An Ignoble Experiment

2. Google, others applaud FCC's plan for 600 MHz unlicensed spectrum

AT&T Mobility (NYSE: T) said it plans to purchase between 20 MHz and 40 MHz of spectrum in the FCC's 600 MHz incentive auction of broadcast TV spectrum, set for next year, if the auction entices enough broadcasters to participate. However, Verizon Wireless (NYSE: VZ) said only that the FCC has made "progress" on the rules for the auction, comments likely reflecting the carrier's displeasure with auction rules designed to limit the amount of 600 MHz spectrum AT&T and Verizon can acquire during the auction.

For their part, Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) stopped short of specifically promising to participate in the 600 MHz auction. But they both expressed satisfaction with FCC rules that essentially prevent AT&T and Verizon from acquiring up to 30 MHz of spectrum in markets across the country, reserving that spectrum for smaller carriers like Sprint, T-Mobile and others.

The apparent hesitation expressed by Sprint and T-Mobile in regard to their support for the FCC's 600 MHz auction rules could be partially due to a stipulation that would effectively remove the reserved spectrum if Sprint and T-Mobile were to pursue a merger before the start of the auction. Analysts at Credit Suisse pointed out that "there is language in the spectrum aggregation rules that could allow the FCC to retract the reserve rules if a major transaction among the top 4 carriers is announced." Thus, the FCC could withdraw its plan to reserve up to 30 MHz of spectrum during the auction for smaller carriers if Sprint and T-Mobile pursue a merger.

As for the nation's Tier 2 and 3 regional wireless carriers, they generally were very pleased with the FCC's auction rules.

"Ntelos looks forward to participating in the 600 MHz auction, and thanks the FCC for adopting rules that will promote wireless competition," said Jim Hyde, the carrier's president and CEO. Ntelos is the nation's seventh largest wireless carrier, with around 468,000 subscribers, and provides service in parts of Virginia, West Virginia, Maryland, Ohio, Kentucky and North Carolina.

Other smaller carriers, including Bluegrass Cellular, Carolina West Wireless, Cellcom and Union Wireless specifically said they would likely participate in the 600 MHz auction next year.

Dish Network (NASDAQ: DISH), for its part, complemented the FCC on its auction rules, but did not specifically say that it would participate in the auction. However, the company has been feverishly working to collect a wide range of spectrum--most recently Dish paid $1.564 billion in the FCC's H Block auction as the only bidder, and Dish Chairman Charlie Ergen has attempted to purchase LightSquared and its spectrum.

But, according to analysts, Dish may not build out its spectrum and could instead sell its spectrum to AT&T or Verizon. The FCC's recent changes to its so-called spectrum screen--which limits the amount of spectrum any one carrier can own--paves the way for Dish to sell its spectrum holdings to Verizon or AT&T.

"Now that the screen has been set, it appears that both AT&T and VZ have a clear path toward acquiring DISH for spectrum; neither deal would trigger the screen," the analysts at New Street Research wrote today in a note to investors. "While buying DTV would be financially accretive for AT&T, we believe that the company would be making a strategic mistake by not acquiring DISH. DISH's ~45MHz of mid-band downlink spectrum would confer a capacity advantage to AT&T that Verizon could not hope to close."

The New Street analysts noted that the FCC's spectrum screen previously covered a total of roughly 453 MHz of spectrum and would kick in if a carrier acquired more than one-third of that total (150 MHz) in a given market. If a carrier purchases spectrum that pushes it over the screen in a given market, the FCC would review the transaction more carefully and could move to block it. Under the FCC's new changes, the screen now includes a total of 582 MHz of spectrum (due to the addition of the AWS-4, H-Block, and EBS bands) and thus would kick in if a carrier acquired more than 195 MHz (around one-third) of the spectrum in a given market.

