294 MHz and 8402 TV Channels May Be Sold, or Just Some Spectrum and a Few Channels. Stay tuned…

Posted by Barlow Keener

TV stations have long been the backbone of the American community.  Marshall McLuhan said in 1964, in Understanding Media: The Extensions of Man : “The medium is the message.”  Marshall_McLuhan_holding_a_mirror © John Reeves / Wikimedia Commons  By 1964, TV had solidly taken over the dominate role of the king of media from radio.  McLuhan was writing about TV. 

Today, 50 years later, the FCC is implementing legislation in a sweeping and dramatic docket that will give mobile broadband carriers up to 294MHz of spectrum occupied by the 8402 U.S. TV stations.  We are seeing mobile and its broadband capability taking over the wheel and securing itself as the dominate new “medium.”  

TV stations have a choice to participate or not in the FCC TV spectrum auction.  Each of the 8402 TV stations occupies only 6MHz of the 294MHz and only a small defined urban geography is occupied by the 6MHz.   The FCC, in the “reverse auction,” must make a determination which stations will be moved – without an opportunity to be purchased – and which stations will be offered if what price to exit, to close down broadcasting.  

TV stations will have to carefully decide what FCC offer price to accept and whether the station wants to stay in business or exit. The future value of any spectrum held will only be going up, appreciating, over the next 20 years so stations that are economically healthy will be be facing a tough decision in turning down an offer that is perhaps worth more than the “non-spectrum” market value of the station if and hoping for future appreciation.

  imageIn In other words, the spectrum occupied by the station may be worth more than the business would be otherwise valued.  TV stations may, going forward, be focused on their 6MHz of property and less on the content delivered over the air.
 

John Hane, Counsel, Pillsbury Winthrop, discussed the broadcasters’ choices and opportunities in the Crossfire – TMCNet Dec. 19, 2012 TV Incentive Auction webinar made the point that the Spectrum Act clearly allowed for the FCC to have more than one auction.   

Crossfire Media–TMCnet TV Incentive Auction 3 hour Dec. 19, 2012 Webinar

John suggested that the FCC take its time.   In comments filed, (click here for the Jan. 25, 2013 FCC Comments) other parties suggested that the FCC move forward slowly.   John, at the webinar, explained that the auction should not be done once but should be an iterative process.   The FCC never really looked at broadcasting and asked, “how do we make broadcasting better?”   For example, John noted, are some of the broadcasting issues part of government regulation? (click here to view the TV Incentive Auction webinar)

The appetite by mobile carriers for spectrum is strong. The demand for revenue by FirstNet and the U.S. Treasury is strong.  But a real question remains as to whether there is enough extra cash held by the mobile carriers to meet the requirements of a) moving TV stations, b) buying TV spectrum, c) funding FirstNet and Public Safety, and d) putting money in the Treasury.   And, all after a complex and risky auction process.  

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294 MHz and 8402 TV Channels May Be Sold, or Just Some Spectrum and a Few Channels. Stay tuned…

Posted by Barlow Keener

TV stations have long been the backbone of the American community.  Marshall McLuhan said in 1964, in Understanding Media: The Extensions of Man : “The medium is the message.”   By 1964, TV had solidly taken over the dominate role of the king of media from radio.  McLuhan was writing about TV. 

If Today, 50 years later, the FCC is implementing legislation in a sweeping and dramatic docket that will give mobile broadband carriers up to 294MHz of spectrum occupied by the 8402 U.S. TV stations.  We are seeing mobile and its broadband capability taking over the wheel and securing itself as the dominate new “medium.”  

TV stations have a choice to participate or not in the FCC TV spectrum auction.  Each of the 8402 TV stations occupies only 6MHz of the 294MHz and only a small defined urban geography is occupied by the 6MHz.   The FCC, in the “reverse auction,” must make a determination which stations will be moved – without an opportunity to be purchased – and which stations will be offered if what price to exit, to close down broadcasting.  

TV stations will have to carefully decide what FCC offer price to accept and whether the station wants to stay in business or exit. The future value of any spectrum held will only be going up, appreciating, over the next 20 years so stations that are economically healthy will be be facing a tough decision in turning down an offer that is perhaps worth more than the “non-spectrum” market value of the station if and hoping for future appreciation.

  imageIn In other words, the spectrum occupied by the station may be worth more than the business would be otherwise valued.  TV stations may, going forward, be focused on their 6MHz of property and less on the content delivered over the air.
 

John Hane, Counsel, Pillsbury Winthrop, discussed the broadcasters’ choices and opportunities in the Crossfire – TMCNet Dec. 19, 2012 TV Incentive Auction webinar made the point that the Spectrum Act clearly allowed for the FCC to have more than one auction.   

Crossfire Media–TMCnet TV Incentive Auction 3 hour Dec. 19, 2012 Webinar

John suggested that the FCC take its time.   In comments filed, (click here for the Jan. 25, 2013 FCC Comments) other parties suggested that the FCC move forward slowly.   John, at the webinar, explained that the auction should not be done once but should be an iterative process.   The FCC never really looked at broadcasting and asked, “how do we make broadcasting better?”   For example, John noted, are some of the broadcasting issues part of government regulation? (click here to view the TV Incentive Auction webinar)

The appetite by mobile carriers for spectrum is strong. The demand for revenue by FirstNet and the U.S. Treasury is strong.  But a real question remains as to whether there is enough extra cash held by the mobile carriers to meet the requirements of a) moving TV stations, b) buying TV spectrum, c) funding FirstNet and Public Safety, and d) putting money in the Treasury.   And, all after a complex and risky auction process.  

image

FCC TV Incentive Auction: How will the spectrum be purchased?

Posted by Barlow Keener

The FCC TV Incentive Auction is looming ahead.  It is the first spectrum auction in more than four years.  The last auction raised $19 billion and sold off the A, B, and C Upper 700MHz blocks.    Today, the C block spectrum is being used for LTE – a success story for the FCC and for spectrum policy.

The 2008 auction did not require that the FCC “buy back” spectrum from exclusive licensees like TV stations.  The upcoming FCC TV Incentive Auction is much more complex.   The FCC outlined the proposed process in the Oct. 2, 2012 Notice of Proposed Rule Making (NPRM) entitled “Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions.”   The FCC will first conduct a “reverse auction” to buy back spectrum from TV stations.  Congress was responsible for the high-level process as set forth in the February 2012 Spectrum Act.  However, the FCC is responsible for making it happen.   The complexity of buying TV spectrum, then selling the same spectrum to mobile carriers, setting a band plan acceptable to all constituents, making a significant profit for public safety’s FirstNet ($15 billion+) and for the U.S. Treasury ($3 billion), and then clearing the purchased spectrum will not be easy.  The complexity has led to the first extension for “Comments” due on January 25, 2013, rather than the original date of December 21, 2012.     Reply Comments are due on Mar. 12, 2013.

The FCC is working to explain the complex, new auction process to the public and to industry .  The FCC conducted an Event Workshop on Oct. 26, 2012, entitled Incentive Auctions LEARN (Learning Everything About Reverse-Auctions Now Program).

