FCC did not formally implement this decision until November 7.

Since the early 1990s, the FCC has also sought to clear an additional 85 MHz of spectrum for 3G services in the UHF band (TV channels 52-69). Legislation generally requires this spectrum to be vacated by broadcasters by December 2006 as part of a comprehensive plan for the introduction of new digital television (DTV) services by all broadcasters on channels 2-51. To that end, Congress originally directed the FCC to reclaim and auction much of the vacated UHF spectrum by December 2001 and to encourage voluntary relocation arrangements underwritten by new users. Thus far, however, the majority of affected broadcasters have been reluctant to initiate DTV service on their new channels, and, given the interim relocation costs for new users of the spectrum, most of the FCC’s UHF spectrum auctions have been delayed. In addition, the 700 MHz bands are not part of the global 3G spectrum allocation, which means cellular handsets and base stations are not currently available for these bands.

The upshot is that while the base of cellular and PCS subscribers grew over 350% between 1996 and 2002 to almost 140 million, the FCC licensed only a few slivers of new spectrum for mobile services — a credit crunch by any other name.

It is probably too early to predict the full impact of the FCC’s November 7 "monetary easing." However, some of the consequences of the agency’s recent actions may include the following:

1. New Spectrum auctioned in 2003 and beyond will cost less per MHz than old spectrum, and possibly much less. Since peaking in early 2001 (with the re-auction of licenses recovered from bankrupt NextWave Communications), U.S. spectrum prices have fallen considerably as the economy has weakened and investors have become more skeptical of capital-intensive communications businesses.

2. Cheaper spectrum, however, is likely to attract new money to the mobile industry (entrepreneurs, equipment vendors, private equity firms). It will also make spectrum-hungry applications more economical. At the same time, cheaper spectrum may well devalue the assets of existing mobile operators.

3. More competition and cheaper spectrum are likely to increase the pressure for industry consolidation. That will be aided by the January 2003 expiration of the FCC’s historic 55 MHz "cap" on the amount of spectrum any provider can own. There are already six national mobile operators and at least twice that number of regional carriers; with even more competition on the horizon, mergers seem inevitable. Caveat emptor: with the expiration of the FCC’s spectrum caps, future mergers may be subjected to more searching review under general antitrust rules.

4. More spectrum is also likely to mean multiple new FCC auctions. And that could stimulate the M&A business too as various bidding groups and alliances form to acquire spectrum they desire. Some cross-industry consortia may also emerge to acquire licenses for showcasing next generation services or products.

5. If spectrum prices fall, wireless services which have started on unlicensed free spectrum — for example, the WiFi or 802.11 wireless networks pioneered by Boingo and others — may migrate to licensed frequencies. At a minimum, such services are likely to face stiffer competition as existing cellular and PCS players try to bundle "free" services with their core offerings, as some operators (T-Mobile) are now doing with WiFi points at Borders, Starbucks and other popular meeting places.

While a new era of cheaper spectrum is almost certainly on the way, the FCC’s ability to ease the current crunch will not be without controversy. Just as a looser monetary policy tends to favor debtors over creditors, any increase in the supply of available spectrum will create winners and losers. Many of the affected parties can be expected to urge the FCC to amend its future auction plans accordingly.

The Supreme Court’s expected decision in the pending NextWave case in 2003 (ruling on whether the FCC can lawfully cancel the licenses of a bankrupt carrier which defaults on license payments) will also affect the timing and scope of future spectrum auctions. In addition, Congress will doubtless make its own views known as a rising national deficit makes revenues generated from upcoming FCC auctions more important than ever.

Future FCC spectrum policies also will be influenced by the agency’s ongoing efforts to rewrite its existing spectrum management rules — a top priority for FCC Chairman Michael Powell. At the same meeting where the agency voted to release more spectrum for 3G services, Chairman Powell endorsed the recommendations of a new Spectrum Policy Task Force established in June 2002. They include proposals to grant existing licensees much more flexibility to use their spectrum as they see fit, like a property holder, and to make it easier for mobile radio licensees to lease or trade their spectrum to third parties. The Task Force report also urges the FCC to allocate more spectrum for unlicensed uses, such as WiFi networks, and to permit licensees to sell access to their networks during off-peak periods by, for example, using smart receivers that search for unused frequencies. These spectrum reforms may well put additional downward pressure on future spectrum prices.

Vinson & Elkins will continue to monitor the implementation of the FCC’s recent spectrum policies. At its November 7 meeting, the FCC initiated a new rulemaking proceeding to determine the service rules and auction terms for the 90 MHz of newly allocated 3G spectrum. Comments will be due in early 2003. The FCC also is expected to invite comments shortly on the landmark report of the Spectrum Policy Task Force. Please contact us if you would like copies of any of the FCC documents referenced here or if you may be interested in participating in any of the agency's proceedings.

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