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Broadband Wireless World Forum. Obtaining Radio Spectrum Through The Secondary Market: New Guidelines For Leasing Spectrum Wednesday, February 21, 2001 Moscone Center – San Francisco, CA. Obtaining Radio Spectrum Through The Secondary Market. Greg Whiteaker Principal
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Broadband Wireless World Forum Obtaining Radio Spectrum Through The Secondary Market: New Guidelines For Leasing Spectrum Wednesday, February 21, 2001 Moscone Center – San Francisco, CA
Obtaining Radio Spectrum Through The Secondary Market Greg Whiteaker Principal Bennet & Bennet, PLLC 202-371-1500 www.bennetlaw.com
Obtaining Radio Spectrum Through The Secondary Market What Are the Opportunities? What Are the Tools and Guidelines for Their Use?
A Bit Of Background • Spectrum Allocations • The Radio License • Spectrum License Assignment • First Come, First Served • Comparative Hearings • Lottery • Competitive Bidding Bennet & Bennet, PLLC
Spectrum: An Intrinsically Regulated Resource Communications Act (Section 301): “No Person Shall Use or Operate Any Apparatus for the Transmission of Energy or Communications or signals by radio….except with a license granted under the provisions of the Act” License: “An Agency Permit, Certificate, Approval Registration, Charter, Membership, Statutory Exemption or the Form of Permission” Bennet & Bennet, PLLC
Spectrum Markets • Primary • Directly From Government Through Assignment Process • Secondary • From the Private Sector Entity Who Has Authority to use Spectrum • Profit Motive in Play • Government Still Has A Role Bennet & Bennet, PLLC
What Are the Opportunities? A lot of licensed spectrum out there Little or no plans to deploy services to tier two markets Small/rural providers can’t get spectrum
Why is It Difficult to Get Spectrum? Auction $$$ FCC Retreating from Designated Entity Benefits Open bidding for C block spectrum No bidding credits for closed bidding No more installment payments or set-asides DE rules full of holes: AT&T is a “small business”
Why is It Difficult to Get Spectrum? The FCC Licenses Spectrum in Very Large Geographic Areas BTAs are out; Economic Areas (EAs) are in EAGs – Six in the U.S. Long License Terms w/ Minimal Construction Requirements Population Based “Substantial Service” at 10 Years
Tools for the Secondary Market • License Assignments • Business Transfers of Control • Geographic Partitioning • Spectrum Disaggregation • Management/Resale Agreements • Spectrum Leasing, Franchising & Joint Operations Bennet & Bennet, PLLC
License Assignments and Business Transfers • Traditional Means of Acquiring License From A Licensee • All or Nothing Approach • Deal Cannot Close Until FCC Approves Bennet & Bennet, PLLC
Partitioning & Disaggregation • Geographic Partitioning • Division of the geographic license area into two or more smaller pieces • Spectrum Disaggregation • Division of the spectrum (bandwidth) into two or more sub-bands Bennet & Bennet, PLLC
Geographic Partitioning • Partial Assignment of a License • Application and Approval of FCC • Negotiated by the Parties • Boundaries defined by the parties • Compliance with Construction Requirements • Both Parties can meet or original licensee can satisfy • Partitionee must demonstrate “Substantial Service” Bennet & Bennet, PLLC
Spectrum Disaggregation • Partial Assignment of a License • Application and Approval of FCC • Negotiated by the Parties • Sub-bands defined by the parties (no minimum required) • Compliance with Construction Requirements • Share responsibility -- both on the line together • Either party may independently take on responsibility • May be used with Geographic Partitioning Bennet & Bennet, PLLC
Partitioning & Disaggregation • Advantages/Disadvantages • You Hold the License • You Define your License Area and Buildout Requirements • What is the Issue? • Very little interest to date • Spectrum valuation uncertain • Business plans uncertain • Licensees want to flip their licenses • Cost of doing the deal exceeds the value to the licensee Bennet & Bennet, PLLC
Partitioning & Disaggregation • FCC Continues to rely on Partitioning & Disagregation as the primary means of deploying service to rural areas • We need another tool Bennet & Bennet, PLLC
Spectrum Leasing • Advantage/Disadvantage • Licensee still holds the license • Lease can’t create a property interest or extend beyond the license term • Fast & Inexpensive to administer • Does not require prior FCC approval • Does not impair value of core asset • More attractive to licensees Bennet & Bennet, PLLC