On Dec. 19, 2012,  FCC Senior Advisor, Media Bureau, Rebecca Hanson, participated in a three hour video taped industry webinar produced by Crossfire Media,  “Incentive Auctions: What Broadcasters Need to Know,” along with more than a dozen economists and attorneys including former FCC Commissioner Harold Furchtgott-Roth.

It was made clear during the webinar that prior spectrum auctions were relatively simple and used well-tested auction methodologies such as “descending clock” auctions.  This auction will be complex because the FCC will first buy back the TV stations’ spectrum and then turn around and sell the spectrum to mobile carriers.   Buying the spectrum back from TV stations is not simple because there has been no market in the past for TV spectrum.   Stations received their spectrum for no cost (just as the original mobile providers).  After years of building the TV station business, each TV station will have unique valuation characteristics related to TV valuation methodologies and also to mobile spectrum valuation methodologies.

Each TV station serves unique geographies and populations.    TV station valuations, up until the Spectrum Act, have been valued based on typical business valuations for the broadcast industry, and not on mobile spectrum values such as dollars per population per mega-Hertz served (POP/MHz).

When the FCC makes offers for TV station spectrum, using a “reverse auction” process described in the NPRM, many options will be available to the FCC in considering: the amounts to offer each station, determining which stations to offer the bids to, determining which stations can be “repacked” to lower UHF channels without paying the stations for the vacated spectrum, determining which stations can share in what geographies, and anticipating which TV spectrum geographies will be most sought after by the mobile carriers and thus valued higher than other TV spectrum.

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Rebecca Hanson explained some of the issues for broadcasters.  A broadcaster can go off the air and contribute all of its 6 MHz of spectrum.  The FCC does not have a bid contribution mechanism for channel sharing.  Channel sharing is where two or more stations share a single transmitter and antenna using one 6 MHz channel.  If 2 or more TV stations want to “channel share,” the stations themselves can collaborate on the sale of the spectrum by one or more stations and use the single channel of one of the stations for both stations.  Or, all three can move to a new channel and share it.   The FCC believes that stations will save OpEx and CapEx by sharing a single transmitter and antenna.   The stations will also make money by selling off one (or more) of the station’s 6 MHz.  Stations that channel share will also keep their must-carry rights with cable companies.

There are two types of bidding processes the FCC is considering.  Ms. Hanson commented that the FCC is leaning towards using a “Descending Clock,” multiple-round auction method.  Bidders can see prices for each bid option offered by the FCC during the auction, prices will decline round by round (as the FCC lowers the offers), and bidders (the TV stations) can exit the auction (permanently) when the prices are too low.

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While the FCC works through the various options, it is a difficult business because the FCC will want to purchase spectrum in urban areas used by very healthy TV stations. The FCC, it seems, would rather have that healthy station voluntarily sell its spectrum rather than be forced to move to a new channel (repacking).  However, TV stations that are financially healthy may be in a position to ask for more than even a mobile provider will offer.   The FCC’s goal is to raise $15b-$25b for public safety and for the Treasury and not to conduct a mere “swap” of spectrum between TV stations and mobile providers.  Thus, the FCC has to spend much less for the spectrum it buys from TV stations than it will sell the spectrum to mobile carriers.

TV stations are working with economists and auction experts to make well-informed, and valuable decisions about what actions to take.   This auction brings together for TV stations a combination of mobile auction experts and TV station valuation economists and attorneys.  The use of such cross-expertise is also a first for TV stations and can not be undervalued.  Economists and attorneys participating in the Dec. 19, 2012 Crossfire Media webinar included:  John Hane, Pillsbury Law; Brian Madden, Lerman Senter; Marty Stern, Moderator, K&L Gates; Prof. Thomas Hazlett, George Mason Law School; Coleman Bazelon, Brattle Group; Mark Fratrik, BIA / Kelsey; Armand Musey, Summit Ridge Group, LLC Moderator; Dr. Preston Marshall, Information Sciences Institute, USC;  Dan Kirkpatrick, Partner, Fletcher, Heald & Hildreth; Trey Hanbury, Partner, Hogan Lovells; and, Barlow Keener, Principal, Keener Law Group.

Dec 19th TV Incentive Auction Webinar: What Broadcasters Need to Know

Posted by Barlow Keener

FCC TV Incentive Auctions will turn-over broadcast TV to mobile carriers. TV Incentive Auctions are coming. Dec 19th 9am-12pm TMCnet Webinar image

FCC Comments are due in Jan 25 2013. TV stations and investors are scrambling. Congressional hearings are happening.

 TMCnet and Carl Ford’s Crossfire Dec. 19th video webinar covers Part I: The Broadcasters’ Reverse Auction.  The live video streaming will be direct from the Pillsbury Law firm in Washington D.C.  It is addresses the broadcasters’ and investors’ questions. TV stations are selling. Investors are buying spectrum with the goal of selling in the upcoming TV Incentive Auction. I am speaking along with a host of other attorneys, regulators, and TV broadcaster-focused economists.

Is it arbitrage? There are 11 TV stations in NYC – how many will "go off the air." If the stations decide not to sell will the auction fail? No one knows these answers. There are many plates spinning in the air. The panel of  experts will address the issues – in advance of the comments which are due on Jan 25, 2013.

http://www.tmcnet.com/webinar/crossfire/incentive-auctions.htm

The panels and speakers include:

Introduction Former FCC Commissioner Harold Furchtgott-Roth

Legal Perspective: TV Incentive Auction "Reverse Auction" Process for Broadcasters

  • Rebecca Hanson, FCC Senior Advisor
  • John Hane, Pillsbury Law
  • Brian Madden, Lerman Senter
  • Marty Stern, Moderator, K&L Gates Moderator

Valuation: Valuing The Reverse Auction Assets TV Finance Focus Spectrum Valuation

  • Coleman Bazelon, Brattle Group
  • Mark Fratrik, BIA / Kelsey
  • Armand Musey, Summit Ridge Group, LLC Moderator

Policy Perspective:The FCC’s Goals vs. The TV Industry Goals

  • Preston Marshall, George Mason
  • Fred Campbell, CLIP
  • Dan Kirkpatrick Fletcher, Heald & Hildreth
  • Trey Hanbury, Hogan Lovells
  • Barlow Keener, Keener Law Group Moderator

http://www.tmcnet.com/webinar/crossfire/incentive-auctions.htm


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Incentive Auctions:
What Broadcasters Need to Know

Wednesday December 19, 2012
TIME: 8:45 AM ET / until 12:00 PM ET

Leading experts in the legal, financial and policy fields discuss the implications of the FCC’s upcoming television broadcast incentive auction on the television broadcasting industry. The discussion will focus on challenges facing the television broadcasters as they decide whether to participate in the auction and how to calibrate their bids for optimal results. Participants will discuss the requirements in the Spectrum Act, the FCC’s recent Notice of Rulemaking Proposal (NPRM) as well as unresolved legal issues. Other panels will include a discussions of valuation and policy issues facing broadcasters.

What Attendees will learn:

  • An overview of the incentive auction process
  • Implications of key elements
  • Valuations considerations when bid planning
  • Policy implications of the auction process

Who should attend:

  • Television Broadcasting industry executives
  • Investors in television broadcasters
  • Attorney’s, bankers and other advisors to the television broadcast industry
  • Equipment manufacturers and other suppliers to the television broadcasting industry.

