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Wavelengths
D Block allegations don’t add
up
By Donny Jackson
April 4, 2008
For the past few months, one of the big debates in the wireless
community concerns the failure of the 700 MHz D Block spectrum to
attract a legitimate bid that would allow the partnership between the
commercial operator and the Public Safety Spectrum Trust (PSST) to
become reality.
It’s also been a topic of interest in our nation’s capital, where
officials want answers—House Oversight and Government Reform Committee
Chairman Henry Waxman (D-Calif.) posed a number of pointed question
before the auction began, and FCC Chairman Kevin Martin has asked his
agency’s inspector general to look into the matter. Of course, because
of the FCC’s anti-collusion rules, no one involved in the auction have
been able to talk about it until those rules were lifted last night.
As a result, the debate largely has been limited to Internet blogs. And
the hot topic in those blogs has been a discussion between officials of
Cyren Call—the Morgan O’Brien-led advisor to the PSST—and
Frontline Wireless—a startup company headed by former FCC Chairman
Reed Hundt and other high-profile leaders—that supposedly undermined
Frontline’s plans to bid on the D Block.
Frontline’s interest in the D Block was no secret, as it had driven
many of the rules included in the FCC’s plans for a public-private
partnership that would develop a nationwide broadband network for public
safety, including the commission’s decision to allow Frontline to
participate in the D Block as a designated entity. Despite receiving
this status—one that allowed it to bid 25% less than the high bids of
existing operators and still win the rights to the spectrum—Frontline
surprisingly did not make the necessary downpayment to enter the auction
and announced that it was closed for business.
Frontline didn’t say why it made these decisions, but multiple reports
indicated the company was unable to secure the financing necessary to
make the downpayment for an auction bid, which had to be at least $1.3
billion to meet the FCC’s reserve price for the D Block. Of course,
with its 25% discount as a designated entity, Frontline would have been
looking at a minimum of $1 billion out of pocket to win the D Block.
While $1 billion is a lot of money, the real financial risk is the
nationwide network that would need to be built on the 10 MHz of D Block
spectrum and the adjacent 10 MHz of public-safety spectrum licensed to
the PSST. While the cost to deploy a normal commercial nationwide
wireless network probably would be $13-15 billion, most estimates for
this network—given FCC and public-safety buildout requirements—were
said to be about $20 billion.
In other words, Frontline needed at least $21 billion just to get its
business off the ground, and that’s before figuring in money for
employees and other operating costs. Given the ever-tightening capital
markets at the time and speculation that an inflationary period is just
around the corner, it’s understandable that investors might be
hesitant to support such an endeavor—especially committing so much
money to a startup that wants to compete in a cutthroat industry against
deep-pocketed giants like AT&T Mobility and Verizon Wireless.
However, several bloggers have indicated the big problem was that Cyren
Call told Frontline it would have to pay the PSST $500 million over 10
years as a spectrum lease ($50 million per year) for the right to use
public safety’s airwaves. To read these blogs, this spectrum-lease
cost was much higher than Frontline officials anticipated and undermined
the company’s financing efforts.
Today, the PSST and Cyren Call confirmed that a $50 million-per-year
figure was discussed with Frontline, although the other terms cited in
the blogs were not. Certainly the need for the PSST to seek a
spectrum-lease payment is understandable.
After all, the PSST has expenses—not the least of which includes
paying Cyren Call as its advisor—and no way to generate revenue until
customers start subscribing to the network, an event that is several
years away. Moreover, the FCC’s order contemplates a spectrum lease
and the PSST’s bidder information document informed potential bidders
that such a lease would be part of the package.
In other words, the idea of a spectrum lease should not have been a
surprise to Frontline, although maybe the amount was. However, even if
the spectrum-lease cost was more than anticipated, I’m having a
difficult time understanding the notion that it was a deal breaker in
this instance, contrary to what the blogs are stating.
