Auction of key airwaves begins Thursday

WASHINGTON Tue Jan 22, 2008 3:20pm EST

The Nokia N810 Internet Tablet sits on display at the Web. 2.0 Summit in San Francisco, California October 18, 2007. REUTERS/Kimberly White

The Nokia N810 Internet Tablet sits on display at the Web. 2.0 Summit in San Francisco, California October 18, 2007.

Credit: Reuters/Kimberly White

WASHINGTON (Reuters) - Bidding begins on Thursday in a crucial auction of government-owned airwaves that is expected to help set the future course of the U.S. telecommunications business.

Companies ranging from AT&T Inc and Verizon Wireless, to possible new competitors like Internet company Google Inc, EchoStar Communications Corp and Cablevision Systems Corp will be able to snap up some of the last remaining wireless spectrum and perhaps use it for a new generation of wireless broadband and other advanced services.

"This spectrum is probably the last spectrum (to be offered) for the foreseeable future," said Tole Hart, an analyst with Gartner Group. "So it's kind of the last crack at the apple."

Verizon Wireless is a joint venture of Verizon Communications Inc and Vodafone Group Plc.

Although the flagging economy could crimp some bidders, the FCC has high hopes for the airwaves auction. The sale is seen as a way to spur more competition in the wireless business, create a new network that can be used by public safety agencies and rake in as much as $10 billion into the federal treasury.

"I think there's no question (that) it's an unprecedented opportunity in terms of the quality and the characteristics of the spectrum that were going to be auctioning," FCC Chairman Kevin Martin said recently. "It's going to be critical in facilitating additional innovation."

Under rules set out by the FCC, the spectrum will be sold in five separate blocks, ranging from smaller regional chunks set aside in blocks designated "A" and "B," to larger blocks designated "C" and D" that could more easily be used to create a nationwide network.

The final, "E" block, is considered less useful because it is limited to one-way data transmission.

BIDDER IDENTITIES SECRET

The auction is expected to continue for weeks, or even months, with multiple rounds of back-and-forth bidding each day. Major bidders typically draw up elaborate strategies, often with input from game-theory experts.

Under FCC rules, the identities of daily bidders will be kept secret although bid amounts will be posted on the agency's Web site.

The 700-megahertz signals are valuable because they can go long distances and penetrate thick walls. The airwaves are being returned by television broadcasters as they move to digital from analog signals in early 2009.

"It's there for players to roll out new services or enhance existing services," said Paul Glenchur, an analyst with Stanford Group.

Major carriers could use the new spectrum to offer consumer more advanced services such as broadband access via mobile phones and wireless broadband to laptop computers. "These services are too expensive now. But if you have more capacity to run them, more people might take them up," Hart said.

The FCC aims to go a step further and stoke new competition by imposing a condition sought by Google. It will require the winner of the "C" block licenses to open the network to any device or software application, as long as the bidding reaches a minimum $4.7 billion reserve price.

Martin credited the C block conditions with prompting Verizon and AT&T to adopt new open-network policies recently.

The FCC approved a separate condition on the D block airwaves requiring the winner of that spectrum to build out a national network and share it with U.S. public safety agencies. For that piece of the airwaves, the FCC has set a minimum of over $1.3 billion.

However, analysts say it is unclear whether the auction will achieve all the FCC's goals.

They expressed doubts about whether the auction will entice Google into the wireless business, given the difficulties of setting up a new network from scratch.

Instead, analysts view Verizon Wireless as the most likely winner of the C block spectrum because it needs additional spectrum more than other large carriers.

"We think the C block will simply prove too expensive for any new entrant, with the possible exception of Google, whose primary purpose in participating in the auction, we believe, is not to create a new network but to trigger the FCC's openness condition," analysts at Stifel Nicolaus said.

The auction is being conducted during a credit crunch that has hurt the ability of companies to raise capital and could hinder smaller bidders.

A potential bidder for the D block airwaves, Frontline Wireless, dropped out earlier this month. Frontline declined to say why, but analysts blame it on a shortage of financing.

The same problems that forced Frontline to back away from the auction could hamper other bidders as well, possibly forcing the FCC to rebid the D block.

"I would guess there's a reasonable chance that they don't get anyone bidding the ($1.3 billion) minimum," Glenchur said.

Auction requirements enacted by Congress force the FCC to move ahead with the auction now, even though FCC's Martin expressed concern last week about economic conditions.

"We're required by law to conduct the auction at this time, so we'll go forward with it no matter what," Martin said.

(Editing by Tim Dobbyn)