FCC Auction Opens Door to Open Access

With a burst of bids, the FCC's latest wireless auction will be its most profitable everand a mobile network open to any device or service is a virtual certainty

A sudden spurt of bidding has turned what was shaping up as a bust into the most robust auction of wireless spectrum the federal government has ever conducted, salvaging hopes for a new generation of mobile networks that are open to any device and any service.

The weeklong auction cleared a crucial stage on Jan. 31 as the combined bids for the five swaths of spectrum being sold reached $15.64 billion, which is 14% more than the record $13.7 billion raised in 29 days of bidding during the Federal Communications Commission's last auction a year and a half ago. Most of the blocks, each of them broken into multiple biddable chunks, have now drawn the minimum bids set by the FCC, including one of the two blocks being sold with unprecedented requirements that their eventual owners open their networks to devices and services from other companies.

C Block's High Bidder Unknown

The bigger of the two "open access" swaths, the C block, finally drew a $4.71 billion bid—a 2.3% premium over the FCC's $4.6 billion minimum price—after attracting little interest for a week. Blair Levin, a former FCC official and an industry analyst at Stifel Nicolaus (SF), said his analysis of the bid patterns indicates that "the bidding for the C block is likely over." For now, there appear to be no takers for the D block, the other open-access piece of spectrum that was earmarked to serve public safety agencies. Analysts believe the D block will have to be auctioned again in the next few months with many of these stringent requirements removed.

While the identity of the high bidder for the C block remains a mystery under the FCC's rules, it now appears certain the nation will see its very first open-access wireless network within a few years. Until now, the FCC has always allowed licensees to exercise full control over which phones and applications could be used on their networks. Indeed, three of the five blocks being auctioned this time around will allow the owners traditional discretion over their networks.

Levin says the bidding patterns suggest that the C block's current high bidder is Verizon Wireless, which is owned jointly by Verizon Communications (VZ) and Vodafone Group (VOD). But it's also possible the bid came from Internet search giant Google (GOOG), which pledged to bid at least $4.6 billion for the block after leading the charge that persuaded the FCC to place open-access requirements on the spectrum. The names of the winners will remain under wraps until the auction ends, likely sooner than expected, in a few weeks.

The actual degree of the new network's openness will depend in large part on the identity of the C block winner. "Open access means different things to different people," says Harold Furchtgott-Roth, a former FCC commissioner and founder of consultancy Furchtgott-Roth Economic Enterprises. "I think the more likely scenario here [if Verizon is the winner] is open hardware, not open software." Google, on the other hand, might be inclined to remove restrictions on which applications and services consumers could access on their mobile gadgets. But in either scenario, the winner will be testing an unproven business model on a very expensive investment in wireless spectrum.

A Win-Win for Equipment Makers

Google, a newcomer to the industry, would face an especially costly and complex endeavor with no existing network and wireless operations on which to build. The company would have to spend at least $2 billion just to line up sites for its wireless transmitters, figures Bastian Schoell, director of wireless carrier business development for Nortel Networks (NT) in North America. Then it would need to deploy billing and back-office systems from scratch.

The good news for telecom equipment makers is that even existing wireless carriers typically need to spend as much to expand their network operations as they've spent on new spectrum. With analysts now projecting this auction to raise $18 billion, companies such as Nortel, Alcatel-Lucent (ALU), Nokia Siemens Networks, and Ericsson (ERIC) are expecting a major windfall of orders for equipment, software, and services. And thanks to the FCC's stringent deadlines for launching services on auctioned spectrum, these orders might start trickling in soon. The winner of the C block, for instance, has to build a network covering 40% of the population within four years. "We could see deployments at the beginning to mid-2009," says Schoell.

Some of the current winners may yet withdraw their bids. Still, chances are the next few weeks of the auction will only see bidders driving prices higher. After all, says Schoell, "We see it as prime real estate for deploying innovative technologies."

Before it's here, it's on the Bloomberg Terminal.