Subject: [NEXTEL-1] Decision Time

From: [email-masked]
Date: Wed, 16 Jun 2004 20:24:34 -0400

Decision Time
June 14, 2004 4:36pm
Mobile Radio Technology

A Federal Communications Commission order to reband 800 MHz users to
resolve interference with public-safety communications is expected soon,
so soon, in fact, that it may occur before this edition of MRT is in
subscribers' hands. According to conventional wisdom, the FCC's will
weigh the risk of litigation that would jeopardize spectrum realignment
against the potential of alienating Nextel Communications, which is
expected to pay for rebanding.

At least the federal regulators now have choices, something the FCC
lacked for the first two years of this proceeding, when the Consensus
Plan backed by Nextel and most public-safety organizations was the only
rebanding proposal to consider. That changed on April 29, when the
Cellular Telecommunications & Internet Association — the trade
association for commercial wireless carriers — submitted an alternate
rebanding proposal to the FCC.

The proposal marked a big shift for CTIA, which had joined Nextel's
competitors in advocating technical solutions to mitigate the
interference problems and staunchly opposing any spectrum award without
an auction. But CTIA President and CEO Steve Largent said his
organization made the proposal when it became evident the FCC would opt
for rebanding. “We know for a fact that there are suppliers developing a
solution that would take care of the interference problem at 800 MHz,
but we also recognized that the FCC was way past that,” Largent said.
“We read the cards on the table and tried to propose to the FCC a
solution that would work for all parties involved.”

CTIA's proposal is structured much like the Consensus Plan, calling for
Nextel to pay for rebanding in return for 10 MHz in a band suited to
host the advanced wireless services the carrier wants to offer. Even the
$3 billion payout in the CTIA plan is in line with what most analysts
projected Nextel would have to pay to get new spectrum, instead of the
$850 million called for in the Consensus Plan.

There is one significant change: CTIA's plan calls for Nextel to receive
spectrum at 2.1 GHz instead of the 1.9 GHz frequencies it desires to
replace the 2.5 MHz of spectrum at 800 MHz it will cede to public safety
under the Consensus Plan.
Technically, the differences between spectrum at 1.9 GHz and 2.1 GHz are
not great. Both sets of airwaves have propagation characteristics suited
to host advanced wireless services. In fact, Nextel's original rebanding
white paper released in November 2001 targeted 2.1 GHz frequencies as
the replacement spectrum.

In practice, however, the difference is significant. For U.S. commercial
wireless carriers, 1.9 GHz spectrum is “prime real estate,” according to
Verizon Wireless spokesman Jeffrey Nelson. There are plenty of vendors
with commercial-ready equipment to operate in the band, meaning Nextel
could begin deploying a new network quickly at a reasonable cost. In the
future, multiple vendors would compete for Nextel's upgrades, making the
latest innovations accessible at a competitive price.
None of those efficiencies exist for Nextel at 2.1 GHz, unless it opts
for UMTS, the 3G standard for GSM-based carriers in Europe. To date,
Nextel has shown no interest in UMTS, opting instead to make overtures
about CDMA and to conduct trials of Flarion Technologies' orthogonal
frequency division multiplexing high-speed wireless solution using
leased 1.9 GHz spectrum.

At 2.1 GHz, Nextel would need vendors to develop and test new equipment,
which likely would delay the carrier's entry into the advanced-services
market while increasing the company's cost to build and maintain its
network.
With this in mind, Nextel President and CEO Tim Donahue entered the 800
MHz debate for the first time by declaring in a May 12 letter to FCC
Chairman Michael Powell that an order containing replacement spectrum at
2.1 GHz would be “untenable” to the carrier's stockholders.

“My responsibility to Nextel's shareholders requires that Nextel obtain
comparable value in any retuning transaction — 2.1 GHz does not meet
that test,” Donahue said in the letter. “Nextel cannot and will not
accept that result and will avail itself of every possible legal
challenge to the outcome.”

Indeed, Guzman & Co. telecom analyst Patrick Comack said he would advise
Nextel to walk away from an offer of 2.1 GHz at the $3 billion price
included in CTIA's plan.

“To think [Nextel] would pay the same for 2.1 GHz [as 1.9 GHz], you'd
have to be on acid,” Comack said. “You have to smoking something really
funny to say that. They should pay Nextel to take that spectrum.”

Though disagreeing with Comack's valuation of the 2.1 GHz spectrum,
Largent said he agrees that 1.9 GHz airwaves are significantly more
valuable than those at 2.1 GHz. While CTIA believes Nextel should pay $3
billion as part of a rebanding deal for 2.1 GHz spectrum, Largent said
Nextel would have to pay $5 billion or more for 1.9 GHz spectrum.
With this in mind, Largent said Nextel would benefit more from paying $3
billion for 2.1 GHz, even if network deployment costs increased to $1
billion.

“Will it work for what Nextel wants to use it for? Yes,” Largent said.
“And I believe the total out-of-pocket expenses to build out a network
would be less at 2.1 [GHz] than it would at 1.9 [GHz].”

