This Week in Telecom Innovation: Portals to Innovation? The Broadcast Incentive Auction and the Future of Regulatory Oversight

Author: Steve Augustino & Jameson Dempsey, Kelley Drye & Warren LLP

Kelley Drye & Warren LLP LogoIf one were to make a list of “Most Innovative Organizations in America,” it’s unlikely that the Federal Communications Commission (“FCC”) would spring immediately to mind.

And yet, over the last few years, the FCC – housed in a building known as “The Portals” –  has been adopting innovative programs and policies that would make even a Valley VC proud.

For example, the Commission has launched several experimental pilot programs to rapidly test how it can reorient the four Universal Service Fund programs for the broadband era.  These programs include a Lifeline Broadband Pilot Program to expand broadband access among low income consumers; a Rural Health Care Pilot Program to facilitate the deployment of a national broadband network connecting health care providers; and a series of recently announced Next-Generation Broadband Experiments to deploy ultra-high-speed broadband in rural communities throughout the country.  The pilots have not been without controversy, but they certainly have represented a new way of doing business at the FCC.

140516-Kelley Drye-1(source: Official FCC Blog)

 

Among all of its recent innovations, however, none is as potentially transformative (and risky) as the forthcoming broadcast incentive auction.  The incentive auction is part of a broader effort to reallocate spectrum toward licensed and unlicensed commercial use, and reflects an acute understanding that valuable and scarce low-band spectrum is not being used as efficiently as it could be.  For example, the FCC has noted that that while in the 1960’s nearly all television households received solely over-the-air television broadcasts, today, with the rise of cable, satellite, and online television, that number has dwindled to only 10%.  At the same time, the explosion of licensed and unlicensed wireless broadband services has created an increasing need to free up spectrum to meet commercial demand.

 

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The broadcast incentive auction is designed to address this problem.  Through the auction, the Commission seeks to repurpose “beachfront” low-band spectrum (i.e., below 1 GHz) by encouraging current broadcast television licensees to give up their right to use the spectrum in exchange for money earned from an auction of new licenses for that spectrum.  This low-band spectrum is uniquely valuable based on its range (ideal for rural areas) and ability to penetrate walls (ideal for urban areas).

The incentive auction will take place in three phases.  First, the FCC will conduct a “reverse auction” in which broadcast TV licensees will submit bids to voluntarily relinquish spectrum usage rights in exchange for payments.  Second, the Commission will “repack” the TV bands to free up a portion of the ultra high frequency (“UHF”) band for other uses.  Finally, the FCC will hold a “forward auction” of initial licenses for flexible use of the newly available spectrum.  In conducting this forward auction, the Commission has adopted a spectrum screen, which would block certain large wireless carriers (i.e., AT&T and Verizon Wireless) from participating in the auction once bidding has reached a certain level, giving smaller providers an opportunity to bid for available spectrum.  As required by law, certain proceeds from the auction will be placed in a trust fund that will support, among other things, a national first responder network (FirstNet) and national deficit reduction.

Several of these elements are quite innovative.  For example, broadcast licensees do not “own” the spectrum on which they operate (indeed, no one owns spectrum).  However, the incentive auction will allow broadcasters to share in the proceeds from the auction of their spectrum – in effect, getting paid for an asset they don’t own.  The spectrum screen also is unusual (and controversial).  According to descriptions, the screen will apply only after certain thresholds are met, making it the first time such an approach has been used.  It also represents a “thumb on the scale” to help balance wireless competition.

Like all large-scale innovative endeavors, the FCC’s proposal comes with substantial risks.  The reverse and forward auctions are voluntary and interdependent: the broadcasters must be willing to give up their spectrum in the reverse auction, and the wireless carriers must be willing to participate in the forward auction so that the broadcasters can get paid.  If any of the large carriers chooses not to participate in the forward auction, then broadcasters may conclude that it is not worth giving up their licenses in the first place.  Likewise, if not enough broadcasters participate in the reverse auction, then it could mean less spectrum available for mobile broadband, less money available for deficit reduction, and less money available to support FirstNet.  However, if all goes as planned, the incentive auction will provide the Commission with opportunities to advance some of its core goals, including: (1) increasing wireless competition, (2) creating nationwide spectrum for unlicensed use, (3) promoting spectral efficiency through “spectrum sharing,” and (4) providing greater opportunities to use spectrum for other innovative uses.

The incentive auction is part of a broader effort by the Commission to achieve the “500 MHz Challenge” set forth in the 2010 National Broadband Plan.  In the National Broadband Plan, the FCCidentified a goal of making 500 MHz in additional spectrum available for mobile, fixed and unlicensed broadband use within 10 years.  President Obama has made this a priority, requiring the FCC and its government-spectrum counterpart, the National Telecommunications and Information Administration (“NTIA”) to work together to identify available spectrum and coordinate transition plans.  The broadcast incentive auction is a key component of the Plan, but it alone is not enough.  In addition to the broadcast spectrum, the FCC by law must auction 65 MHz of spectrum by 2015.  Moreover, the FCC has a major proceeding to expand unlicensed broadband in the 5 GHz band, and recently made 100 MHz of this band available for unlicensed Wi-Fi.  This is key to alleviating congestion in the current Wi-Fi bands (esp. 2.4 GHz) and to accommodate the new 802.11ac standard.  Google, Microsoft and others also are pressing for unlicensed secondary use on a block in the 3.5 GHz band, dubbed a “Citizens Broadband Service.”  In short, there is a lot to do to meet the 500 MHz Challenge.

The Commission’s recent efforts – from the broadband pilot programs to the multifaceted spectrum auctions – reflect a startup mentality of experimentation, iteration, and “moonshots.”  Commissioner Rosenworcel has called on the FCC to “build more sandboxes” for experimentation at the FCC through pilot programs and flexible spectrum licensing.  Chairman Wheeler – a former entrepreneur and VC himself – has noted the intrepid and complex nature of the broadcast incentive auction, which he likened to a Rubik’s cube.  Ultimately, however, massive undertakings like the broadcast incentive auction will not be judged on the creativity of the idea, but on the success of its execution.  For this reason, we should hope that in embracing Facebook’s “move fast” motto, it doesn’t “break things” in the process.*

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*Tellingly, even Facebook has modified its mantra.

 

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