LightSquared, Spectrum, and the Dilemma of Competition

LightSquared, the company that wanted to turn satellite communications spectrum into a wholesale land-based wireless broadband network has hit the end of the regulatory road. The National Telecommunications & Information Agency is convinced that Lightsquared’s technology cannot avoid interfering with an adjacent band used for GPS signals. And the Federal Communications Commission is about to withdraw LightSquared’s provisional permission to operate the network.

Sascha Segan at PCMag.com has an excellent take on how muddled federal spectrum policy contributed mightily to the LightSquared fiasco. But the article also runs into a contradiction between two goals of sensible spectrum policy: fostering competition and insuring that the winning bidders in spectrum auctions have the wherewithal to build out their networks:

“That’s going to require facing up to a lot of entrenched interests. It’s going to require making hard decisions about which existing technologies are more and less important than wireless broadband, and it’s going to require hiving off a lot of new spectrum for new entrants. It may also require putting stricter buildout rules on spectrum auctions, so we don’t get situations like we’re seeing with Clearwire, where companies sit on massive banks of unused spectrum because they can’t afford to build networks.”

The problem is that building out a wireless network requires a ton of capital investment. Strict buildout requirements would seem to mean that bidders must in some way certify that they have the financial means to build out the spectrum  they want to buy. But those requirements might just work to the benefit of well capitalized incumbents.

History is not encouraging on this point. In the late 90s and early 00s, Congress required the FCC to set a side a share of spectrum auctions for small and minority-owned businesses. As the Congressional Budget Office found in a study of these auctions:

“This analysis shows that the preferences adopted by the  FCC in the PCS auctions, particularly those used in the  auction for the first large block of spectrum set aside for small businesses, the C block, did not ultimately result in widespread or long-term participation by small businesses in the PCS market. As of 2005, it was a common occurrence that control of a large portion of the PCS spectrum authorized by licenses set aside for small businesses had been sold to large providers; thus, many of the expected benefits of small-business participation were not realized.”

In other words, the auction winners never built networks and instead sold their spectrum to incumbent carriers. Some undoubtedly planned to “flip” their winnings from the beginning (and some of these were undoubtedly little more than fronts for the incumbents from the get-go.) Others actually tried to build networks, but failed to raise the necessary capital.

Then there was the sorry case of NextWave, another would-be competitive entrant. In 1996, with won a spectrum auctions for $4.7 billion, but filed for bankruptcy after making the initial, minimum 10% payment. The government tried to get the spectrum back. Ten years of litigation ensued and the bandwidth ended up being sold to, you guessed it, Verizon Wireless, Cingular (now AT&T), and MetroPCS.

And if more examples are needed, there’s the long, sad ClearWire story. ClearWire had a stellar group of investors, including Intel, Motorola, Sprint, Comcast, and Time Warner Cable. It also had 100 MHz of nationwide 2.5 gigahertz spectrum. But it made a bad technology bet–WiMAX rather than LTE 4G–and foundered before it could build very much of the planned national network. That huge block of spectrum is now sitting mostly unused while Sprint, which ended up the majority owner, tries to figure out how to salvage the wreckage.

There is, alas, no easy solution to the tension between increasing competition and assuring buildout. For a brief time, it looked like Google could become a rich new entrant when I said it planned to bid in a 2008 auction of 700 MHz repurposed television spectrum. Google succeeded in getting the FCC to adopt network neutrality ruled for a big block of the spectrum, but it apparently was never a serious bidder. It bowed out of the auction as soon as the bidding hit the reserve price and the bandwidth was eventually bought by Verizon, which is using it to deploy LTE service. With the withdrawal of cable companies from the wireless game (they too are selling their spectrum to Verizon), we are running out of well-heeled new entrants to the business. And history has shown that it is a game that only the well-heeled can  play.