Spectrum Leasing • Traditionally used in MMDS/ITFS • Satellite, some other services • “Turning a blind eye” • Affiliation deals, management agreements • FCC Policy Not Clearly Defined Bennet & Bennet, PLLC
Spectrum Leasing • Communications Act • Requires FCC to Approve Transfers of Control of Licenses • License does not create a “property interest” • Licensee required to maintain control of its license/spectrum Bennet & Bennet, PLLC
Spectrum Leasing • Intermountain Microwave -- FCC weighs six factors to determine if there is unauthorized transfer of control • Who controls day-to-day operations ? • Who controls employment/supervision of personnel ? • Does licensee have unfettered access ? • Who is responsible for financial obligations ? • Who receives money and profit ? • Who determines and carries out policy decisions ? Bennet & Bennet, PLLC
Spectrum Leasing • How can a lease meet Intermountain? • FCC seeks to foster Secondary Market • 700 MHz Guard Band Order • De Facto Control Petition • The Secondary Markets Policy Statement • The Secondary Markets Notice of Proposed Rule Making Bennet & Bennet, PLLC
Spectrum Leasing • 700 MHz Guard Band Order • Guard Band Manager -- “New” class of licensee • Subleases Spectrum to third-parties • Maintains ultimate control of the license Bennet & Bennet, PLLC
Spectrum Leasing • De Facto Control Petition • Rural Carriers are licensees • Rural Carriers form Operating Company • Operating Company leases and manages combined PCS/LMDS operation • Comments Universally Support Bennet & Bennet, PLLC
Secondary Markets Policy Statement Government Needs to Promote A Market For Spectrum With: • Clearly defined Economic Rights • Full Information on Prices and Products • Mechanisms to Bring Buyers and Sellers Together in Efficient Transactions • Easy Entry and Exit From the Market for Both Buyers and Sellers • Effective Competition, With Many Buyers and Sellers Bennet & Bennet, PLLC
Secondary Markets Policy Statement Future FCC Actions Will: • Remove, Relax or Modify Rules and Procedures that Inhibit Secondary Market Transactions • Promote Flexibility an Fungibility in Spectrum Usage • Encourage Advances in Equipment • Encourage Market Mechanisms: Information, Exchanges, Brokers Bennet & Bennet, PLLC
Secondary Markets Policy Statement • FCC plan to evaluate prohibition of security interests and reversionary interests in licenses • Could allow greater access to capital Bennet & Bennet, PLLC
Secondary Markets • A Fundamental Problem: What is the Spectrum “Product”? • Licensees should have clearly defined spectrum usage rights as to frequency bands, service areas, license terms and renewal expectancy. • Licenses and Spectrum usage rights should be easily transferable for lease or sale, divisible or aggregatable. • Licensees/Users should have flexibility in determining the services to be provided and the technology used. • Licensees/Users Have a fundamental obligation to protect against and a right to be protected from harmful interference. Bennet & Bennet, PLLC
Secondary Markets Proposal Goals • Eliminate Unnecessary Impediments to Operation of Secondary Markets • Encourage Advances in Equipment • Encourage Development of Mechanisms to Aid in Operation of Private Spectrum Markets Bennet & Bennet, PLLC
Secondary Markets Proposal • Removing Barriers to Leasing • Recognizes that Management Agreements, Joint Marketing Agreements and Resale Agreement Aid Spectrum Efficiency • Recognizes Leasing Goes on Already in ITFS/MDS, Satellite Transponders, Private Land Mobile Sharing, 700 MHz Band Managers • Concludes that Wider Use of Spectrum Leasing Would Increase Efficiency of Spectrum Use • No Limits on Geography, Spectrum Amount or Duration • No FCC Approval Bennet & Bennet, PLLC
Secondary Markets Proposal Applicability of Leasing Proposal • Wireless Radio Services • Exclusive Use Licenses • Not Radio, Television, Public Safety, Amateur, Personal, Maritime or Aviation • Not MDS/ITFS Bennet & Bennet, PLLC
Secondary Markets Proposal Rights and Duties • Licensee Ultimately Responsible for Lessees’ Compliance with FCC Rules? • FCC Will Hold Licensee Directly Responsible for Acts of Others? • A Due Diligence Obligation on Licensees? • Mandated Contract Terms? • Record of Written Contracts? • Contractual Disputes to the Courts? Bennet & Bennet, PLLC
Secondary Markets Proposal • Licensee Responsible for Lessees’ Compliance with Interference, Frequency Coordination & Other Technical Rules • Can Lessees Resolve Interference with Other Licensees? • Can Lessees Seek Approvals From FCC & Local Governments? Bennet & Bennet, PLLC
