Onerous Requirements, Not Collusion, Led to D Block Failure

Collusion isn’t to blame for the D Block’s failure to sell at the FCC’s 700MHz spectrum auction, according to a new report from the Inspector General.

Rather, the D Block didn’t sell because of sky-high lease payments and onerous buildout requirements, investigators said.

The findings, published late Friday, vindicated Cyren Call Communications, a firm backed by Nextel co-founder Morgan O’Brien. That’s because allegations arose during the recent auction that Cyren Call played a role in the demise of frontrunner Frontline Wireless, which unexpectedly folded earlier this year. Some media reported that Cyren Call had demanded lease payments be paid to it, a for-profit business and adviser to the Public Safety Spectrum Trust (PSST). The PSST is a non-profit corporation that holds the FCC license for half of the D Block.

The speculations about Cyren Call and collusion were false, the Office of the Inspector General (OIG) found. Instead, Frontline Wireless investors lost confidence in the D Block plan when they examined all of the stipulations attached to it.

The FCC set aside the D Block as a public-private partnership. The winning bidder would have been required to build a national wireless broadband network that, during times of emergency, would be used exclusively by first responders. At all other times, the licensee could have used the spectrum for commercial purposes. Frontline Wireless, backed by former FCC Chairman Reed Hundt, was expected to bid for, and win, the D Block. But it became clear that wouldn’t happen when the company shuttered in early January.

In its report, the OIG explained what went wrong.

First, the lease payments were too high. The amounts were never written down, but Cyren Call told Frontline Wireless the amounts would range between $50 million and $55 million annually for 10 years, although the rates were negotiable, OIG reported.

But that wasn’t all.

“Frontline, as well as other entities interviewed, stated that the lease payment amount was only one of many factors it considered in deciding whether to participate in the D Block,” OIG staff wrote. “Witnesses from all of the entities interviewed also described a host of problems and concerns with the D Block that, as a whole, deterred their participation in the D Block.”

Frontline Wireless then learned of other conditions it hadn’t known. For example, the PSST said the D Block network’s quality of service had to be “much higher than that considered acceptable for commercial use,” the OIG said. First responders cannot deal with dropped calls, the PSST said. Developing such a network would have been more expensive than what other major providers have built. So in addition to the lease amount uncertainty, Frontline Wireless investors couldn’t justify the cost of a network that would exceed typical quality.

The number of first responders using the network, and the geographic coverage required, also were larger than Frontline Wireless had anticipated. On top of that, there were no guarantees that public safety or commercial users would sign up to use the system. That would have meant Frontline Wireless would compete against big-name carriers with no guarantee of sales.

Finally, Cyren Call, a for-profit business, wanted to be a MVNO for Frontline Wireless, serving as the sole contractor with public safety users. But Frontline Wireless feared it wouldn’t be able to reach all interested public safety users that way.

Combined, none of that appealed to investors. Frontline Wireless closed and the D Block didn’t sell during the eight-week auction. Qualcomm submitted the only bid for the block – far below the reserve price – and told OIG staff it did so to preserve its bidding eligibility. Qualcomm had hoped to sell its technology to Cyren Call.

Cyren Call and PSST both said in prepared statements they were glad they were cleared of any rule-breaking, and that they hoped to work with FCC on a re-auction of the D Block.

“We cannot afford to take our collective sight off the critical task of solving our nation’s public safety communications crisis,” Cyren Call’s O’Brien said.

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