No airwaves for you! Verizon, AT&T will face bidding limits in incentive auction

Last week the Federal Communications Commission laid out all of its proposed rules for next year’s controversial broadcast airwave incentive auction, save one. It didn’t address the most contentious rule of them all: whether the countries’ two mega-carriers AT&T(s t) and Verizon(s vz) will have free rein in the auction or face restrictions on how many airwaves they can buy.

The FCC is now taking a whack at the political piñata, and AT&T and Verizon aren’t going to be pleased with what comes out. On Thursday, FCC Chairman Tom Wheeler began circulating proposed rules for low-band spectrum auction — of which the incentive auction is most definitely one — that would limit Verizon and AT&T’s ability to bid on all licenses in markets where competition for frequencies is particular intense.

Source: Shutterstock / Rebelf
Source: Shutterstock / Rebelf

What means in areas where there’s the most demand for mobile broadband airwaves, such as the big cities, the FCC will set aside up to 30 MHz of airwaves for carriers that don’t already own a lot of low-band spectrum. The rules aren’t exactly a surprise since Wheeler has been leaning in this direction for months, though they’re likely to get overshadowed by the FCC’s controversy du jour, net neutrality.

The reason low-band spectrum is valuable is because of its propagation — it can reach out long distances in rural areas and punch through walls in dense metro areas. Most of the low-band spectrum in use in the U.S. today is owned by, you guessed it, Verizon and AT&T, both of which have tapped 700 MHz for the backbones of their LTE networks.

Wheeler elaborated in the FCC’s blog:

“… two national carriers control the vast majority of that low-band spectrum.  This disparity makes it difficult for rural consumers to have access to the competition and choice that would be available if more wireless competitors also had access to low-band spectrum.  It also creates challenges for consumers in urban environments who sometimes have difficulty using their mobile phones at home or in their offices.

To address this problem, and to prevent one or two wireless providers from being able to run the table at the auction, I have proposed a market based reserve for the auction.”

The nitty gritty

The way the auction would work under the FCC’s proposal is that in any given market, all carriers would bid freely for these 600 MHz airwaves. But after bidding hits a particular trigger point indicating high demand for those licenses, the FCC would basically split the auction in two, creating a reserve chunk of airwaves up to 30 MHz that only smaller carriers like Sprint(s s), T-Mobile(s tmus) and regional operators could bid on. The unreserved portion would remain open to all bidders.

Verizon and AT&T wouldn’t necessarily face restrictions in every market. It all depends on the extent of their low-band holdings in any given region. There are even a few geographical cases where regional carriers like U.S. Cellular(s usm) hold enough 700 MHz spectrum that they would be excluded from the reserve camp, FCC officials said.

FCC Commissioners (L to R): Commissioner Ajit Pai, Commissioner Mignon Clyburn, Chairman Tom Wheeler, Commissioner Jessica Rosenworcel and Commissioner Michael O’Rielly (Source: FCC)
FCC Commissioners (L to R): Commissioner Ajit Pai, Commissioner Mignon Clyburn, Chairman Tom Wheeler, Commissioner Jessica Rosenworcel and Commissioner Michael O’Rielly (Source: FCC)

The rules certainly aren’t final. In May they go before the full commission, which will decide on specific mechanisms such as which auction stage reserve bidding would be triggered and what percentage of licenses in any given market could be reserved. It could also change up the rules entirely, easing restrictions on AT&T and Verizon, or toss them out entirely. Those carriers are putting a lot of political pressure on the FCC and Congress for an entirely open auction, and AT&T even threatened to sit the whole auction out.

AT&T may just be bluffing, but the threat has to give the FCC some pause. A major bidder sitting out the auction wouldn’t just mean less revenue for the government, it could cause the entire auction to fail. The way this complex auction is structured (I spell out all the details here), the broadcasters currently using the UHF band would agree to part with their TV channels, but only if their selling prices are met. The fewer bidders there are to buy those repurposed airwaves, the less likely the auction will meet those prices.

We’re still a year away from the first bids being placed, and it’s becoming increasingly clear there’s no way the FCC is going to be able to make happy all the various broadcasters, carriers, politicians and public interest groups involved. It’s just a question of whether it can make enough of them happy to actually pull the auction off.