Agenda:

8:45 AM – 9:00 AM
Introduction – Open Remarks
Harold Furchtgott-Roth Former FCC Commissioner

9:00 AM – 10:00 AM
Legal Perspective: TV Incentive Auction Reverse Auction Process

  • Comparing the reverse auction to prior auctions
  • Legal appeals issues for the reverse auctions
  • Pitfalls for auction participants
    • Rebecca Hanson, FCC
    • John Hane, Pillsbury Law
    • Brian Madden, Lerman Senter
    • Marty Stern, Moderator, K&L Gates Moderator

10:00 AM -11:00 AM
Valuation: Valuing The Reverse Auction Assets

  • TV Finance Focus
  • Spectrum Valuation
    • Coleman Bazelon, Brattle Group
    • Mark Fratrik, BIA / Kelsey
    • Armand Musey, Summit Ridge Group, LLC Moderator

11:00 AM – 12:00 PM
Policy Perspective:

  • The FCC’s Goals vs. The TV Industry Goals
    • Preston Marshall, George Mason
    • Fred Campbell, CLIP
    • Dan Kirkpatrick Fletcher, Heald & Hildreth
    • Trey Hanbury, Hogan Lovells
    • Barlow Keener, Keener Law Group Moderator

The Cost: $150 (CLE Credit Available)

Presenters:
Coleman Bazelon
Fred Campbell
John Hane
Rebecca Hanson
Barlow Keener
Preston Marshall
J. Armand Musey
Marty Stern
Harold Furchtgott-Roth
Dan Kirkpatrick
Trey Hanbury
Brian M. Madden
Mark Fratrik

Register Today

Sponsors:




 

 
 
Presenters:

Coleman D. Bazelon
Principal, The Brattle Group


Fred Campbell
Director, Communications Liberty and Innovation Project


John Hane
Counsel, Pillsbury Winthrop


Rebecca Hanson
Senior Advisor, Broadcast Spectrum; Federal Communications Commission


Barlow Keener
Principal, Keener Law Group


Preston Marshall
Research Professor, University of Southern California


J. Armand Musey
Founder, Summit Ridge Group, LLC


Marty Stern
Partner, K&L Gates


Harold Furchtgott-Roth
Former FCC Commissioner


Dan Kirkpatrick
Heald & Hildreth


Mark Fratrik
Vice President and Chief Economist, DIA Kelsey


Trey Hanbury
Trey Hanbury, Partner, Hogan Lovells

Brian M. Madden
Member, Lerman Senter

For Complete Bios Click Here!

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Dec 12, 2012: Broadband Spectrum Rules!

Posted by Barlow Keener

Dec. 12, 2012.   Today was a big day for spectrum in Washington DC (where a lot, but not all happens with regard to wireless regulation). 

All the FCC Commissioners testified before the House Subcommittee on Communications and Technology.  The Subcommittee wanted to hear from the Commissioners on the upcoming TV Incentive Auction (FCC TV Auction NPRM).   Congress passed into law last February 2012 the TV Incentive Auction legislation (part of the Middle Class Tax Relief and Job Creation Act of 2012).  The up coming auction of TV stations – meaning the TV stations spectrum – is new and is very complicated.   There are 5 primary goals of the auction: 1) making prime spectrum, the very best 700MHz grade, available for auction to mobile carriers, 2) funding Public Safety’s “FirstNet” “nationwide” and “interoperable” mobile network (making up for the failed “D” block private/public auction that took place 4 years ago), 3) money Public Safety state first responders, 4) money for public safety research, and 5) money for the Treasury.  image

Commissioner Ajit Pai, who has not failed to impress me, explained to the Subcommittee the auction complexity and the risks: “The broadcast incentive auction is inherently complicated; unnecessary complexities are likely to deter participation.”    Commissioner McDowell agreed, calling the auction process: “the most complicated in world history.”  The complexity of the reverse part of the auction, which is applied to TV broadcasters electing to sell and exit, is exemplified by the following statement in the NPRM pointed out by Commissioner Pai who suggests the statement could result in a placing a cap on the sale of the spectrum by paying for TV stations for spectrum and moving TV stations but not raising achieving the 5 goals:

“[W]e also will consider implementing a reserve price, or maximum payment, that would be made to broadcasters relinquishing spectrum usage rights.  This reserve price could take the form of a maximum dollar payment to a broadcaster based on characteristics of the station such as population or viewership.” (NPRM para. 53)

imageThe TV auction will take place in three parts:

1) a “reverse auction” setting minimum floor prices TV stations, wanting to exit the airwaves, would accept from bidders;

2) “re-packing” TV stations that do not wish to sell, meaning “packing” two or more TV stations into once over the air “channel” (like sharing a hotel room – it can work of course); and,

3) a “forward auction” for mobile bidders bidding for the spectrum. 

After 60 years, TV stations will be paid by the government to sign-off “the air” permanently. This is big.

Selling Guard Bands. One controversy is the FCC proposal to not sell the guard bands.  While all the Commissioners supported the goal of raising $7 billion from the auction for Public Safety’s FirstNet nationwide mobile project, not all Commissioners supporting selling the 10MHz of “guard bands” off and giving up on unlicensed White Space spectrum.

White Spaces Supported: In 2010, the FCC authorized the use of unlicensed White Spaces spectrum using the spectrum freed up by the first Digital TV move.   This same spectrum is now under the threat of being sold and licensed.  Congresswoman Eshoo placed into the Congressional record a letter signed by 300 industry leaders supporting the use of unlicensed White Spaces spectrum.  Congressman Waxman explained the use of unlicensed “White Spaces” spectrum.  He supported the FCC auction NPRM to create 10MHz guard bands for White Spaces calling it “smart spectrum policy.”   Chairman Walden supported selling off the guard bands to produce a lot for Washington DC.  Congressman Eshoo pointed out the the Subcommittee was not the budget committee but was tasked with keeping the broadband law “on track” rather than simply raising revenue for the Treasury.

 

Comments on the TV Incentive Auction NPRM are due on January 25, 2013.    image

Chairman Genachowski mentioned during the hearing that the FCC was participating in conferences and webinars to educate broadcasters.

TMCNet, Crossfire Media, and Carl Ford are hosting 3 hour webinar on the TV Incentive Auction next Wednesday, Dec. 19, 2012.   There will be a strong panel of attorneys, economists, current and past regulators. The panels will address the NPRM legal issues, valuation issue, and policy issues. 

Webinar Speakers include former FCC Commissioner Harold Furchtgott-Roth, Senior Fellow, Hudson Institute ; Rebecca Hanson, Special Advisor, FCC; Coleman Bazelon, The Brattle Group; Fred Campbell, Communications Liberty and Innovation Project; Armand Musey, Summit Ridge Group; Marty Stern, K&L Gates; Mark Fratrik, BIA/Kelsey; Trey Hanbury, Hogan Lovells; Daniel Kirkpatrick, Fletcher, Heald & Hildreth; John Hane, Pillsbury Law; Brian Madden, Lerman Senter, Preston Marshall, ISI, and yours truly, Barlow Keener, Keener Law Group.