The screen is especially concerning for Sprint because, as New Street points out, the carrier owns an average of roughly 201 MHz of spectrum in the nation's top 100 markets, largely due to its vast holdings of 2.5 GHz spectrum (which sits in the EBS band). In comparison, Verizon owns an average of 105 MHz, AT&T owns 129 MHz and T-Mobile owns 78 MHz of spectrum in the nation's top 100 markets.

For more:
- see this Sound Off about the FCC's incentive auction rules

Read more about: DISH Network, T-Mobile US
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This week's sponsor is GSMA.

By Tammy Parker

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3. FCC incentive auction rules likely to benefit Sprint, T-Mobile and smaller carriers

The FCC approved rules for next year's incentive auction of 600 MHz broadcast TV spectrum that will open up bandwidth for unlicensed wireless use. Depending upon the how much spectrum is voluntarily relinquished by broadcasters in a reverse auction and repacked for the forward auction, a total of 14 to 28 MHz of guard band spectrum should be available for unlicensed use in a given area. An FCC official said that, depending on how much spectrum is repurposed in a given market, the agency expects the guard bands to be between 7 MHz and 11 MHz wide.

The forward and reverse auctions will be implemented in a series of stages, with each stage aimed at a specific clearing target. The commission adopted Partial Economic Areas (PEAs) as the service area for the 600 MHz Band.

Advocates of unleashing more unlicensed spectrum welcomed the commission's plan, which passed on a 3-2 vote along party lines, with Democrats in the majority.

Because much of the spectrum that might be opened for unlicensed use would sit in vacant spaces between TV and broadband services, it would have to be managed in the same manner as current TV white space (TVWS) spectrum, whose rules require devices to contact an authorized TVWS database and ensure channel availability and other operating parameters so they will not interfere with TV broadcast operations.

Google (NASDAQ: GOOG), which operates a spectrum database to support the use of TV white space (TVWS) spectrum that was liberated for unlicensed use via the 700 MHz auction, said it will work to ensure its database also enables sharing in the newly allocated spectrum. In March, Google lobbied the commission to open four 6 MHz-wide channels in the 600 MHz band on a nationwide basis, a wish that was not granted. On April 30, a representative for Google, Broadcom and Microsoft (NASDAQ: MSFT) presented a modified plan to the FCC.

Commenting on the FCC's newly passed 600 MHz band plan, Aparna Sridhar, Google policy counsel, wrote in a blog post, "While the plan doesn't provide as much unlicensed spectrum as we recommended, it should provide just enough unlicensed spectrum to attract investments in equipment and operations in the new band."

"We applaud the commissioners for adopting an incentive auction band plan that facilitates both licensed and unlicensed broadband services, including a win-win solution that accommodates both wireless microphones and unlicensed innovation," said Michael Calabrese, director of the Wireless Future Project at the New America Foundation.

The Wireless Innovation Alliance--whose membership includes Google, New America Foundation, Microsoft and others--said the FCC's blueprint "offers the potential for allocating a baseline amount of spectrum necessary to ensure a way forward for TV white spaces, Wi-Fi and the myriad of unlicensed applications that will meet our nation's growing wireless needs."

The commission's Report and Order lays out a 600 MHz band plan consisting of 5 MHz, paired uplink and downlink bands, with the uplink portion starting at channel 51 (698 MHz) and expanding downward. The plan also includes "technically reasonable" guard bands--including a uniform duplex gap of 11 MHz to separate uplink and downlink spectrum--which can be used for unlicensed services nationwide. Wireless microphones used by broadcasters and cable programming entities will be licensed to operate on a portion of the duplex gap. Other wireless mics can operate unlicensed in the guard bands.

In addition, unlicensed devices will be able to use 6 MHz at channel 37 in locations where the channel is not already in use, "subject to the development of technical rules to prevent harmful interference" to the incumbent Wireless Medical Telemetry Service and Radio Astronomy Service, the commission said.

The FCC said it expects there will be at least one channel not assigned to a TV station in all areas at the end of the repacking process, and this "naturally occurring" TV white-space channel will be allocated for shared use by unlicensed devices as well as wireless microphones. Further, any other unused TV channels following the incentive auction will be available for unlicensed devices as well as wireless microphone use.

