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DBS, Net Firms Unite on Auction Plan

3/09/2007 7:08 PM Eastern

Washington— DirecTV and EchoStar Communications have formed an alliance with Google, Intel, Yahoo and Skype to support a national licensing scheme in a pending federal auction of spectrum expected to raise at least $10 billion, according to a Federal Communications Commission filing the parties made last week.

The portion of spectrum in the 700-Megahertz band that is being sold is highly prized because it could give a deep-pocketed entrant like Google a shot at creating from scratch a national wireless broadband network by using the best segment of airwaves ever made available by the FCC — now occupied by UHF broadcast television stations — for the provision of mobile high-speed data service.

The same opportunity awaits EchoStar and DirecTV, even though both direct-broadcast satellite providers abruptly pulled out of an FCC auction last year in which some top cable operators came out as the big winners.

Spectrum Picture
Frequency band: 700 Mhz
Amount of bandwidth: 60 Mhz
Currently houses: TV channels 52 to 69.
Auction starts: No later than Jan. 28, 2008
Who’s interested: DirecTV, EchoStar Communications, Yahoo, Google, Skype, Intel
Why: Particularly strong set of frequencies for high-speed and multimedia uses. Communications carry far and penetrate obstacles.

NATIONAL TRIPLE PLAY

Armed with a national wireless license, DirecTV and EchoStar could market digital TV and broadband-access service, perhaps with a voice-over-Internet Protocol application included, to better battle cable operators’ triple-play combinations of telephone, TV and Internet.

Plunking down billions now could make sense because the spectrum about to be sold has a qualitative advantage over what’s previously been allocated. Located on space currently used by analog TV stations, 700 MHz signals easily penetrate walls and other barriers, meaning, for example, that calls won’t cut off in elevators.

The alliance, formally called the Coalition for 4G in America, is backing an auction process that would allow bidders to aggregate enough licenses to include the entire 50 states. In addition to bidding rules, the FCC is also considering two plans that slice and dice the spectrum into allocations of 5 MHz, 5.5 MHz and 10 MHz.

Creating the 4G Coalition doesn’t mean Google and DirecTV are planning to ally themselves in the actual auction.

“I do not read this joint position as indicating that they plan on bidding together,” said Rebecca Arbogast, a wireless-policy analyst at Stifel Nicolaus. “Spectrum makes strange bedfellows. You can have different companies that will end up having very independent bidding strategies coming together for a particular position on how to create the bandplan.”

The auction has to start no later than Jan. 28, 2008, and proceeds from the sale need to be deposited with the U.S. Treasury no later than June 30, 2008. Auction winners can’t launch service until analog TV service is shut down on Feb. 17, 2009. The 700 MHz band corresponds with analog TV channels 52 to 69.

The 60 MHz block of spectrum up for grabs is considered “beachfront property.” As a result, 700 MHz providers are expected to be able to operate systems at lower cost and with fewer towers than wireless incumbents located higher up on the spectrum chart.

“With 700 MHz, you can talk on your phone in the elevator. It is really powerful spectrum,” said Precursor telecommunications analyst Scott Cleland.

Except for satellite auctions, the FCC usually conducts auctions for licenses that cover regions varying in geographic size. DirecTV and EchoStar want rules that both facilitate license aggregation on a national basis and prevent “a company from blocking nationwide entry simply by acquiring one regional license.”

The DBS player’s approach is called “package bidding.” Last fall, EchoStar and DirecTV dropped out of the FCC’s most lucrative auction ever in part because the absence of package bidding defeated their national bidding strategy.

DirecTV and EchoStar favor a national licensing scheme because it would promote the efficient marketing of their video and broadband services across the country, according to DirecTV and EchoStar officials who asked not to be indentified.

Rupert Murdoch’s News Corp. is selling its 38.4% interest in DirecTV to Liberty Media partly because the satellite carrier can’t compete with cable’s “triple-play” bundle of voice, video and data services. Although the 700 MHz auction could give DirecTV the vehicle to match up better with cable, Sanford C. Bernstein vice president and senior analyst of U.S. cable and satellite broadcasting Craig Moffett has doubts.

“I’ve always been skeptical about the 'need’ for a broadband solution for [DirecTV] and Dish. What they 'need’ is a marginal cost position that’s competitive with cable’s triple play, and building a second network, with a second set of capex, a second set of opex and a second set of receiving equipment, doesn’t really solve the core problem,” Moffett said.

The motives of Google, Intel and Skype were difficult to determine because none of them responded to e-mail or phone messages.

If members of the 4G Coalition decide to bid as a group or individually, they will likely need to outbid cable and phone companies. Barring a sudden policy shift, the FCC is planning to allow cable and phone companies — which control 80% of the residential broadband access market, according to the agency — to put up the necessary billions to nullify any over-the-air threat to their lucrative high-speed data business.

INCUMBENTS READY

“The FCC’s upcoming spectrum in the 700 MHz band is shaping up as a key event in the communications industry: it could open the door to new wireless broadband and video competition to the Bells and cable, but the incumbents appear likely to make a strong bid to acquire much of the spectrum,” Arbogast’s firm said in a report. Incumbents include Verizon Wireless and AT&T/Cingular, as well as rural phone companies such as Alltel and U.S. Cellular.

“The only company that can afford not to play is Sprint Nextel. Sprint Nextel has plenty of spectrum,” Cleland said. “Everybody else has to look long and hard.”

The FCC hasn’t placed significant bidding restrictions on cable operators since the 1998 Local Multipoint Distribution Service (LMDS) auction.

At the time, the FCC said that a cable operator couldn’t acquire an LMDS license that “significantly overlaps” its cable franchise.

In recent years, the FCC has appeared to place a higher premium on auction revenue than competition policy.

Last fall, an alliance that included Comcast, Time Warner Cable, Cox Communications, Bright House Networks and Sprint Nextel was the top bidder in the Advanced Wireless Services auction at $2.34 billion.

The FCC has taken in about $27 billion from auctions since the early 1990s when Congress authorized spectrum sales. Commissioner Robert McDowell recently told reporters that the FCC’s 700 MHz rules wouldn’t cater to wealthy incumbents.

“Everyone will have an opportunity to own some of that spectrum,” he said.

 

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