The End of Broadcast TV: Incentive Auctions

Posted by Barlow Keener

On September 28, 2012, the FCC’s open meeting will address the implementation of the TV inventive auction requirements contained in February 2012 $150 billion "Payroll" bill, or the “Middle Class Tax Relief and Job Creation Act of 2012.” The Payroll legislation was amended at the last minute to require the FCC to design and hold spectrum auctions that will result in the “voluntary” sale of 120MHz of broadcast television channels. It is estimated that the sale will generate $22b in revenue. Mobile carriers were crying “spectrum scarcity” at the time the bill passed and were pleased that more spectrum was being made available to help solve the data demand issue created by smart phones like Android and iPhones.

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The legislation, initially opposed by some TV station owners, may actually turn into the TV station relief act.  TV stations may now see the incentive auction as a potential cash out opportunity, especially in light of projected declining television advertising revenues and dropping viewer numbers. In other words, we are looking at the possible closing down of TV stations across the country. 

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Technology advances are now rapidly driving legislative and regulatory policy towards ending more than 60 years of broadcast TV.  Broadcast TV is being sacrificed to create more mobile spectrum and more broadband spectrum.  The TV sacrifice will generate revenues for the purpose of building a nationwide public safety mobile network.  Over the air TV spectrum will become mobile spectrum. 

As every one with a TV set remembers, in 2009 the FCC juggled around the broadcast TV station channel numbers opening up new spectrum for TV broadband White Spaces.  TV stations changed channels they had used for more than 50 years. The only reason these TV stations could have moved to new channels was because of technology advances in the form of digital signaling – a technology advance over analog signaling.   It is same basic digital signaling technology that has built the runway for mobile networks, for Wi-Fi, and for cable television.  Digital signaling was used to take away the many guard bands from TV stations (the channels of white fuzz between the TV channels).  The TV station occupants were forced by the FCC to move.   Now three years later, the TV stations are being forced to move again and, rather than having their own dedicated 6MHz channel, like channel 30, they are going to be required to “share a room” on the channel with one or more stations or, if they wish to sell out, close down.  

It is expected that 120MHz of spectrum will be available to be auctioned off.  This amount, however, depends on how many stations volunteer to sell off their 6MHz broadcast channels. 120MHz equals 20 6MHz channels in the highly desired 470MHz to 700MHz TV range.

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The auction and technology changes required by TV stations, as outlined in the Payroll bill, will not be simple or easy.  Just imagine TV stations changing from one large TV antenna to another.  The Payroll bill allocated $1.75b for the TV stations’ relocation and re-packing costs. These difficult issues were raised in part by the TV stations at the FCC’s June 25, 2012 workshop. 

FCC TV Broadcaster Relocation Fund Workshop – June 25, 2012 image

 

The FCC will release a NPRM (Notice of Proposed Rule Making) and allow 60 days for comments, 45 days for reply comments putting the final NPRM in 2013 with the auction process to start in 2014. 

The incentive auction proceeding, and NRPM, will raise many, many issues that have never been faced by the FCC, the TV stations, or the TV investors.  Already investors like Michael Dell’s MSD Capital LP are reported to be eying the possibility of buying stations in order to sell the licenses in the incentive auction. The Deal reported:

Private equity firms have been studying the possibility of buying stations and selling their licenses in the auctions, sources said. In some cases the spectrum auctions may be a Plan B … Michael Dell’s MSD Capital LP and Fortress Investment Group LLC have provided funds to station groups that could be prime candidates for participation in the broadcast incentive auctions, according to regulatory filings and court pleadings. MSD backs OTA Broadcasting LLC, while Fortress has provided loans to NRJ TV LLC.

Another key issue involves White Spaces.  The legislation will require the FCC to sell off spectrum in rural areas that may be currently used for the innovative and newly ordered unlicensed White Spaces.  White Spaces is the result of years of work by the FCC and industry and should be able to solve many of the radio propagation difficulties caused by trees and mountains found in rural areas.  White Spaces can deliver broadband to rural homes and businesses in areas where there is none now.  Selling the TV spectrum on an exclusive licensed basis may result in the possible loss of broadband connections to these customers.   On the other hand, it is highly unlikely that there will be bidders for this White Spaces rural spectrum.  In addition, it is likely that new White Spaces spectrum in urban areas may open up giving White Spaces the same dedicated spectrum nationwide.

Another major issue will be if the FCC, in a separate proceeding that will be started on September 28th, proposes to limit the amount of spectrum a single mobile carrier company may purchase.  Such a decision may be in the public interest to increase the number of competitors, but also may result in the failure to meet the bill’s revenue targets because only the top four mobile carriers may have the capital to deliver the expected auction dollar results.

The incentive auction is also unique as an auction. It will be the first "incentive" auction held by the FCC. The auction process will allow TV stations to bid to be low bidders to supply spectrum (the “reverse auction”) and buyers would compete to be high bidders to license the spectrum for mobile broadband use (the “forward auction”).     Stacey Higginbotham, at GigaOm, gave an excellent description of some of the issues related to the Incentive Auction:

[T]there were no guarantees that urban [TV] broadcasters who had the most valuable spectrum would want to vacate their bands. That meant that the FCC’s plans might free up a lot of spectrum in rural areas where no one particularly needed it. … There were also gripes about paying broadcasters for airwaves that were technically a public good given over to them, and debates on whether there was even a spectrum shortage to begin with.

The funds generated from the auction will also be used for a unique purpose, rather than going back into the -$16 trillion General Fund as funds from other auction have.   A portion of the auction proceeds will be paid to the TV stations that re-pack and sell ($1.75b), a portion will placed in the General Fund (~$13.2b), and another portion will given to a public safety wireless company created in prior legislation for building out a national public safety network, around the ($7b).

  Spectrum Management: Prioritization & Sharing, A New Wireless Ecosystemimage

The other real possibility that may come out of the auction is the creation of a new wireless ecosystem that is neither exclusively licensed or exclusively unlicensed.   The FCC is likely to allocate a mix of licensed and unlicensed for the freed up TV spectrum but could also initiate the start of a future vision of a new wireless ecosystem.  These concepts where outlined in the recently released PCAST report.  New FCC spectrum regulatory policy could require the use White Spaces database technology, registration of devices in the database, carrier priority sold in on an auction basis, and – in the same spectrum – shared, lower-priority, “unlicensed” use.  

FCC Chairman Julius Genachowski recently summed up the significance of the incentive auction:

"In freeing up spectrum for wireless broadband, incentive auctions will drive faster speeds, greater capacity, and ubiquitous mobile coverage. These are essential ingredients for innovation and leadership in the 21st century economy where smartphones and tablets powered by 4G LTE [long term evolution] and Wi-Fi networks are proliferating, and the mobile Internet becomes more important every day. Over the last few years, the U.S. has regained global leadership in mobile innovation —and we must not let up now." (here)

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Aside from the reported moves by TV investors, it just makes common sense that TV stations faced with advertising dollar declines and lower numbers of viewers, might jump at the opportunity to sell out to an investor willing to take a risk with the FCC’s innovative auction process.  What station owner, with the shareholder in mind, would not seriously consider taking this early "safe" opportunity to sell out now with the incentive auction, rather than face the real risk of selling out in a less opportune moment.  With the FCC holding the auctioneer’s gavel, we will witness over the next two years the end of 60 years of dominance by over the air television.