When you’re facing a $21 billion investment over 10 years (again, not
including Frontline’s operating costs), would a $500 million spectrum
lease obligation to the PSST—which represents just 2.38% of $21
billion—be a big concern for your investors, especially after the
FCC’s designated-entity ruling effectively handed you at least a $350
million break? It’s difficult for me to believe that this was the
proverbial “straw that broke the camel’s back” for Frontline’s
potential investors.
In fact, on Dec. 4—after short forms were filed and Cyren Call stopped
talking to anyone about any subject related to the auction—Frontline
told the FCC to disregard its petition to lower the reserve price on the
D Block, stating that the commission’s decision to allow a designated
entity credit removed the need to lower the reserve price. That’s not
the kind of stance a company that is having trouble securing financing
typically would make on the eve of an auction—and Frontline presumably
already had the alleged spectrum-lease discussion with Cyren Call by
that point.
Meanwhile, the fact that the PSST needs a spectrum lease to generate
revenue in the early stages of this partnership is an issue that needs
to be addressed. As we’ve stated in this space before, an underfunded
PSST may not be in a position to adequately represent public safety’s
needs in negotiations with a D Block winner.
This issue cannot be addressed by the FCC, which has no funding power.
However, Congress has funding authority and, more importantly, $7
billion more in its coffers from the 700 MHz auction than it expected.
With a little help from Capitol Hill, the entire spectrum-lease issue
could be taken off the table.
In addition, removing the substantial financial penalty (10% of the
winning bid price, according to the FCC order) that the D Block winner
would have to pay had it failed to reach an agreement with the PSST
needs to happen. In fact, Cyren Call advocated removal of this
stipulation more than six months ago, noting that the complexity
inherent in a unprecedented network-sharing arrangement could prevent a
deal being made, even if both sides are negotiating in good faith.
Meanwhile, with the U.S. Treasury already meeting its 700 MHz budgetary
goals, there is no need to have a reserve price on D Block spectrum when
it is reauctioned.
Many in public safety believe these changes will be enough to attract
bidders. I’m not sure. The big problem for anyone considering a D
Block bid is the network cost, and even the PSST’s bidder information
document carried the caveat that most items were “subject to
negotiation.” It may be that the network-buildout expectations need to
be crystallized more—for instance, a timeline for hardening tower
sites, both critical and non-critical—so that bidders can more
precisely value this important swath of spectrum.
By all accounts, officials in Washington, D.C., will be re-evaluating
and investigating what happened in the D Block auction. Hopefully, the
bulk of these efforts will be focused on helping address the significant
network-cost issues and not on fingerpointing regarding a spectrum-lease
arrangement, which seems to be a red herring by comparison.
E-mail me at djackson@mrtmag.com.
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In the News
PSST,
Cyren Call refute allegations
By Donny Jackson
April 4, 2008
Officials for the Public Safety Spectrum Trust (PSST)
and PSST advisor Cyren Call acknowledged that representatives of
potential D Block bidders were told that a spectrum-lease arrangement
would be part of the deal but refuted reports regarding the terms cited
in various Internet blogs.
Firetide
introduces tri-band mesh infrastructure
By Mary Rose Roberts
April 3, 2008
Los Gatos, Calif.-based Firetide this week unveiled the
tri-band capability of its HotPoint access points and HotClient client
premises equipment to expand the functionality of its mesh nodes.
M/A-COM
says New York state system ready for testing
By Donny Jackson
April 1, 2008
Public-safety communications vendor Tyco Electronics
M/A-COM has certified that the New York Statewide Wireless Network (SWN)
is ready for operational testing in the initial project area, meaning
testing that will decide the fate of the $2 billion contract will be
conducted this month, according to the state.
More News
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integrated into Cisco platform
April 3, 2008
AT&T
announced S.C. vehicle tracking deployment
Apr 2, 2008
In
Motion technology now Bluetooth compatible
April 2, 2008
April
designated as 911 education month
April 2, 2008
Boeing
loses to Lockheed for $766-million radio contract
April 2, 2008
The Associated Press
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