Advocacy group WiFiForward--whose membership also includes Google as well as Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWC) and others--said that by ensuring unlicensed availability of at least three channels in every community in the nation, "the FCC has laid the foundation for the investment and innovation needed to develop a new class of 600 MHz unlicensed technologies."

FCC Commissioner Jessica Rosenworcel, who has championed unlicensed spectrum, commented that the FCC found "creative ways" to strike a between licensed and unlicensed spectrum. "This creativity started with ditching the tired notion that we face a choice between licensed and unlicensed spectrum. This is a simplistic relic from the past that we should have long since retired--because good spectrum policy requires both," she said.

However, there is still work to be done to open up chunks of the 600 MHz band for unlicensed use. Going forward, the FCC must initiate a rulemaking proceeding to consider changes to its existing Part 15 rules that will facilitate unlicensed use of the television bands, 600 MHz guard bands and channel 37.

The FCC will require repurposed spectrum be cleared no later than 39 months after the repacking process becomes effective. New licensees will be required to build out to 40 percent of the population in their service areas within six years and to 75 percent of the population by the end of their initial license terms of 12 years.

The National Association of Broadcasters was quite unhappy with the auction plan. Among other things, the NAB said the commission's decision to use untested coverage and interference software potentially jeopardizes hundreds of TV stations and millions of over-the-air TV viewers.

For more:
- see this FCC release and R&O summary
- see this Google blog post
- see this WIA statement
- see this WiFiForward statement
- see this NAB statement
- see this Rosenworcel statement

By Phil Goldstein

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4. Analyst: Almost half of Q4 smartphone sales will be financed

WASHINGTON--The FCC adopted rules for next year's incentive auction of 600 MHz broadcast TV spectrum that are more favorable to Verizon Wireless (NYSE: VZ) and AT&T (NYSE: T) than initially contemplated.

However, Sprint (NYSE: S), T-Mobile US (NYSE:TMUS), Dish Network (NASDAQ: DISH) and smaller carriers are likely to claim some measure of victory because the FCC agreed to allow some spectrum to be reserved for carriers that do not control large amounts of low-band spectrum.

The FCC commissioners voted 3-2 along party lines, with Democrats in favor and Republicans opposed, to approve rules for the auction. They also approved changes to the "spectrum screen" the FCC uses to determine whether proposed deals after the auction should be subjected to a more detailed competitive analysis.

In the 600 MHz auction, the FCC approved rules that will withhold, or reserve, up to 30 MHz of spectrum for carriers that currently hold less than one-third of the available spectrum below 1 GHz in a market. Thus, any nationwide carrier with 45 MHz or more of low-band spectrum wouldn't be able to bid on the reserved spectrum. The goal is to ensure that smaller carriers without relatively low amounts of low-band spectrum are able to acquire 600 MHz spectrum in the auction.

According to executives at Mosaik, which tracks the spectrum holdings of the nation's wireless carriers, neither Sprint nor T-Mobile own more than around 20 MHz of low-band spectrum anywhere in the country, and therefore will be able to bid on reserved 600 MHz spectrum. Mosaik executives said that both Verizon and AT&T do own more than 45 MHz of low-band spectrum in locations across the country, but in other locations they don't pass that threshold. The FCC said AT&T and Verizon command around 70 percent of all low-band spectrum licenses and Sprint and T-Mobile hold around 15 percent of all low-band spectrum licenses.

According to the analysts at New Street Research, AT&T owns an average of around 57 MHz of low-band spectrum in the nation's top 100 markets, putting it above the 45 MHz threshold for the FCC's 600 MHz auction. Verizon owns an average of around 47 MHz of low-band spectrum in the nation's top 100 markets.