The White Spaces industry and PCAST spectrum report participants will be gathered for 3 days (Oct 3-5) in Austin at the Super Wi-Fi Summit. Speakers include among others: Blair Levin (GiG.U.), Mark Gorenberg, Rick Whitt (Motorola), Aparna Sridhar (Google), Vanu Bose (VANU), Preston Marshall, John Malyar (Telcordia), Bob Nichols (Air.U.), Jim Carlson (Carlson Wireless), Mark Lowenstein (Mobile Ecosystem), and Paul Garnett (Microsoft).  Attorneys include Marty Stern (K&L Gates), Steve Coran (Rini Coran), and me.  Carl Ford, the conference organizer, has given us a discount code for attendees (KLG2012).  #PCAST #WhiteSpaces #SuperWiFi

PCAST Spectrum Sharing: A Mobile Game Changer?

Posted by Barlow Keener

We are about to have a Presidential Executive Order that will change our world — at least our wireless, spectrum world. Ten years ago most of us would have said that mobile can not “change the world.”  Today we know mobile is changing the world and that a major future change to the mobile ecosystem will change our world again. Spectrum sharing has the potential to be that major change.

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The spectrum sharing proposal, issued by the President’s Council of Advisors on Science and Technology (PCAST), is not without controversy and criticism. The report was prepared by private citizens with input from federal agencies. PCAST has been around since 1933 (another economic crisis moment) when President Roosevelt established an advisory committee of scientists, engineers, and health professionals.

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The PCAST spectrum sharing report has the strong backing from the two primary corporate drivers of our world for the last two decades both of which had the highest level executives on the PCAST committee:  Google and Microsoft. Google’s Chairman Eric Schmidt and Microsoft’s Chief Research and Strategy Officer, Craig Mundie, served on the PCAST report committee. Both Eric and Craig were active members of the committee, participating in writing the report and in presenting the report at a White House ceremony to the President himself. In addition, Mark Gorenberg, Managing Director, Hummer Winbald Venture Partners, chaired the PCAST Spectrum Sharing Report (here) committee .

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Mark Gorenberg and the PCAST team personally presented the report to the President at a July 20, 2012 White House event.

In addition, the report was summarized by Mark Gorenberg and the team and presented on May 25, 2012. A webcast of the excellent presentation can be found on TV Worldwide.com’s government video site (here)

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The PCAST Spectrum Sharing Report, was titled “Realizing the Full Potential of Government-Held Spectrum to Spur Economic Growth,” suggesting that government assets could be used for private uses to boost the U.S. economy. Using publicly controlled spectrum for private use is not new. Both TV broadcast spectrum and the initial mobile phone spectrum licenses were provided by the government to private companies at no cost to the recipients. It may have looked like social welfare but at the time providing the spectrum licenses for free were done for the purpose of providing a new technology to serve the public good.

At the highest level summary, the PCAST Report urged the President to implement a policy of spectrum sharing for 1000MHz of government allocated spectrum. The spectrum sharing method for initially piloting the use of the new available spectrum would be the White Spaces database system. Unlike the FCC’s White Spaces requirements, the PCAST recommendation requires registration of all mobile devices using the spectrum to register in the database.

The report estimates that the economic value of opening up the rarely used spectrum to licensed and unlicensed use would be to generate $1 trillion and to create jobs:

The economy created by making spectrum abundant has the opportunity to provide societal value of over $1 trillion and millions of jobs for Americans in the coming decade.

The PCAST committee put together a great power point found on the PCAST site (here).

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Richard Bennett, Senior Research Fellow at the Information Technology and Innovation Foundation (ITIF), criticized the report’s proposal that the spectrum auction process is unsustainable and called the concept “a thought experiment” not backed on empirical data. (here) (Richard will be speaking on PCAST in Austin at the Super WiFi Summit on Oct 3-5)

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Richard’s argument is that the auctions of licensed spectrum have proven to be more effective than the unproven proposal to open 1000MHz of fallow spectrum to unlicensed use:

On the basis of this assertion, the PCAST report embarks on a thought experiment toward a new method of allocating spectrum which it terms “a new spectrum architecture and a corresponding shift in the architecture of future radio systems that use it [that] can multiply the effective capacity of spectrum by a factor of 1,000.” Claims of this magnitude should be supported by reams of empirical and analytical data, but the 162 page report offers no data at all to support its presumption that the auction system (which has been employed by the FCC only since 1994) is not “sustainable” or even to define the parameters of “sustainability.

While the point is made that opening up 1000MHz for unlicensed use is not yet proven to be effective, the counter point made by Mark Cooper in a thoroughly researched 58 page academic paper and footnoted in the PCAST report is that unlicensed spectrum could be worth currently $50 billion per year compared to the total cellular revenue of $141 in 2008.  The PCAST Report explained the estimated economic benefits of unlicensed spectrum:

One recent report estimated the value produced by unlicensed spectrum at $50 billion a year;another estimated the value of Wi­Fi alone at $52-99 billion a year.

One argument in favor of ceasing the auction process (which is the primary difference between Richard’s assertion that auctions are good for society and the PCAST report) is that the delivery of the A block and B block licenses spectrum, 25MHz per license (a TV Channel is only 6MHz by comparison) were given free of charge, without an auction, to wireline carriers (the RBOCs) and to non-wireline carrier (various paging companies).

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The FCC’s decision not to auction or sell the initial cellular spectrum resulted in our current mobile network. While these free cellular licenses were granted on an exclusivity basis, the idea for giving the licenses without cost was also based on a thought experiment because giving away such large blocks of spectrum to private companies had not been done in the past. 

WiFi and other unlicensed bands like 900MHz were also thought experiments predicted to have little use by the public.  But as we all know, these unlicensed bands have skyrocketed in use by consumers. Unlicensed bands are occupied by multiple types of devices for many, many creative services.  These services are for the most part the result of entrepreneurial efforts by small companies, and not by large, well capitalized mobile carriers.  As every one who owns an iPhone or Android device knows, WiFi, and not the mobile carrier, is the principal method of accessing data on the phones. 

This unlicensed spectrum has allowed mobile companies to significantly off-load data usage from the cellular network and onto the unlicensed WiFi network.  Thus, the PCAST report’s recommendation just makes good sense that we move beyond the auction method – a method which has been heavily debated as effective or not.   The PCAST recommendation to use the White Spaces database registration technology to accelerate the U.S. into the next phase of mobile service seems a logical, simple step for spectrum sharing.

AT&T also criticized the PCAST report on its AT&T Public Policy Blog (here). It should be noted that there were no representatives from the major carriers like AT&T on the PCAST committee.

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AT&T’s Joan Marsh, VP Federal Regulatory stated that she is concerned about the company’s financial stability being effected by opening up spectrum for unlicensed use as recommended by PCAST:

Licensed spectrum offers a critical cornerstone of certainty on which billions of dollars of capex have been and will continue to be committed.

