The New Gold Rush?
IN THE 1960S, THE FEDERAL Communications Commission (FCC) began to issue broadcast licenses under the Instructional Television Fixed Service (ITFS) program to public colleges and universities, school districts, and other nonprofit institutions so that they could provide educational programming to specialized receivers over 2.5 GHz microwave channels. In 2002, the FCC changed the nomenclature of these licenses to the Educational Broadband Service (EBS) and in 2004 and 2005 provided great flexibility as to how the channels could be used or even leased to commercial parties.
Today the EBS spectrum is used for educational and noneducational two-way, multiuser, fixed, nomadic, portable, and mobile communications that include cable television and the new WiMax high-speed wireless digital broadcast technology. WiMax enables wireless communications from a single transmission point for a radius of 30 miles or more. The commercial potential has attracted the attention of large nationwide wireless service providers including Sprint/Nextel, Clearwire, and NextWave, who are now offering millions of dollars for individual long-term EBS leases. The commercial terms of these leases have varied widely, depending upon the institution's needs, understanding of its assets, and negotiating sophistication.
A starting point is determining the value of the spectrum. Many questions must be addressed when valuing a lease, such as:
What is the coverage area and what is the population covered?
How scarce is spectrum available for lease in that market?
How fast is the demand for wireless services growing?
How much capital do commercial providers have to acquire new spectrum, and will banks and investors participate?
Does the licensee control more than one channel, and are they high, mid-band, or low-frequency channels?
If so, do they adjoin one another on the spectrum (more valuable), or are they separated?
The answers to these questions may make one lease an order of magnitude more valuable than its neighbor's.
EBS leases may contain several different types of compensation, infrastructure, length of lease, and renewal terms, which may render an "apples to apples" comparison of proposals challenging. Payment terms may include a large up-front payment, often coupled with fixed regular monthly payments over the life of the lease or payment levels adjusted for inflation. Other arrangements include balloon payments in later years, single lump-sum payments, or revenue sharing between the parties beyond certain revenue or profitability benchmarks.
Valuing these different options in present dollars requires sophisticated analysis of total dollars and risk factors. Lessees typically provide substantial infrastructure investments in the form of upgrading or replacing legacy systems with advanced digital equipment, including necessary wiring, broadcast antennas, and modems required to receive free or discounted wireless services to the institution. Lease terms may vary from 15 years at the lower end, with one or more automatic renewals, exclusive negotiation periods, and rights of first refusal at the end of a lease term, taking the full lease term beyond 30 years.
Actual leases typically involve some combination of the above components. A professional appraiser will attempt to attach a value to each component and express the total value of a proposed lease over time as a price per "megahertz pop" (total number of megahertz broadcast divided by households reached), usually discounted to net present value.
An agreement by a college or university to lease its spectrum to a commercial entity includes a lengthy, detailed contract which documents all commercial terms and also complies with numerous technical and regulatory FCC requirements. Crucial questions at the outset of the contracting process include: What type of educational use does the institution wish to retain? Is an RFP required to select a partner? Who is authorized to sign the lease? Let's consider each.
The FCC's secondary leasing rules permit three types of leases: spectrum manager, short term de facto, and long term de facto. The choice of lease structure may be influenced by whether the educational entity is actively using its EBS spectrum for educational broadcasts. In a long-term de facto lease-preferred by commercial lessees-the educational institution retains only minimal use of the leased spectrum, typically the minimum 5 percent mandated by the FCC's secondary lease rules.
A common practice to satisfy the FCC's 5 percent rule is for the commercial entity leasing the spectrum to grant a certain number of end-user licenses to the educational institution for use by its students, faculty, administrators, or however the institution deems fit. Thus, for example, a community college leasing its two channels to a commercial operator intending to operate a WiMax network might receive 10 "free" user licenses per month plus the equipment required to use the network. Another option for a college or university that controls four channels but wants to maintain the right to use part of the spectrum now or in the future is to lease the full capacity on three channels under a long-term lease and retain control over the fourth channel, thereby maintaining 25 percent educational use.
Another threshold contracting question is what type of process is legally mandated in selecting a commercial partner? In the case of educational institution spectrum licensees, state law or the bylaws governing the institution often mandate a process for the sale or lease of valuable assets. The lease of broadcast spectrum space worth millions of dollars increasingly has been compared to a long-term lease of real property. Under some state regulations, any disposition of real property or other valuable assets owned by a public educational institution exceeding a certain dollar value must be governed by a request for proposal (RFP) process soliciting bids from the public or from a preselected list of potential commercial partners. Consult an attorney to determine the correct procedure to use under your state's law.
Whether or not an RFP process is required by law, it is often a good business practice, particularly where a long-term lease is desired, a wide array of contractual arrangements is possible, and the rapidly evolving technology of wireless, high speed communications makes future uses difficult to predict.
The advent of EBS leases has been an important windfall for IHEs.
Potential lessees may also vary widely in their track records, financial stability, ability to deliver a wireless communications product in the near future, willingness to share revenue, and commitment to invest in infrastructure upgrades.
A thorough RFP will include a variety of questions, such as:
What revenue does the lessee expect over the term of the lease?
What payment structure will it offer, and at what net present value to the IHE?
How does the lessee intend to smoothly transition the current use consistent with FCC guidelines?
What technical support will be offered?
What equipment and other investment resources will the lessor provide?
What educational services will the institution be permitted to operate?
What is the lessee's experience in operating a wireless broadcast network?
What is its long-term track record in delivering commercial services?
How well is it capitalized, and has it had any financial difficulties?
What happens to the lease, equipment, and educational services if the lessee defaults in payment or is unable to perform its obligations under the lease?
An often overlooked factor in leasing 2.5 GHz broadcast spectrum space to a commercial entity is identifying who at the college or university should, and has the authority to, sign the lease and FCC lease approval application.
Again, this is an area governed in many jurisdictions by state education codes or institutional bylaws or charters. In some states, absent regulation, any appropriate official, such as the chief financial officer, purchase manager, or EBS manager, may sign a long-term lease. In other jurisdictions, only the board of trustees or the highest ranking officer has the authority to sign a long-term lease, although this authority may be delegated through specified procedures.
Both the spectrum owner and the commercial entity need to ensure that the proper authority is obtained before signing a lease, or serious consequences may ensue. Under the laws of many states there is no doctrine of "apparent authority" with respect to public entities, and a lease signed by the wrong officer may be void or unenforceable by either party.
The advent of EBS leases has been an important windfall for many educational institutions. With the exploding demand for wireless broadband services, the value of EBS spectrum space is likely to remain significant.
The ability of a college or university to capitalize on the wireless revolution depends on a variety of factors, not the least of which is the ability of administrators to manage the myriad of market, financial, and legal issues that dictate the ultimate value of an EBS license lease.
John S. Sanders is a principal with Bond & Pecaro, a Washington, D.C.-based consulting firm whose practice includes valuing broadcast spectrum. Harmeet K. Dhillon is the managing partner of Dhillon & Smith, a San Francisco-based law firm that has represented educational institutions in a variety of matters, including EBS spectrum leases.