The D Block on Ice: What's Next?
March 05, 2008
By Russell H. Fox
While the 700 MHz auction isn’t over yet, it’s unlikely that the so-called D block will be licensed. That’s bad news for the public-safety community, and the American public and should also send the FCC back to the drawing board. Unless the FCC makes some significant changes, the D block spectrum may remain unlicensed the next time it is auctioned as well.
The D Block is 10 megahertz of spectrum available to a commercial entity but dedicated to a public/private partnership. The spectrum is required to be used in connection with the 10 megahertz allocated to the Public Safety Broadband Licensee (PSBL); the D block licensee is obligated to construct a public-safety broadband network, which it can use for commercial services too. When it allocated spectrum for the D block, FCC officials said that the licensee would be subject to a variety of conditions, including a mandatory and complicated network-sharing agreement (NSA) between the D block licensee and the PSBL. In fact, the D block licensee wouldn’t be issued its FCC authorization until it finalizes the NSA with the PSBL. The FCC’s rules include a lengthy list of obligations imposed on the D block licensee through the NSA.
The Auction Rules
The FCC’s auction rules contain several provisions that likely contributed to a lack of interest in the D block. As it did for all 700 MHz licenses, the FCC set a “reserve” price for the D block — $1.33 billion. That is, if the auction high bid doesn’t equal the reserve price, the FCC is obligated to re-auction that spectrum block. The reserve prices have been exceeded for all the other 700 MHz blocks, except for the D block. In its comments to the FCC concerning the D block reserve price, Frontline Wireless, a D block proponent, argued that the FCC’s proposed reserve price was too high. Frontline contended, in fact, that the reserve price should have been about one-fifth of the price proposed by the FCC. The FCC nonetheless proceeded to set the reserve price at the originally proposed $1.33 billion level.
Second, the auction rules impose a penalty on any entity that defaults or is disqualified after the auction concludes. The payment consists of a deficiency payment, equal to the difference between the amount of the bidder’s bid and the amount of the winning bid the next time the license is auctioned, plus an additional amount based on a percentage of the defaulter’s bid or the subsequent winning bid, whichever is less. In the 700 MHz auction, the additional default amount was 15 percent of the winning bid for all licenses being auctioned. In November, the FCC reduced the default amount for the D block to 10 percent of the winning bid.
The default payment is a unique threat in the context of the D block because it may be imposed on the D block winner if it fails to enter into an NSA with the PSBL or if its so-called long-form application — the application for a license submitted after the conclusion of the auction — is denied for any reason. Therefore, if a D block licensee obtained the license for the reserve price and failed to enter into an NSA, it could stand to lose $133 million. In November, the FCC attempted to calm potential D block bidders, in addition to reducing the default percentage to 10 percent from 15 percent, by saying that it wouldn’t impose the default penalty based on denial of the long form application or a dispute regarding the NSA unless it took one of two steps. Those steps include issuing a decision on the disputed issues and requiring a draft agreement consistent with its decision, or referring the issues to the full commission for an immediate decision.
The FCC’s November public notice and the reduction of the default payment notwithstanding, the D Block’s most vocal proponent, Frontline, dropped out of contention Jan. 8. Industry insiders speculated Frontline couldn’t make the upfront payment required to participate in the auction, although company officials said only that the firm was “closed for business.” It’s impossible to know why Frontline dropped out before the auction even began, and because of the FCC’s anti-collision rules, Frontline executives won’t say more. It’s possible that Frontline’s potential investors didn’t believe that the D block was worth a minimum of $1.33 billion or that the investors were concerned that they could lose $133 million with nothing to show for it.
The auction rules say that if the reserve price for any spectrum block isn’t met in the auction, at the conclusion of the auction, the FCC is required to announce a date no later than three weeks after the end of the auction to begin a new auction (designated Auction 76) for the unauctioned spectrum. Therefore, if the auction ends this week, it’s possible the FCC could release a public notice within a few days after the end of the current auction and begin Auction 76 by the beginning of April.
However, it isn’t clear, for two important reasons, why Auction 76 would produce different results than the current Auction 73. First, the FCC’s auction procedures provide that only entities eligible to participate in Auction 73 can register for Auction 76. That means that Frontline, which failed to make an upfront payment in Auction 73 and didn’t become a qualified bidder, can’t bid in Auction 76. Unlike past auctions, little information is available about the entities that are eligible to bid on each license. At least one entity is eligible to bid on the D block, because it placed an initial bid of just more than $472 million. That was the first and last bid placed on the D block, and it was well below the $1.33 billion reserve price. It isn’t clear, therefore, if that entity would bid in a re-auction or if any other entity is eligible to and would bid in a re-auction.
The other important reason that a re-auction may not produce different results than the current auction is that there is no guarantee that the FCC would change any of the rules applicable to the subsequent auction. The FCC may keep the reserve price the same, and it may, for example, continue to consider the failure to enter into an NSA a trigger to impose a default penalty on the D block licensee. The FCC held out the possibility that it may re-evaluate some of the license conditions.
It’s now clear that the FCC must re-evaluate the conditions it imposed on the D block licensee. While the D block licensee must continue to have strong obligations to the PSBL, those obligations can’t be a chokehold to discourage bidders. The FCC must also reduce the reserve price for the D block license. At least one entity in the auction is now eligible to bid on the D block license, and there may be more. That bidder plainly doesn’t value the license at the FCC’s reserve price. Finally, the FCC should consider waiving its rules to accept applications from entities that were not eligible to bid in Auction 73. Frontline’s numerous proposals to the commission still left the PSBL at the altar, but there likely are others who would be serious bidders if given another opportunity. For now, the PSBL must bide its time and wait for the current auction to end.
Derek Poarch, chief of the FCC's Public Safety
and Homeland Security Bureau, addresses
attendees at IWCE 2008 last week.
Russell H. Fox is a member of the communications section of the law firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, practicing in its Washington office. E-mail comments to editor@RRMediaGroup.com.