Under the rules, the FCC will split the spectrum in a market into "reserved" and "unreserved" spectrum only after the auction raises a specific, yet-to-be-determined amount of money. The FCC needs to raise enough revenue from the spectrum auction to pay and clear broadcasters that are giving up their spectrum and to fund the FirstNet public safety broadband network. Importantly, bidding can continue after the spectrum is split into "reserved" and "unreserved" spectrum.

The amount of reserved spectrum in a market will be based on the demand from bidders. If the demand for reserved spectrum is less than what has been set aside, a portion of the reserved spectrum that is not in demand would revert to being unreserved.

The FCC also said that any provider that holds less than one-third of available low-band spectrum in a market would be able to bid on all the spectrum in that market, whether it's reserved or unreserved. Only nationwide carriers will be subject to the rules for reserved vs. unreserved bidding--meaning that regional carriers with more than one-third of a market's low-band spectrum will still be able to bid on reserved spectrum. That's a clear victory for the Competitive Carriers Association, which represents mainly smaller, regional carriers.

The FCC can reserve of up to 30 MHz of spectrum if broadcasters give up at least 70 MHz of spectrum. However, in a compromise that could aid Verizon and AT&T, in situations where broadcasters have given up only 60 MHz of spectrum, only 20 MHz can be reserved, and where broadcasters have given up 50 MHz of spectrum, only 10 MHz can be reserved.

Companies that win 600 MHz spectrum will have restrictions placed on them related to selling the licenses for six years after the auction.

"I am confident that the wireless industry, including providers of all sizes, will rally around the rules," FCC Chairman Tom Wheeler said at a press conference after the vote.

He said the FCC will now work on outreach to broadcasters and "make clear to the broadcast industry that they really have a once-in-a-lifetime opportunity."

The rules ensure that there is a "viable spectrum reserve for competitors in every market nationwide" and "will make sure that consumers are more likely to benefit directly from increased competition in all parts of the country," Wheeler added.

Verizon and AT&T have repeatedly argued against reserving spectrum for smaller carriers. They say such rules improperly favor Sprint, T-Mobile and smaller carriers, and could cause the auction to fail if it doesn't generate enough revenues. They also argue broadcasters will shy away from giving up their spectrum because of the restrictions. For their part, smaller carriers and their advocates argue the FCC has the legal authority to set such rules and that such rules are necessary so that larger carriers don't block smaller carriers from acquiring spectrum. Indeed, the CCA pointed out that Alltel participated in the 700 MHz auction in 2008 but was unable to win any licenses, and was subsequently acquired by Verizon Wireless.

"Creating a spectrum reserve will allow every carrier, large and small, the opportunity to bid in the auction, which is critically important given the superior propagation characteristics of low-band spectrum," CCA President Steve Berry said in a statement.

Republicans, however, sharply criticized the rules. Republican Commissioner Michael O'Rielly said the auction rules essentially create "corporate welfare for certain multinational companies with large market capitalizations and access to global capital markets."

Republican Commissioner Ajit Pai said rules could allow "one of any number of companies to acquire every single 600 MHz license in every market, even though the order claims that the restrictions are needed to prevent any one firm from running the table." He also said the rules ignore the importance of high-band spectrum--perhaps a reference to Sprint, which owns a vast trove of 2.5 GHz spectrum.

"This means that a company that holds 44 MHz of low-band spectrum and large swaths of high-band holdings in the same market can acquire as much additional low-band spectrum as it wants," he said. "But a competitor that has just 45 MHz of low-band spectrum and no high-band holdings in that market would be restricted from bidding for certain blocks of spectrum. Would anyone seriously maintain that the latter company's spectrum position poses a greater competitive threat than the former's?"

As for the FCC's spectrum screen, the agency's new rules represent a defeat for Sprint, since the FCC is going to add the vast majority of Sprint's 2.5 GHz spectrum without weighting high-band spectrum differently from low-band spectrum. That could make it more difficult for Sprint to strike spectrum deals after the auction.