The concerns raised by Richard and by AT&T that the PCAST recommendations could be disruptive to the current mobile phone economic structure underscores the potential upside of the proposal.  Currently, there are only 4 (maybe 5) major nationwide mobile carriers. There is a crisis in data use by the consumers on all these carriers.  Most, not all, of the carriers have imposed data caps on users that would make your home broadband use seem tiny.   While LTE allows for much faster speeds of 5-12 Mbps, the carriers have implemented data caps at 2-5Gb. So what good is a phone if there is a data cap.  T-Mobile has a cap that if data is downloaded on unlicensed WiFi it does not count towards the cap.  Unlicensed WiFi spectrum, and not licensed exclusive spectrum, seems to be the primary method of using the mobile data in the U.S.  

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Municipal Wi-Fi at Work in Brookline, Massachusetts

The major mobile companies have more than enough available licensed spectrum purchased through multiple auctions but the spectrum has not been utilized and much of it lays fallow. The 4G LTE caps alone are good proof that the problem is not just “spectrum scarcity” because with LTE the issue is not just a lack of spectrum.  The LTE data caps also underscore that the number of mobile competitors are much more limited than necessary. 

The PCAST recommendation could remove the competitive hurdle of spectrum rights, opening up the mobile world to true competition with multiple carriers providing service on “free” new unlicensed spectrum.  Wireline competition – with a duopoly owning the wires on the poles – has been a failure. However, with the PCAST report, the administration opens the doors for real wireless competition.  Opening the doors by using public spectrum will give the public lower mobile prices, higher bandwidth speeds, and may result in the end of  mobile phone data caps. Delivering such competition, granted, will take years but implementing the PCAST report is the first step in a long march.

On another note, almost all of the White Spaces industry players and experts and many PCAST experts will be gathered for 3 days (Oct 3-5) in Austin at the Super Wi-Fi Summit. Speakers include among others: Blair Levin (GiG.U.), Mark Gorenberg, Rick Whitt (Motorola), Aparna Sridhar (Google), Vanu Bose (VANU), Preston Marshall, John Malyar (Telcordia), Bob Nichols (Air.U.), Jim Carlson (Carlson Wireless), Mark Lowenstein (Mobile Ecosystem), and Paul Garnett (Microsoft). Attorneys include Marty Stern (K&L Gates), Steve Coran (Rini Coran), and me. Carl Ford, the conference organizer, has given us a discount code for attendees (KLG2012).  #PCAST #WhiteSpaces #SuperWiFi

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FCC TV Spectrum Reallocation: Win-Win Plan?

Posted by Barlow Keener

Starting in 1996, the FCC began the work of moving TV broadcasters from analog to digital TV.   At the time it was anticipated that TV stations would use their spectrum to deliver additional, unspecified non-broadcast- type services.  In 1998, the FCC prescribed a rule (47 CFR 73.624(g )), following the 1996 Telecom Act, allowing TV stations to offer such supplementary and ancillary services, and requiring broadcasters to pay 5% of the revenues from these services to the Treasury, as compensation to the public for these additional uses.   Now, 15 years later, the FCC and Congress are proposing to re-locate the TV stations “repacking” them together on different channels preventing them from taking advantage of this flexible use specifically authorized by the 1996 Act, including using broadcast spectrum to provide broadband services. 

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Last year, on November 30, 2010, the Commission issued a notice of proposed rulemaking to allow TV stations to voluntarily “repackage” to new channels, combining 2 TV stations onto a single channel. The order did not propose selling off White Spaces spectrum. But the order proposed selling the vacated TV spectrum using an incentive auction and delivering an unspecified amount from the auction proceeds to the TV stations that voluntarily move, with the balance to the Treasury. Marty Stern from K&L Gates discussed the order and the rights of TV broadcasters and White Space providers in detail at the 4GWE White Spaces session in Miami in February 2011.

FCC Chairman Genachowski described the value of the TV station spectrum that could be voluntarily returned by broadcasters and then resold to a cell phone provider:

The roughly 300 MHz of spectrum in the TV bands is among the most robust available.  Beachfront property.

The incentive auction, proposed by the FCC, is said to potentially make 84-120 MHz available for new broadband uses.  TV broadcasters worry that “voluntary” repacking will not be voluntary once it starts as Robert Good of WGAL-TV testified on April 12, 2011 at the House Energy and Commerce Committee.  See Broadcasting & Cable.   TV broadcasters that are repacked (2 stations into 1 6MHz channel) will lose their ability to sell or use their full 6MHz of beachfront spectrum for broadband services, a right they have now. 

In the last several weeks, multiple bills, substitutions, and amendments have been proposed both in the House and Senate regarding repacking:  Senators Lieberman-McCain, Senators Rockefeller-Hutchison (S.911), Sen. DeMint (R., S.C.),  Sen. Toomey (R., Pa.)  Sen.  Rubio (R., Fla.), Sen.  Blunt (R., Mo.) , Sen. Warner (D., Va.), Sen. Wicker (R., Miss.), and Sen. Klobuchar (D., Minn.).   And the House has jumped on this as well.  So there is lots of action happening in our nation’s capital with regard to moving TV stations again and selling off publically owned beach front property to the highest bidder.  

There have also been recent suggestions that giving the FCC incentive auction authority may be addressed in legislation to raise the debt ceiling.

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Basically the Rockefeller-Hutchinson bill suggest that by selling off 84MHz to 120MHz of TV spectrum, $12 billion will be raised to give public safety funds for a public safety organization made up of leaders from cities, states, and federal agencies to build a nationwide public safety exclusive network.  The D Block network would use two 10MHz of nationwide spectrum (758MHz-763MHz, 788MHz-793MHz), one dedicated to public safety and one for commercial use (the D-Block was one of many blocks of spectrum set forth in the Telecom Act to be auctioned off in 2008 but failed for several reasons: a $1.3 billion minimum bid, the requirement that the winner pay an additional $500m over 10 years to the FCC, and onerous build out terms.  See posts by Susan Crawford and Harold Feld.  The cost to build a 1.2 Mbps nationwide broadband network is estimated by the FCC staff to cost $40 billion, not $14 billion originally envisioned.   Selling 120 MHz of TV and White Spaces spectrum will only generate $28 billion. (FCC June 2010 Public Safety Report, p. 14)

On June 8, 2011, the Rockefeller-Hutchison bill (S. 911) was approved  by the Senate Commerce Committee and is awaiting action by the full Senate. (Washington Post)

Risks of going forward with a TV repack and selling off beach front spectrum in an incentive auction are huge:

1) TV broadcasters will lose spectrum, never able to use their full 6 MHz again. Right now, TV stations are entitled under FCC rules and under the 1996 Telecom Act to use a portion of their full 6MHz channel for delivering broadband to consumers, and with minor tweaks to the FCC rules consistent with existing authority under the broadcast flexibility provision of the 1996 Act, broadcasters could also have the ability to sell rights to their spectrum to broadband providers.  TV stations will once again move from their designated channels.  Disruption with viewers will result as old viewers will have to hunt again for the station’s newest channel.  TV broadcasters will be giving up very valuable beach front property in the form of spectrum without any commitment on what they would receive in return.

