Consistent With A Long Line Of FCC Precedent, The C-Band Carriers Should Receive 100% Of The Proceeds From The Sale Of Their Spectrum Usage Rights

These are my views and do not implicate any former or current employer or client.  In particular, this blog has not been approved by CBA.  Rather the views below reflect my personal outrage that the government is changing the rules just because so many chose to “pile on” in the C-Band proceeding.

 Some have argued that the C-Band Satellite Carriers should not be allowed  to receive 100% of the proceeds of an FCC sale of a portion of their spectrum usage rights because they received their spectrum for free.  In the case of SES and Intelsat, this argument is factually incorrect.  And regarding all C-Band licensees, this argument is contrary to the history of secondary market sales of FCC authorized spectrum usage rights and 60 years of evolving Coasean theory of spectrum allocation.  Other than “bad actors”, all FCC licensees who sold their spectrum usage rights in secondary market sales have received 100% of the proceeds – not 10%, not 50% – 100%.

For decades the Federal Communications Commission awarded usage rights to bare spectrum (an ephemeral “asset” of no value to the public without massive investments in related infrastructure) for FREE.  If there was only one applicant for a specific spectrum band, she/he got it and paid nothing to the government.  If there were multiple applicants, the usage rights were divided among the applicants or awarded to one applicant based on comparative hearings or lotteries – but in any event, the party awarded the spectrum usage rights paid nothing to the government.

For example, America’s great over-the-air broadcast system was built this way by risk-taking visionaries.  The spectrum usage rights for every Radio and TV station in America were granted for FREE without payment to the government.  These private sector risk takers invested vast sums in transmitters, towers, personnel and programming to make the spectrum useful to the public. Later, as stations were bought and sold – with the spectrum usage rights being the most valuable asset transferred – 100% of the proceeds went to the seller, not to the government.  That continues to be the case for every broadcast station in America today – including transactions approved by the FCC as recently as a few weeks ago.  Broadcast spectrum sellers who paid nothing to the government receive 100% of the proceeds when they sell.

The same is true regarding early wireless spectrum usage rights.  In the early 1980’s the FCC granted the first cell phone usage rights in the 30 largest U.S. cities.  Two licenses were granted in each city – one to the local wireline telephone company for FREE and the second to another applicant, also for free.  Through a comparative hearing victory in Chicago and lottery outcomes in other big cities, my first employer, Metromedia, was granted a number of these non-wireline phone company licenses – paying nothing to the government.  I know because I filed the applications.  Metromedia’s principal, John Kluge, invested vast sums to build out the cellular systems for which demand at the time was thoroughly uncertain.  His risk-taking was rewarded when Metromedia sold those systems – including most importantly the spectrum usage rights– for $Billions to Southwestern Bell (now AT&T which uses those spectrum usage rights to this day).  Metromedia received 100% of the proceeds of that sale.

Eventually the FCC changed its policy and began to auction NEW wireless spectrum usage rights instead of giving them away for free.  But, except for “Bad Actors”, existing wireless spectrum usage rights holders (both those who initially received the rights for free and those who purchased the rights in private market transactions) universally were permitted to sell those rights and retain 100% of the proceeds. That continues to be the case today.  For example, when America’s Cable TV Companies sold their wireless spectrum to Verizon, they kept 100% of the proceeds.  When XO Communications sold their spectrum to Verizon, they kept 100% of the proceeds.

Which brings me to the current debate over the so-called C-Band spectrum.  Initially these spectrum usage rights were granted, for free, to companies such as GE Americom, Loral and PanAmSat that  invested vast sums to build satellite distribution systems primarily for radio and television programming.  In 2001 Intelsat paid $1 billion for Loral’s C-Band facilities and in 2006 Intelsat paid $3.2 billion (plus the assumption of over $3 Billion of debt) for PanAmSat’s C-Band assets – including in each case the spectrum usage rights.  SES paid $5 billion when it bought GE Americom’s C-Band business – including the spectrum usage rights – in 2001.  All of these private market sales of spectrum usage rights were approved by the FCC.  The sellers who had received their spectrum from the government for free received 100% of the sale proceeds.

Some have argued that the sale of a portion of the C-Band is different because the buyers of the spectrum would be using it for a purpose – wireless – that is different from the use for which it was originally licensed – satellite communications.  But, sound spectrum policy should encourage all spectrum holders – private and Federal – to be willing give up some of their spectrum for a use of higher value to society.  Therefore there is even more reason why the C-Band sellers should receive 100% of the proceeds.

The wireless industry has coveted the C-Band spectrum for years because it represents a “Goldilocks” balance between low band spectrum (great for distance) and high band spectrum (great for capacity).  Reallocating at least some of the C-Band for wireless is the key to keeping America competitive with China in the “Race To 5G”.

After years of fighting any reallocation, the C-Band satellite carriers have stepped forward with a voluntary plan to sell off 60% of their private spectrum usage rights – rights for which they paid $Billions and in which they have invested vast additional sums.  The response from commercial vested interests and other critics has been in the worst tradition of the Washington, D.C.  Despite the long tradition of private market sales of spectrum usage rights, the critics scream “four foreign companies want to sell spectrum that belongs to U.S. taxpayers”.  It is a great sound bite, but does not begin to fully and fairly inform the listener.

The “foreign operators” have made billions of dollars of contributions to the U.S. economy and treasury by employing over 1,500 U.S. staff, have bought dozens of satellites and launches from U.S suppliers and continue to provide mission critical services to the U.S. DoD and civilian agencies and U.S. media and telecom companies.  Over 70% of Intelsat shareholding is U.S. based.  And, the “National Treatment” clauses in all U.S. trade deals require each country to treat foreign nationals (including companies) the same as they treat their own citizens.

There are many public policy reasons to permit the C-Band carriers to receive 100% of the proceeds when their usage rights are sold – like all other spectrum usage rights holders have done.  First, the active cooperation of the C-Band carriers will enable the FCC to conduct the sale in 2020 – immediately sending the buyers to place equipment orders to keep pace with China.  Second, the value to the economy of getting 5G deployed quickly dwarfs the value of any U.S. Treasury proceeds from a government sale.  And, the sale of C-Band spectrum will serve as an incentive for other spectrum use rights holders to step forward and allow their spectrum to move to its highest and best use for American consumers.

The Coasean history is clear:  (1) radio and TV stations who sold their spectrum in secondary market transactions (whether they were the initial free recipient of the spectrum or bought that spectrum in FCC approved secondary market transactions) received 100% of the proceeds; (2) wireless companies who sold their spectrum in secondary market transactions received 100% of the proceeds; (3) companies like XO, originally licensed for services other than mobile wireless who sold their spectrum for mobile wireless and were not “bad actors” received 100% of the proceeds.

So the question posed is, if the FCC wishes to be consistent with a long, long line of Coasean precedent and wishes to encourage both private and government parties with spectrum usage rights to allow their spectrum to move to its highest and best use for our society, how in the world would the FCC justify allowing the C-Band carriers to receive less than 100% of the proceeds from the sale of their spectrum usage rights as all other sellers have received?  Why are the rules changing just for C-Band?

With not just China but other major players, including Japan and South Korea poised to overtake the significant early investments of the United States and lead the way on 5G, mid-band spectrum remains the elusive input U.S. carriers need to keep apace with Asia.  It is a dangerous time for the FCC to abandon history, precedents, and its principles that encourage investment, risk taking and facilitating the transfer of licenses for higher uses.

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