FCC: D Block bidders driven away by prospects of high lease fees, penalties

It should have been a fairy tale come true for an entrepreneurial wireless provider with top-notch leadership. But the FCC's D Block option kept Frontline Wireless out of the picture; and today, an FCC report points the blame at no one.

Last year, the US Congress granted the Federal Communications Commission the authority to conduct an auction of portions of the public airwaves currently devoted to UHF television, with the condition that it devise the means for some of that spectrum to be used by public safety officials and first responders. Without federal funding available to secure the project, though, the FCC came up with a unique plan that would involve entrepreneurial corporations cooperating with a non-profit public safety organization, enabling the corporations to establish profitable services while at the same time helping the public firm maintain the public safety network, presumably at reduced costs.

As it turned out, no one ended up winning a full 10 MHz of prime-quality spectrum.

The fear that such a presumption was premature, and that private bidders for the so-called "D Block" might actually owe high lease fees and also run the risk of penalties, drove major bidders such as Frontline Wireless out of the bidding, according to an FCC Inspector General's report made public on Friday.

The report cites Reed Hundt, Frontline's vice chairman, as having "explained that the realization gradually dawned on Frontline that the nationwide shared network the D Block winner would likely have to build would be far more costly, and yet perhaps less reliable in terms of commercial use, than Frontline had first thought. Of course, these things were all subject to negotiation, but...Frontline felt it would be at a disadvantage in such negotiations."

It was supposed to have been Frontline's reason for existence, and with leadership like that of Hundt -- himself a former FCC chairman -- and former Netscape CEO Jim Barksdale, it would not have been a fly-by-night operation. But D Block space was unattainable under the operating guidelines that were set by Cyren Call the private consultancy the FCC had hired. In January, before the auction even closed, Frontline ceased business.

Soon after the 700 MHz auction ended, the FCC began its inquiry as to why only Qualcomm placed a bid for this prime real estate, and why its bid was way too low anyway. Speculation in the wireless press that Cyren Call may have demanded lease fees that were way beyond anything Frontline could afford, led to Cyren Call's chairman, Morgan O'Brien, flatly denying there was ever any such discussion.

"Anyone stating or implying that I or any member of Cyren Call or the Public Safety Spectrum Trust Corporation (PSST) 'demanded' a spectrum lease payment is lying," O'Brien wrote on April 3 (PDF available here). Furthermore, anyone suggesting that any spectrum lease payment would be paid to Cyren Call is lying."

But those quotation marks around "demanded" may have raised some suspicions that O'Brien's comment may have been a "non-denial denial." The Inspector General's office (OIC) eventually determined that such discussions did, in fact, occur -- whether one chooses to call them "demands" or not.

"Cyren Call officials met with Frontline and Verizon to discuss an estimated spectrum lease payment amount of $50 to $55 million (amount varied depending on the interviewee) per year for a period of ten years," the OIC's report reads. Addressing those quotation marks specifically, the OIC said that while there was a discussion, there were no stipulations placed on lease fees.

"Mr. Hundt, one of the Frontline founders and a key Frontline decision-maker, stated that, following the November 29 meeting, Frontline and its investors did not interpret the Cyren Call statements concerning the lease payment as a hard and fast demand," the report reads. "Instead...the possibility of an uncertain future lease payment was only one of many uncertainties that troubled Frontline's investors. The $50 million [lease payment estimate] number was never shown in writing to Frontline or other potential bidders. It appears that Cyren Call's statements to Frontline on the lease payment issue were intended to be primarily informational, and also to mark the starting point for future negotiations on the issue."

Perhaps a pair of quotation marks were in order for the phrase "in writing;" because later in the very same report, a meeting was cited between Cyren Call and Verizon.

"The statements regarding the expected lease payment were made to only one other potential bidder in the D Block - Verizon," states the report. "Verizon was given the $50 million estimate on November 28, 2007. It is clear that the statements did not deter Verizon from bidding in the D Block auction. Verizon had all but decided not to bid by the end of November 2007, and never evaluated the lease payment amount carefully."

While Verizon may not have been deterred by these lease estimates, it also did not bid.

There were other deterring factors, the Inspector General found. In fact, some commissioners had already raised their own inquiries about other potential obstructions to Frontline's participation.

As Commissioner Robert McDowell testified before Congress two weeks ago, "I have met with a number of parties since the anti-collusion prohibitions were lifted. Early critiques of the Commission's efforts reveal that potential bidders were deterred by onerous build-out and service requirements that required the eventual licensee to incur massive costs in an atmosphere of extreme uncertainty regarding how many, if any, public safety entities might actually sign up as paying customers."

The OIC wrote, "Frontline faced considerable uncertainty as to what would be required to finance the build-out of the nationwide public safety network contemplated in the FCC's orders. It did financial modeling and met often with [the Public Safety Spectrum Trust, which is the non-profit concern established by the FCC] and Cyren Call in an effort to ascertain what would be required."

Commercial customers have lower expectations for quality of service than first responders would mandate, Frontline told the OIC, and thus the cost of establishing service with a much higher QoS than all of its competitors operating on the C block would require, was simply prohibitive. The high lease rate was one factor, but it wasn't the only one.

In a statement Friday, Cyren Call expressed relief that it had not been taken to task for the $50 million non-requirement requirement, saying, "The release of the Inspector General's report is an encouraging sign that the FCC is moving forward to re-auction the D Block."

Not everyone is relieved by the outcome of the D Block situation. As Commissioner Jonathan Adelstein testified before Congress on April 15, "Though I would have preferred direct Federal funding for building a national public safety broadband network, I was nevertheless painfully aware that the public-private partnership framework itself presented the only option available to us. And while this approach could have succeeded, the rules we ultimately adopted simply did not reach the appropriate balance to meet the needs of both public safety and a commercial partner."