Wireless carriers bid fiercely for Los Angeles airspace at the recent Federal Communications Commission spectrum auction and raised $1.5 billion for the U.S. Treasury, but local consumers could be the unwitting losers in the long run.
In total, the FCC raised a record-breaking $16.86 billion for the Treasury in its auction of 422 licenses covering 195 markets across the country.
The most lucrative L.A. license netted the government $514 million, and the city’s total was second only to New York City, where licenses fetched more than $2 billion.
More available airspace in a market like L.A. is supposed to facilitate beefed up wireless networks, fewer busy signals, more roaming space and, possibly, quicker rollout of Web-based wireless services all good news for local wireless users.
Or so it would seem.
The FCC, supposedly to enable smaller companies to compete for the coveted airwaves, set aside 170 of the 422 licenses for startups with gross annual revenues of less than $125 million and assets less than $500 million. Those winners get 25 percent discounts on their bids, so they could bid as much as 25 percent less than one of the industry giants, like Verizon Wireless, and still win.However, the FCC permits big companies to own substantial stakes in small companies, as long as they don’t control the small company.
While the winning bidders for spectrum licenses in L.A. and in other major markets have cute, rustic-sounding names like “Alaska Native” and “Salmon,” most are substantially owned by the dominant industry giants.
“That’s not fair to consumers,” said David Butler, a spokesman for Consumers Union, publisher of Consumer Reports magazine. “The process is unfairly dominated by the major players.”
“The idea that the system would benefit smaller companies has proven to be a fraud,” Butler said.
Cellco Partnership, backed by Verizon Wireless, walked away with the most licenses overall, 113, and generated the most revenue for the federal government, spending more than $8.78 billion for a share of the spectrum in major markets. The company spent $514 million for its L.A. license.
Alaska Native Wireless LLC, in which AT & T; Wireless has a 35 percent interest, spent the second-highest amount, $2.83 billion for 44 licenses. That included $435 million for one in L.A.
Salmon PCS, 85 percent owned by Cingular Wireless, placed winning bids for 79 licenses, spending $2.35 billion. Its most expensive purchase was a license in L.A. for $409 million.
Down payments were due to the government within 10 business days of the public notice of close of the auction on Jan. 26.
Airing complaint
“The biggest players with the biggest purses won the biggest prizes, and that’s not how the system was intended to work,” Butler said. “With fewer players, there is less incentive for them to aggressively compete and to try to out-match one another for quality of service. We think it’s a black eye on the face of the FCC.”
The high-priced bidding squeezed many out of the auction early on, including Nextel Communications Inc. and Sprint Corp., the parent of its wireless division Sprint PCS.
Big companies said they scooped up the licenses because they needed additional space on the airwaves to roll out advanced wireless technologies that gobble up more of the spectrum.
“We’re outgrowing our network in L.A., which is the biggest market for cell phone users in the country,” said Todd Hallenbeck, Verizon’s Southern California manager of technology. “Our goal is to add more spectrum to increase network size in anticipation of new wireless data services.”
Some analysts question if there is even a demand for those expanded wireless services.
“Consumer demand for wireless services in general is very slow right now,” said Rohit Shukla, CEO of the L.A. Regional Technology Alliance. “The major carriers have lost touch with what consumers really want and at what price point. They’ve also saddled themselves with huge debts as a result of the license wars.”
Carriers in the U.S. might do well, Shukla said, to focus more on more basic wireless services, rather than the sexier array of services that are costly to provide and expensive for consumers to obtain.
“It’s a gamble,” Hallenbeck said. “We put $8 billion on the table because we’re assuming that the market will grow. We think the wireless data industry will materialize, but people have been wrong.”
A major problem with consumer demand in the U.S. is a lack of compatibility among the wireless service providers. The different transmission protocol standards, as they are known, prevent phones tuned to Sprint’s network, for example, from working on AT & T;’s.
Incompatible standards
American carriers are split among three broadly defined digital technologies, which differ according to how they allow individual calls to function within their limited transmission capacity. Sprint, for example, uses a technology known as code division multiple access, or CDMA, while AT & T; uses time division multiple access, or TDMA. One smaller company, VoiceStream, uses a technology called global system for mobile communications, or GSM.
The latter standard is used throughout most of Europe, which accounts for the wide compatibility of phones all over that continent.
Another problem with consumer demand here, according to Shukla, is that Americans are used to surfing the Web with PCs connected by phone lines or cables, as opposed to surfing on small wireless devices. Consumers in the U.S., which has the world’s highest household penetration of phone lines, have not embraced the wireless phone in the same way that users in Japan or many other industrial nations have.
The question is: Will a handful deep-pocketed carriers meet consumer demand faster, better and more affordably than a broader array of carriers would? Hallenbeck agreed that the wireless market is “boiling down to about three national carriers that are going to dominate the scene,” but that’s not bad for consumers, he insisted.
“Having a carrier with a large national foot print is a good thing from a user perspective because it allows us to have competitive pricing plans and it gives users the ability to roam easily,” he said.