2) Public safety will not receive from an incentive auction the estimated $40 billion required to build a 1.2Mbps+ broadband network.  See Public Safety Report p. 14 on the estimated $40 billion cost.   Public safety will not have an experienced wireless communications provider building, managing, running, and evolving a D-Block network.  Devices made for the D-Block network will not be numerous and will therefore be costly – these devices are smartphones the public has been using for years.  Rather than having a commercial provider running the network and paying for management, tower leases, back haul, and power, public safety, the tax payers will pay many, many millions of future operating expense dollars for the public network.  Where will this necessary future operating expense come from as it is not in the budgets of public safety today? What is the likelihood that a group of law enforcement leaders representing different political view points and from numerous geographies, governmental organizations (town, county, state and federal) be able to build such a network on time? 

3) Consumers will not be able to make use of the new “unlicensed” Super WiFI innovations or TV stations’ broadband services.   Chairman Genachowski projected that the new White Spaces would deliver “$7 billion in new economic value annually.”  This additional economic value will not be realized if a TV repack bill is passed.  The FCC’s White Spaces effort over the last 10 years and White Spaces innovations by U.S. businesses large and small would be also wasted.  And the U.S. would take a back seat to other countries now launching White Spaces trials.

4) U.S.A and the American public will give up the future rights to use public “beach front” spectrum in exchange for a few billion dollars.  To put the “billions” in perspective, the total U.S. government annual budget is $3,456 billion.   Spectrum, not roads and highways, will lead our economic and innovative growth in the future.  It should not be sold off without seriously considering the negative future ramifications.

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**White Spaces Trial on the Yurok Indian Reservation in Northern California Carlson Wireless Technologies equipment tested.

5. White Space Super WiFi Innovators. What was implemented last year by the FCC in the September 23, 2010 White Spaces order, will be taken away or significantly reduced.  White Space innovator companies, like Google, Microsoft, Carlson, Spectrum Bridge, and others, have been spending investor dollars to develop radio and database technologies for the new unlicensed spectrum based on the FCC’s orders.  Chairman Genachowski strongly supported White Spaces when it passed last September:

"Today’s focus is on unlicensed spectrum, which offers unique opportunities to innovators and entrepreneurs. … This new unlicensed spectrum will be a powerful platform for innovation. And as we’ve seen time and again, when we unleash American ingenuity, great things happen. … Today, Wi-Fi is a multi-billion industry and an essential part of the mobile ecosystem. As compared to the airwaves we released for unlicensed use in 1985, this “white spaces” spectrum is far more robust – traveling longer distances and through walls, making the potential for this unlicensed spectrum much greater. One analyst estimates white spaces applications could generate more than $7 billion in economic value annually.

What is the answer for meeting public safety’s need for a nationwide broadband network?   Re-auction the D-Block. The FCC already has the rules and process in place for immediately re-auctioning the D-Block to a private-public safety provider.

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**D-Block Coverage for a public-private partnership covering 93% of the population

By lowering the minimum bid and removing the $50m annual fee and other onerous provisions, bidders should flock to gaining a nationwide spectrum.   The benefits are enormous: 

  1. Public safety gets a a broadband, state-of-the-art, nationwide network at no cost; 
  2. Treasury gets the money it lost when the D-Block failed;
  3. Consumers get a new competitive, nation wide cellular provider;
  4. TV stations can stay in place and start delivering broadband services under the FCC rules;
  5. White Spaces is allowed to continue to innovate and deliver advanced wireless services over the unlicensed White Spaces spectrum; and,
  6. The U.S. does not sell “invaluable” public beach front spectrum

Thoughtfulness is needed before selling off our public beach front spectrum. The simple, reasonable solution for public safety, for the future millions in operating expenses that will be required to be funded by Congress, for TV broadcasters losing their full assigned spectrum, for White Spaces innovators, for consumers, and for the future of U.S. spectrum, is to re-auction the D-Block.

The re-auction of the D Block will create the revenues needed by Treasury to make up for the failed 2008 auction. And the commercial-public requirements for the D Block will deliver a state of the art network, built on time, and build with private investment.

USF Reform– Untangling the Line: Part II

Posted by Barlow Keener

On April 18, 2011, comments were due for the USF Reform Notice of Proposed Rule Making and Further Notice of Proposed Rule Making.   Various parties filed 130+ comments.  Reply comments are due on May 23, 2011.    USF reform comments were filed by ILECs, RLECs, CLECs, state commissions, fiber providers, cable companies, mobile providers, associations, and VoIP providers.   The Rural Broadband Alliance, for example, recommended in comments basically leaving the USF subsidy as it is in place and providing a “glide path” to reform.   Rural LECs are completely dependent on the USF subsidy, paid for by every telecommunications customer, for their financial survival.  RBA suggested creating “Transitional Stability Plan” to insure that the rural LECs dependent on the USF subsidy recover increased operational costs and capital investments for delivering broadband service.  RBA is against reducing carrier access charged by LECs to IXCs and proposed a freeze on existing USF subsidies, unless a LEC shows that it expanded service or spent extra on maintenance.   

Tom Evslin wrote a good post about the rural USF subsidy issues not as an advocate of a carrier but as citizen and a leader in the rural state of Vermont (pop. 621,000):

It’s easy to envision a future — it’s almost here — when nobody is using copper landlines for plain old voice services except those rural pockets where both the erecting of poles and the original provision of telephone service was subsidized and where telephone service is still being subsidized today. … it isn’t economical to provide cable or cellular or broadband services where the population is thin.  …  there is also a huge threat to the existing subsidies for rural POTs. These subsidies are collected from other users of POTS; if we country people are the only remaining users of POTS, where’s the subsidy going to come from? 

Tom is correct that rural America has the most to risk from the loss of USF subsidies.  Rural America relies on subsidies for almost all of the rural infrastructure: electric, highways, agricultural, and telephone.

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However, the subsidy payments for telecommunications made to rural America though are anything but simple and transparent.   The RBA comment for example refers to NECA “pooling” for the carrier access subsidy  – but the pooling methodology is not made public so access fee payers (the interexchange companies and ultimately every end-user customer) do not know which company and their customers receive how much or why. 

The other issue is that the “High Cost Fund” (HCF) portion of UFS (about 50% of the total 15.5% USF fee on interstate revenues) paid by consumers to rural America has almost tripled in 10 years from $1.7b to $4.3b.  The High Cost Fund is used to pay for the costs of reaching homes in very low density areas to provide telecommunications and information services.

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However, over the same 10 year period, the number of traditional access lines (sometimes called POTS)  and interconnected VoIP access lines, now renamed by the FCC as “Service Connections,” have remained nearly stable at around 160 million.

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This means that on average $9 per connection was paid to the High Cost Fund in 1999 but that this amount increased to $27 per connection by 2010.    One other take away, that could be assumed from these numbers, is the cost of providing service to rural consumers appears to have increased by 300% from 1999 to 2010.   More than likely, such a large cost increase did not occur but the large increase in the HCF fee collected from U.S. consumers to support rural American consumers should be questioned.   