Importantly though, Wheeler said that such rules are "based on the current structure and they could change" if the market changes. That could mean the rules could change if Sprint decides to merge with T-Mobile.

Related Articles:
CCA's Berry expects strong participation from smaller carriers in 600 MHz auction
T-Mobile: FCC auction rules that limit AT&T, Verizon will be a boon for competition
AT&T: There's 'no basis' to give Sprint, T-Mobile a leg up in incentive auction
Verizon takes aim at Sprint, T-Mobile in pushing back on FCC auction restrictions
With 2.5 GHz, Sprint won't have much wiggle room in FCC's new spectrum screen
FCC to add Sprint, Dish spectrum to spectrum screen

Read more about: Michael O'Rielly, Sprint, Ajit Pai
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By Mike Dano

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5. Verizon targets business users with new 100 GB shared data plans

According to new predictions from Ben Schachter at Macquarie Research, around 43 percent of all smartphones sold by the end of this year will be paid for through handset financing plans and not through traditional wireless carrier subsidies.

The prediction from Macquarie Research, highlighted in a new Business Insider article, is underscored with research by Consumer Intelligence Research Partners. CIRP found that fully 25 percent of all smartphones sold in the first quarter are being paid for through handset financing plans, a figure that it up from just over 15 percent in the fourth quarter.

Indeed, the popularity of handset financing plans in the wireless industry is not being lost on the wider business world. For example, Amazon (NASDAQ: AMZN) is now advertising to some of its customers its own interest-free financing plan for its Kindle devices. Under the plans, Amazon customers for example can purchase the Kindle Fire HD in four monthly installments of $27.80. "At checkout, we'll charge 20% of the device price, plus any applicable tax and shipping charges in full. The remaining balance will be automatically billed to your credit card in four equal installments every 30 days," Amazon said.

The drive toward financing plans kicked off last year when T-Mobile US (NYSE:TMUS) overhauled its pricing plans to separate the cost of its service from the cost of its devices. The rest of the nation's top carriers have since followed suit, though they continue to offer subsidized plans as well.

Indeed, in the first quarter Credit Suisse pointed out that roughly 40 percent of AT&T's (NYSE: T) new subscribers opted for the carrier's handset financing option. That figure was closer to 15 percent for Verizon Wireless (NYSE: VZ)--but Verizon said that number could double in the coming months as it expands its handset financing offer to indirect sales channels.

Although handset financing represents a significant change to the way wireless carriers sell smartphones, carrier executives have widely said that the change from subsidies to financing won't dramatically affect their bottom line. Essentially, handset financing programs like AT&T's Next and Verizon's Edge move the cost of the phone from a carrier's service revenues to its equipment revenues--an accounting change but not a material one. Indeed, Verizon CFO Fran Shammo noted during the carrier's first quarter earnings conference call that the carrier's Edge program "had a favorable effect on profitability," according to a Seeking Alpha transcript of the event.

However, some analysts have painted a decidedly cloudy picture on the shift to handset financing. "Our analysis shows that migrating a subscriber from a VZ subsidized plan to an unsubsidized Edge plan destroys about $800 of customer lifetime value (LTV), or about 16% of LTV," wrote New Street Research analysts shortly after the release of Verizon's first quarter earnings results. "However, keeping a sub at a lower value is better than losing a sub altogether. As such, VZ cannot afford to ignore the segment of customer that values early upgrades and no contracts."

And what of the effects of handset financing on users? CIRP noted that an average consumer would pay roughly $1,059 over the course of a year for a subsidized phone with a two-year contract, while that same consumer would pay roughly $1,133 for the same phone and service through a financing program.

Separately, an analysis from Re/code found that AT&T provides the least expensive financing program when full, yearly costs are calculated, while Verizon provides the most expensive plan. However, the publication pointed out that the Tier 1 carriers provide slightly different offerings--for example, Sprint's (NYSE: S) plan includes unlimited data.

For more:
- see this Business Insider article
- see this Re/code article
- see this Amazon page

By Mike Dano

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