FCC Announces Key Dates for Upcoming Auction of PCS Spectrum; Auction 58 Restricts Bidding for Many Licenses to Small Businesses

In January 2005, the FCC plans to conduct one of the largest spectrum auctions since 2001, with approximately 49 percent of the licenses to be auctioned reserved for bidding by “small businesses.” The FCC’s upcoming Auction 58 is an auction of 242 broadband PCS (2 GHz) licenses that were previously auctioned, and then subsequently “reclaimed” by the FCC for a variety of reasons. Although participation in this auction is not limited to entities that meet the FCC’s definition of “small business,” the ability to bid on certain licenses will be limited to small business designated entities (“DEs”). The key aspects of the upcoming auction are summarized below.

If you think you might be interested in participating in Auction 58, please note several important upcoming dates (several of which were revised by the FCC on October 15).

Important dates

Permissible uses of PCS spectrum

Under the FCC’s rules, PCS spectrum may be used to provide mobile voice and/or data services. Since the spectrum was first allocated for PCS in the early 1990s, it primarily has been used to provide traditional wireless mobile (cellular type) voice communications. With the advent of latest-generation digital technologies (“3G”), PCS carriers have added internet access, short messaging service (“SMS”), games and other two-way data capabilities.

Licenses offered and bidding eligibility

Because the licenses offered in Auction 58 were auctioned previously and then reclaimed by the FCC, licenses will only be available in certain markets. However, licenses will be auctioned in a variety of large (e.g., Los Angeles, Houston, Seattle), mid-sized and smaller markets. The FCC has released an inventory of licenses/markets that will be available for bid in Auction 58, which can be found at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-04-3005A2.pdf. This list is broken down by market, and shows the amount of spectrum associated with each license to be auctioned, the specific frequencies, and the market population along with the required upfront payment to participate in the auction and the minimum opening bid for each license.² The vast majority of licenses being auctioned are 10 MHz licenses that are reclaimed 30 MHz C block licenses, which the FCC subsequently subdivided into 10 MHz license blocks. There are two 30 MHz A block licenses available in this auction (the Guam and American Samoa markets). Other than the two A block licenses, the geographic market area of the remaining 240 licenses to be auctioned in Auction 58 are based on Basic Trading Areas (“BTAs”). The United States and its territories are comprised of 493 BTAs.

With Auction 58, the FCC essentially is following the procedures it established for Auction 35, which was a controversial re-auction of PCS licenses previously awarded to NextWave (and a few other businesses). Like Auction 35, Auction 58 is somewhat unusual in that the FCC will utilize an “Open/Closed” bidding system. The FCC’s “Open/Closed” bidding system works as follows: BTAs are divided into two categories—"Tier 1" BTAs (which are all BTA licenses with populations equal to or greater than 2.5 million) and "Tier 2" BTAs (which are the remaining BTAs). All A, D, E, F block licenses and certain C block licenses are available to all bidders in "open" bidding, while the FCC will restrict bidding on certain Auction 58 licenses to DEs that meet the FCC’s definition of “entrepreneur” (defined below). These entrepreneur-only markets are identified on the license inventory as closed markets. The following chart from the FCC helps visualize how the FCC has broken down the markets for Auction 58, and is also helpful in interpreting the license inventory:

Note: In some cases, licenses are available for only part of a market or may not include all of the spectrum associated with a particular frequency block in Auction No. 58. Gray boxes indicate that no license of the particular tier/frequency block combination will be available in Auction No. 58.

A fair number of the licenses to be auctioned are in closed markets.³ As explained above, any entity can bid for an open market license, and several of the nationwide wireless carriers have indicated that they plan to participate in Auction 58. To encourage DEs to bid in open markets, the FCC will offer two different types of bidding credits (15 percent and 25 percent) to entities that meet the FCC’s definition of “small business” (defined below). These bidding credits will only be awarded to DEs bidding in open markets. A bidding credit represents the amount by which a bidder’s winning bids are discounted.

Designated entity definitions and other credits

As mentioned above, the FCC will only allow entities that meet its definition of entrepreneur to bid for licenses in closed markets. In addition, entities that meet the FCC’s test for “small business” or “very small business” can take advantage of bidding credits if they bid on licenses in open markets. These terms are defined below.

Entrepreneur - In order to qualify as an “entrepreneur” and to be allowed to bid on closed markets, an applicant, together with its affiliates and persons or entities that hold interests in the applicant and their affiliates, must have had gross revenues of less than $125 million in each of the last two years and must have less than $500 million in total assets.

Small Business - Qualifying applicants in Auction No. 58 are eligible for a small or very small business bidding credit on C and F block licenses won in “open” bidding. The size of the bidding credit depends on the average annual gross revenues for the preceding three years of the applicant, its affiliates, its controlling interests, and the affiliates of its controlling interest:

• A bidder with attributable average annual gross revenues of not more than $40 million for the preceding three years ("small business") receives a 15 percent discount on its winning bids for C and F block licenses won in open bidding;

• A bidder with attributable average annual gross revenues of not more than $15 million for the preceding three years ("very small business") receives a 25 percent discount on its winning bids for C and F block licenses won in open bidding.

Small-business bidding credits are not cumulative. Qualifying applicants receive either the 15 percent or the 25 percent bidding credit on its winning bid, but only one credit per license.

The FCC also offers Tribal Lands Bidding Credits. These credits are in addition to, and separate from, any other bidding credit for which a winning bidder may qualify. A winning bidder need not qualify for a small-business bidding credit to be eligible for a tribal lands bidding credit. This bidding credit works as follows: a winning bidder that intends to use its license(s) to deploy facilities and provide services to federally recognized tribal lands that are unserved by any telecommunications carrier or that have a telephone service penetration rate equal to or below 70 percent is eligible to receive a tribal land bidding credit. However, unlike other bidding credits that are requested prior to the auction, a winning bidder applies for the tribal land bidding credit after winning the auction when it files its long-form application (FCC Form 601). In order for a winning bidder to be awarded a tribal land bidding credit, it must provide specific certifications regarding the servicing of tribal lands and is subject to specific performance criteria

Please contact us if you have any questions about Auction 58.

Footnotes:

1 Registration is required if you want to attend the pre-auction seminar. The seminar will be held from 9:30 a.m. until 2 p.m. at FCC headquarters in Washington, D.C.

2 The FCC’s auction procedure rules, especially its rules on how to maintain bidding eligibility during an auction, are complicated and not easily summarized here. CRB has significant experience in representing clients in prior FCC auctions, and would be happy to explain the FCC’s auction process, or answer any questions you may have. In addition, the FCC’s auction procedures will be a major topic of discussion during the FCC’s pre-auction seminar.

3 Several of the nationwide wireless carriers attempted to get the FCC to change its rules and allow any entity to bid on any license in Auction 58. Last Friday, the FCC again rejected these efforts, and it seems unlikely that the current open/closed market auction format will be changed.