The new FCC USF Reform goal is to provide broadband service to all American homes and businesses.  To achieve this goal, USF will need to be used for capital expenses such as fiber construction which costs between $30k to $65k per mile on poles.  One would think that HCF funds have been primarily used for such capital expenditures rather than for operational expenditures.  This is not the case and it should be changed by the Commission.  Even a recent court decision made the point that USF HCF goes to operational expenses, not capital expenses.  In a recent, January 2010 Fifth Circuit Court of Appeals decision determining the taxability of USF payments to recipients as income or capital contributions, AT&T argued that USF was a capital contribution for capital expenses but the court disagreed.  The court explained:

AT&T argues that the legislative and regulatory background for the payments indicates that they were intended to increase AT&T’s investment in capital assets.  However, universal service support did not provide money exclusively for the specific purpose of making capital improvements, such as building an airport or locating and constructing a plant.  Instead of providing the money only for that type of investment, the governments provided supplemental income so as to provide the telephone companies an enhanced return on their investment.   

To ensure that USF HCF funds are properly used for extending fiber broadband connections to end-users and also are  taxed as capital contributions rather than income, the FCC could require that HCF USF funds be used for capital expenses only.  The FCC could even specify the types of capital the HCF funds should be used for such as outside plant and network equipment, just as the NTIA required with the Recovery Act grants.  This capEx only requirement would ensure that the funds are spent building fiber highways rather than merely subsidizing operating expenses of existing telephone networks. 

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One other suggestion for USF reform is that the largest ILECs collect, pay to the USAC, and then receive back from USAC hundreds of millions of dollars of USF Funds.  The FCC could enable “bill and keep” for such companies paying and then receiving funds.  Using bill and keep would allow the LECs receiving the funds to use the cash immediately rather than having the cash move through the government (USAC) and then return months later.  In other words, put the money to work immediately to build broadband to rural America.

Jonathan Adelstein, RUS

Jonathan Adelstein, USDA RUS

Finally, the smartest decision the FCC could make would be to recommend to Congress that legislation be enacted to transfer the $4.2 billion in USF HCF funds collected annually to the USDA’s RUS for distribution to rural providers.  RUS is now led by one of the most experienced former FCC Commissioners, Jonathan Adelstein.  Former Commission Adelstein’s RUS has the staff resources and years of experience in working with rural American to properly allocate the billions of dollars USF collections for the capital needed to build broadband in rural America.

 

USF: Subsidizing Rural America, Untangling the Line

Posted by Barlow Keener

On February 9, 2011, the FCC released a Notice of Proposed Rulemaking (“NPRM”) and Further Notice of Proposed Rulemaking seeking comment on numerous proposed changes to “fundamentally modernize” the USF (Universal Service Fund) and another subsidy program called the “intercarrier compensation system.” 

The USF “High Cost Fund” is a multibillion dollar annual subsidy created in 1996.  The High Cost Fund is a tangled web of caps, cost studies, and complex rules.  The USF High Cost Fund quietly transfers a significant amount of money – $4.8 billion every year – from urban telephone customers to rural telephone customers.  There is a “quiet transfer” because the typical customer paying the USF fee and the typical customer receiving the fee have no clue that the USF fee is supporting the telephone service for rural customers.  Other USF fees fund geo-neutral services: the  $1.2 billion Low Income fund and $2.7 billion Schools & Libraries E-rate fund.  A grand total of $8.7 billion per year is collected and distributed under the plan. To put this amount in perspective, two years of USF collections equals 12.5% of the total amount of $134 billion Recovery Act stimulus funds received during 2009 and 2010. 

imageThe primary purpose for the federal government’s creating USF in 1996 was to ensure that rural America received the same telephone service “and information services” as urban America.   Rural customers, no matter how far “off the grid,” are entitled (one of our “entitlements”) to a) telephone service – known as “universal service” and b) prices for the telephone service in the ball park (“reasonably comparable”) to what customers in urban areas pay.   

The USF mechanisms for determining which company receives how much of this subsidy is exceedingly complex.  For those of you who wonder about the complexity, take a quick read of the 289 page FCC USF NPRM.  After reading the NPRM, try to explain the USF payment and contribution concepts current or proposed to an intelligent friend.  It is difficult for the average college educated person to understand how USF is charged and who receives the payments.

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This complex USF fee/tax is costly to users.  The fee is now 15.5% of the interstate revenue. The FCC has been under pressure for years to reform USF to remove the complexity and perceived “unfairness.”  The FCC pointed out subsidy payment unfairness by illustrating it on a per line basis and suggested a cap on a “per line” basis:

“But some companies with fewer than 500 lines have received USF support … ranging between $8,000 to over $23,000 per year per line, which translates into subsidies for local phone service ranging from roughly $700 to nearly $2,000 per line per month.”

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The FCC is also concerned that carriers are taking unfair advantage of USF and have no incentive to run an efficient operation:

“We are concerned that, absent some limit in federal support, carriers lack adequate incentives to curb costs.”

One of the primary proposals is to remove the complexity from the USF rules to make the subsidy payments more transparent which will assure that companies needing USF subsidies receive the payments and those companies taking unfair advantage of the USF program stop receiving the subsidies.  The other reason for reforming USF is to combine funds into a new Connect America Fund which will subsidize capital expenses and operating expenses to deploy broadband for rural America.   

There are three problems with USF: 1) calculating USF is complex, 2) determining who receives what is complex, and 3) it is not always achieving its purpose of being used for new capital expenditures (like fiber or wireless construction in rural areas).   One concept to solve problem #1 on the payment and collection side could help eliminate the complexity for the paying customers and companies:

Charge Customers A Simple Flat Rate USF Fee Similar to the 911 Fee.  Currently the USF “fee” – really a tax – is 15.5%.   It is on interstate revenues only.  For flat rate service where all calls in the US are included, as is often offered with VoIP service for example, a default rate of 64.9% of VoIP revenue is used to allocate the  interstate portion of the flat rate service.  It is difficult for customers – the ones paying the $8.7 billion fee – to calculate how the 15.5% is charged.   It would be much simpler to charge a flat fee per access line, Interconnected VoIP service, and mobile phone.   As of 2010, there were 151,171,000 wireline “service connections” consisting of 122,275,000 “access lines” and 28,895,000 “Interconnected VoIP.”  Also, cellular CMRS companies, which often benefit from the USF fees, could collect the fee from their 293 million customers. 

Fundamentally, USF is a tax that is used to support certain portions of the population for telephone and now broadband service.  There is no reason that the tax needs to be so complicated to calculate and so hidden from the American consumer.  The consumer’s bill should just show a flat rate USF fee.  A modest fee of $2.00 per month for wired “service connections” and a cell phone fee of $1.40 per month could generate $8.55 billion annually replacing the USF collections of $8.7 billion.

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There may be some gamesmanship here as an “access line” is not easy to define these days – for example how many access lines are delivered with DS1 or DS3?  But 911 fees have been charged on a per line basis for many years and the 911 model could be used.    

Comments on Section XV of the USF NPRM were filed on April 1, 2011 with reply comments due on April 18, 2011.   The FCC is holding a day long USF workshop on April 6th.  Comments on the other sections are due on April 18, 2011, and reply comments on May 23, 2011. 

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      *The telephone above was used for the railroad in the Mojave Desert in Kelso, California.