The so-called "D Block" of the FCC's gigantic 700 MHz broadband auction was supposed to attract bidders willing to share this spectrum with a public safety communications system made available to the nation's emergency service providers. The D Block network would provide both commercial broadband service and public safety communication services. The auction concluded on March 18th, raising a record $19.6 billion. But no one bid the minimum reserve price for the public safety region: $1.3 billion dollars. When the dust cleared, there was no shortage of finger pointing.

Now, the FCC's Office of the Inspector General (OIG) has completed an audit of the auction process released on Friday. The report reveals the challenges the agency faces in realizing its vision of a nationwide public safety network built without cost to the taxpayers. It also clears Cyren Call of any wrongdoing, calling its actions "a drop in one of many buckets" that undid the effort.

Did somebody break Frontline's back?

One of the biggest boosters of the D-block concept, Frontline Wireless, withdrew from the auction after concluding that it could not raise sufficient funds to bid for and maintain the license. Frontlines' principals have included former FCC Commissioners Reed Hundt and Mark Fowler.

In late January, Harold Feld of the Media Access Project posted an entry on his Wetmachine blog suggesting that Cyren Call founder Morgan O'Brien represented "by accident or design" the "straw that broke Frontline's backers backs." The non-profit Public Safety Spectrum Trust (PSST) had hired Cyren Call's O'Brien as an advisor to help administrate the D Block's Public Safety Broadband License (PBSL), which PSST expected to get. PSST's officers include the President of the International Association of the Chief of Police and the head of the International Association of Fire Chiefs.

According to Feld, O'Brien, as a representative of PSST, met with Frontline and estimated that the company would need to pay about $500 million over a decade to lease the public safety section of the license for commercial purposes. And that figure did not include the license price, build out, and maintenance. "O'Brien's conduct apparently made the Frontline backers extremely worried that even if they won the license, they could never expect to negotiate a [leasing] deal," Feld wrote.

After the auction concluded, Feld, as a representative of the Public Interest Spectrum Coalition (PISC), asked the FCC to investigate the D block failure and Cyren Call's involvement. PISC consists of Public Knowledge, Free Press, the Consumers' Union, and six other similar groups. After discussing the matter with all parties, the OIG confirmed that O'Brien did indeed meet with Frontline, as well as Verizon. Different interviewees told the OIG that O'Brien threw out an estimated annual spectrum lease payment of $50 to $55 million over ten years. But no auction rules had been broken, the FCC concluded. Frontline told the agency that "the lease payment amount was only one of many factors it considered in deciding whether to participate in the D block."

These other factors included:

The Bid Default Rule

Frontline feared that if it could not come to a co-management agreement with Cyren Call after it won the D block, and it withdrew from the whole project, the FCC would hold the company liable for the difference between its bid and the next lowest bid. "This could translate into a penalty of many millions of dollars," the agency conceded. In addition, Frontline apprehended that the threat of this penalty would give Cyren Call tremendous leverage, especially if the FCC consistently sided with O'Brien's PSST. "This left [Frontline's] investors facing a significant and uncertain financial exposure," the Commission observed.

Build-out questions

In the end, Frontline could not anticipate with certainty what it would actually cost to construct the FCC's nationwide public safety network. The company "became more and more concerned with the system requirements that it thought PSST and Cyren Call would demand, with the costs that these would entail, and with the business viability of the venture."

Service quality

PSST officials frankly told Frontline principals that their clients-police, health, and fire emergency responders-did not expect to experience the kind of service delays and blackouts that typical cell phone users put up with from time to time. "It became apparent to Frontline that PSST regarded the quality of service necessary for public safety to be much higher than that considered acceptable for commercial use," the OIG's report discloses.

Too many people and clients

Frontline also did not expect the number of groups that PSST eventually told them would be served by the D Block public safety license, again raising the fear of unacceptable service interruptions. And Frontline's Hundt told the OIG that "the costs necessary to reach only a few additional users would entail a vastly disproportionate additional cost." But at the same time that users could overwhelm the system, they could possibly underwhelm it as well, declining to buy into the D Block spectrum resource, depriving Frontline of millions of dollars in revenue.

Thus, Cyren Call's lease payment negotiations did not cause the D Block's failure to sell at the agency's reserve price. "Rather, the many layers of uncertainty and risk and the growing prospect of high network costs," the OIG concludes, "were responsible for potential bidders' decisions not to bid."

Shortly after the FCC issued its findings, MAP's Harold Feld send Ars a statement congratulating the OIG on its finding that no rules were broken. But the agency's investigation shows that the auction was "fatally flawed," even "doomed to failure" by "terms and conditions set both by the Commission and by the public safety community," Feld wrote.

The OIG's findings also raise the question of

whether a nationwide broadband public safety system can be built and run

entirely by the private sector on a for profit basis. Cyren Call has held four Ex

Parte meetings with the FCC on the 700 MHz auction this month. The agency

will launch a new proceeding on the D Block challenge at its next Open

Commission meeting, scheduled for May 14th.