Secondary Markets Proposal • Applicability of Service Rules to Lessee • Eligibility, Construction, Substantial Service, Renewals, Regulatory Status • FCC Unsure Here: • Same Rules Apply to Lessees? • Different Rules Apply to Lessees? • Licensee to Certify to Lessees’ Qualifications and Operations? • What About Attribution and Aggregation? Bennet & Bennet, PLLC
Secondary Markets Proposal • Can Licensee Rely on Lessee’s Actions to Meet Construction or Service Requirements? • No Additional Reporting on Lessees’ Actions • Possible Annual Report on Lease Activities • Should Unjust Enrichment Payments Apply? • Does the Same Regulatory Status Apply to Both Licensee and Lessee? Bennet & Bennet, PLLC
Secondary Markets Proposal • Licensee Responsible For All Routine Filings With FCC? • Leases Limited in Length to Term of License w/ Option or Right to Renew Permitted Bennet & Bennet, PLLC
Secondary Markets Proposal Intermountain: The Thorny Issue of Control • Section 310(d) Still Requires FCC Approval of Who Controls A License Or Rights Under A License • De Facto or De Jure Control Subject to 310(d) • De Facto Control At Issue with Leases • Intermountain Factors Threaten Any Lease Bennet & Bennet, PLLC
Secondary Markets Proposal A New Test For Transfers of Control? • Intermountain Not To be Applied to Leasing Situations • Changed Circumstances in License Areas, Flexible Use & Auctions • Intermountain Impedes Efficient Use of Spectrum • Test Should Not be Control over Operating Facilities, But Control to Ensure Compliance With Rules • Contract Terms May Be More Useful • New Test Only For Interpreting Section 310(d) as it Relates to De Facto Control with Respect to Spectrum Leasing Bennet & Bennet, PLLC
Secondary Markets Proposal The New Test • Retain Full Responsibility For Compliance With the Communications Act and FCC Rules with Regard to Use of Any Licensed Spectrum • Certify That Each Lessee Meets All Applicable Eligibility Requirements & Complies with all Applicable Service Rules • Retain Full authority to Take All Actions Necessary in the Event of Noncompliance ( Licensee As Guarantor of Other’s Behavior) Bennet & Bennet, PLLC
Secondary Markets Proposal II.Increasing Flexibility in Technical Rules • Seeks Comments on Making Spectrum More Fungible in Various Bands • Goal is to Make Users See Spectrum More As A Substitutable Commodity • SDR Bennet & Bennet, PLLC
Secondary Markets Proposal III. Increasing Flexibility in Service Rules • Harmonize Service Rules in Different Bands • Discontinuance of Service? • Allow For Fixed, Mobile, Satellite, Voice, Data, Video Operations • Don’t Dictate Access Technologies • Commercial vs. Private Distinctions • Swaps & Cross-leasing • Sharing Spectrum With New Technologies Bennet & Bennet, PLLC
Secondary Markets Proposal IV. Availability of Information on Spectrum • Current FCC Databases Do Not Reflect Actual Spectrum Use • Can Government Create/Promote Private Information Clearinghouses? • Are there Barriers to Private Spectrum Exchanges? Bennet & Bennet, PLLC
Secondary Markets Proposal Next Steps • Public Comments Filed February 9 Reply comments due March 9 • Final Decision Expected in 2001 Bennet & Bennet, PLLC
Secondary Markets Proposal • How does this impact ITFS/MDS Leases? • Term of Lease • Responsibilities of licensee • ITFS/MDS Leases have very specific Requirements • Turf Battles and convergence • 3G NPRM acts as if MDS/ITFS covered • Services converging Bennet & Bennet, PLLC
Spectrum Leasing • Example of use of leases • LMDS/39 GHz in rural markets • LMDS/39 GHz for backhaul and fiber rings • Short-term spectrum shortage • The Licensee Mindset • Spectrum is the key to the kingdom • Taking the smallest slice possible Bennet & Bennet, PLLC
Spectrum Leasing • Making a Lease A Winning Business Proposition • % of Gross Revenues + Flat Fee • Spectrum user/Lessee brands service • Put & purchase rights • Exclusive use • Piggy back other services and contracts (e.g., equipment, content, backhaul, Internet) • Support of licensee’s national accounts Bennet & Bennet, PLLC
Fostering a Secondary Market • Be Creative Consider a lease instead of a license • Build Relationships • Stay with it -- It is Early in the Buildout Game • Aggregate The deal has to be worth the licensee’s time • Educate Licensee can’t value the spectrum based on an urban model • Pressure Licensees(e.g. compliance w/ buildout) Bennet & Bennet, PLLC
Obtaining Radio Spectrum Through The Secondary Market Questions? Greg Whiteaker Bennet & Bennet, PLLC www.bennetlaw.com