Keep in mind that those expenses do not include the additional costs
Nextel would incur as a result of a 1.9 GHz plan being litigated —
something Largent said he believes would happen if the FCC chose that
course.

Indeed, Verizon Wireless has said it would not challenge an FCC award of
2.1 GHz spectrum in court, even though the carrier steadfastly believes
the commission does not have the legal right to sell spectrum without
conducting an auction. Verizon would ask the FCC to acknowledge that
this is a special circumstance, not a precedent-setting action, Nelson
said.

“We would support this,” Nelson said. “This is too important for public
safety to hide behind anything — that goes for us, and it goes for
Nextel. Everyone has to eat their vegetables on this one.”

But Verizon Wireless would not take the same hands-off legal position if
the FCC decides to award Nextel spectrum at 1.9 GHz, Nelson said.

And that's a major concern for the FCC, public safety and Nextel. If the
FCC passes a rebanding order that is taken to court on the
spectrum-auction issue, it's possible rebanding would not begin until
after the legal process determined that the deal is legal. At best, that
would delay an interference solution for public safety for at least a
year. At worst, a court could rule against the order, leaving the FCC
and public safety without a solution to the interference problem.

With this in mind, a court could rule that rebanding proceed while it
considers the merits of the spectrum award, said Precursor wireless
strategist Rudy Baca. This would put Nextel in the awkward position of
paying for rebanding at 800 MHz without any assurance it would receive
compensatory replacement spectrum.

Given all of the potential legal problems associated with a 1.9 GHz
spectrum award, Largent believes CTIA's proposal is the best option.
“This plan eliminates interference, does it expeditiously, and does it
on sound legal footing — much more so than [the Consensus Plan],”
Largent said.

But Largent acknowledged that even CTIA's proposal does not remove all
of the legal risks for the FCC, because there are some 800 MHz licensees
that may challenge any rebanding order.

Count on it, said Robert Schwaninger, attorney and principal of
Washington, D.C.-based Schwaninger & Associates, who represents several
small operators at 800 MHz that would be significantly damaged by
unwanted rebanding. And judges are much more likely to side with parties
that are directly damaged by an order than to side with a
multibillion-dollar wireless carrier concerned its competitive position
might be compromised.

“Legally, the FCC has a lot more to fear from ‘Chuck's Towing Service’
than it does from Verizon,” Schwaninger said.
Several analysts disagree, saying that the spectrum-award issue is the
greatest legal concern if the FCC opts for 1.9 GHz spectrum. However,
should the commission choose to issue an order that awards 2.1 GHz
spectrum, the question then becomes: Can Nextel decline to participate
in the deal?

Legally, the FCC has no grounds to force Nextel to pay for rebanding
because the agency has yet to find that the wireless carrier has
violated any rules, Schwaninger said.

Comack echoed this sentiment.

“Listen, Nextel can walk,” Comack said. “They can't be forced to pay one
penny to do anything to solve interference.”
Nextel may be able to walk from a legal perspective, but doing so likely
would not play well in the political arena or the court of public
opinion, according to Baca.

“They've done such a good job of raising public awareness about this
problem, I'm not sure they can just walk away from it now,” Baca said.

In addition, if a rebanding order does not include replacement spectrum,
Nextel does not have a clear path to obtain the airwaves necessary to
enter the high-speed wireless data market at a time when Verizon
Wireless and Sprint are introducing push-to-talk capabilities in an
effort to dent Nextel's domination of that market. Nextel could wait for
NextWave Telecom's former spectrum to reach the market, but the FCC has
no spectrum auctions scheduled for the near future.

So does Donahue's letter mean Nextel would walk away from an FCC order
that includes 2.1 GHz spectrum? One Nextel source said it doesn't,
noting that the goal of the letter was to “get the FCC's focus back on
1.9 [GHz].”

In fact, the FCC has not conducted an auction since its ill-fated
reauction of NextWave spectrum in 2001, when Verizon Wireless led almost
$16 billion in bids that never were distributed — a relief to the
carriers, according to many analysts who claimed they overbid for the
airwaves.

But this absence of recent auctions makes it difficult to determine the
value of spectrum. Verizon Wireless has sponsored a study that claims
the 1.9 GHz spectrum Nextel wants is worth $5.4 billion and has stated
it would open bidding at $5 billion if the spectrum were auctioned
immediately. Nextel countered by sponsoring a study that indicates the
Verizon-sponsored analysis used an unrealistic discount rate to
overvalue the airwaves by $2 billion to $3 billion, while also noting
that no carrier has paid more than $1 billion at auction for 10 MHz of
spectrum it received.

There also is a large discrepancy in the perceived value of the 800 MHz
airwaves Nextel would contribute to public safety and the contiguous
spectrum Nextel would receive in the rebanding process.

For the FCC and public safety, the big question is whether any spectrum
award would be worth enough to warrant Nextel paying at least $2.5
billion to cover the projected costs of rebanding — a necessity because
neither Congress nor the public-safety entities have money in their
budgets for the projects. Everyone agrees that 1.9 GHz airwaves are
significantly more valuable than those at the 2.1 GHz frequency, but
CTIA believes the 2.1 GHz airwaves are worth a $3 billion payout. Nextel
sources indicate the carrier might be willing to pay that much for 1.9
GHz, but 2.1 GHz would not fetch nearly that much money — if Nextel
agreed to accept that spectrum at all.

As Nextel continued to plead its case for 1.9 GHz replacement spectrum,
it made an intriguing offer to the FCC: if the rebanding order included
1.9 GHz spectrum, Nextel would pay at least $512 million to fund the
relocation of broadcasters from 35 MHz of airwaves at 1.9 GHz. Of that,
5 MHz would be part of Nextel's replacement spectrum, but the rest would
be used at the FCC's discretion, including 10 MHz earmarked for auction
to commercial wireless carriers.

 CONSENSUS PLAN CTIA COMPROMISE PLAN
What Does Public Safety Get? • $700 million (maximum)
• Nextel controls selection of fund administrator
• Public safety is only paid/reimbursed for “direct reasonable” expenses

• 2.5 MHz of additional 800 MHz spectrum and 800 MHz rebanding • $3.0
billion (minimum) for incumbent relocation
• Independent Trustee controls public safety fund
• Independent trustee decides when Nextel pays and disbursements are
made to public safety
• 2.5 MHz of additional 800 MHz spectrum and 800 MHz rebanding
What Does U.S. Treasury Get? • Nothing • $5 billion or more from auction
of 1.9 GHz band after Nextel fixes public safety interference

What Does Nextel Get? • 10 MHz of spectrum in 2.1 GHz band after it
fixes public safety interference
• 16 MHz of contiguous 800 MHz spectrum • 10 MHz of spectrum in 1.9 GHz
band before it fixes public safety interference
• 16 MHz of contiguous 800 MHz spectrum
Source: CTIA filing with FCC

Clearing broadcasters off spectrum is no small matter, as the FCC has
proved in several unsuccessful attempts over the years to clear the 700
MHz band for auction. In addition, the offer could remove the sting from
Verizon Wireless' offer to bid at least $5 billion for the 1.9 GHz
spectrum Nextel wants. By Nextel clearing broadcasters from the
frequencies, the FCC would be free to auction almost identical spectrum
— and, presumably, fill the U.S. Treasury coffers with the auction
revenue promised by Verizon.

Nextel's offer received a ringing endorsement from the powerful National
Association of Broadcasters, one of the strongest lobbies on Capitol
Hill — particularly in a general-election year. But the savvy political
move likely still opens the FCC to legal challenges for not auctioning
1.9 GHz spectrum.

“Once again, Nextel is attempting to solve problems for the FCC, but it
still doesn't address the litigation risk,” Baca said.
And that might be the biggest stumbling block for the FCC, which is
under pressure from public safety and the security-conscious Bush
administration to resolve the 800 MHz interference problem as quickly as
possible, not after an extended court battle.

By including 2.1 GHz airwaves as Nextel's replacement spectrum in the
deal, the litigation risk would be reduced significantly, but it may be
tough for the FCC to get Nextel to pay enough money for rebanding. In
addition, there is the sticky situation of Donahue's letter, claiming
that Nextel would not accept 2.1 GHz.

“[Donahue's letter] could be viewed as drawing a line in the sand, or it
could be viewed as more posturing,” said one analyst who requested
anonymity.

The same doubts could be raised about the resolve of Verizon Wireless to
challenge any 1.9 GHz reward in court. Most analysts believe the carrier
is not bluffing, but a few industry observers wonder whether Verizon
would risk some of the political goodwill it earned in the aftermath of
the Sept. 11 tragedies by litigating against a government action
designed to enhance public safety.

Meanwhile, the FCC must sort through the public posturing to determine
various thresholds, including Verizon's legal resolve and the depth of
Nextel's pockets.

One thing most insiders agree upon is that the interested parties have
played all their significant cards in this high-stakes poker game. And
while most recent media reports indicate the FCC is focused on CTIA's
proposal, it's likely that the FCC's order will contain components of
both the Consensus Plan and CTIA's solution. Particularly attractive may
be CTIA's idea of not awarding Nextel replacement spectrum until the
wireless carrier finishes rebanding, which likely would ensure spectrum
realignment would be completed as quickly as possible.

“The idea was to build a carrot into the plan, so we can get to an
expedited solution,” Largent said.
After more than two years of watching the 800 MHz interference battle
rage, a final resolution free of litigation would be welcome news to
public-safety officials.

“I hope [Powell's] going to get something done this month, but he's been
telling us that for the past year,” said Harlin McEwen, retired chief of
the Ithaca (N.Y.) police department and chair of the International
Association of Chiefs of Police Communications and Technology Committee.

“The point is they have got to make a decision, and the facts are
essentially the same as they were two years ago,” he said.Copyright 2004
by Primedia Incorporated
http://www.hoovers.com/free/news/detail.xhtml?ArticleID=NR200406142500.2.3_0e3801910c1b7c32

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