700 MHz: A Pivotal Auction — March 2, 2007 1 Stifel, Nicolaus & Company, Inc.

Blair Levin Rebecca Arbogast David Kaut

202 778 1595 202 778 1978 202 778 4341 March 2, 2007
blevin@stifel.com rarbogast@stifel.com dpkaut@stifel.com

700 MHz: A Pivotal Auction

New Blood for Broadband & Video or Telco/Cable Sweep
AFFECTED
The FCC’s upcoming spectrum auction in the 700 MHz band is shaping up as a key
COMPANIES
event in the communications industry: it could open the door to new wireless broad-
band and video competition to the Bells and cable, but the incumbents appear likely to Telco/Wireless
make a strong bid to acquire much of the spectrum. VZ-VOD, T, S, Q,
DT, AT, USM,
LEAP
• THE AUCTION. The FCC is gearing up to auction 60 MHz of prime spectrum in the 700
MHz band in the second half of 2007, which we believe will be one of the most significant Cable
telecom events of the coming year due to its potential impact on core industry dynamics. CMCSA, TWX,
CVC, CHTR,
• BROADBAND OPPORTUNITIES, CHALLENGES. The auction could be a pivotal MCCC
event in the development of broadband competition for delivering voice, video, and data
Satellite TV
services to consumers, creating both opportunities and challenges for new entrants, incum-
DISH, DTV
bents, edge players, and equipment manufacturers.
Equipment Makers
• NEW ENTRANTS OR INCUMBENT SWEEP. Because of its physical characteristics, ALU, CSCO, TXN,
this spectrum, which is scheduled to be cleared of TV broadcasters by February 2009, pre- MOT, QCOM
sents an important opportunity for a new entrant to emerge as a national broadband competi-
tor to the telcos and cable. But it could also easily end up being another incumbent sweep, Edge Providers
particularly if the lower half of the band emerges as exclusively a one-way video play and GOOG, YHOO,
the FCC maintains the current bandplan or accelerates the auction start date. AMZN, MSFT

• FCC DECISIONS. The FCC must resolve several issues, and some of those decisions --
particularly the start date of the auction, the size of the licenses, and any other service rules TIMETABLE
-- could affect participation, which in turn will determine price and eventual usage.
• August 2007
• VARIOUS RISKS REMAIN. We don’t anticipate the auction will be postponed, but note Earliest possible
the overhang posed by (a) proposals to redirect part or all of the spectrum for public safety start date for auc-
use, (b) the unsettled status of the FCC small business credit used in the AWS auction, (c) a tion. By statute, it
constitutional challenge to the budget bill that set a “hard” deadline for TV broadcasters to must begin no later
vacate the spectrum, and (d) the risk that the DTV transition doesn’t proceed apace. than Jan. 28, 2008.

• SMALLER LICENSES EYED. We believe that the FCC’s existing bandplan will be sig- • June 30, 2008
nificantly revised to include a variety of market sizes, including smaller geographic areas, FCC must deposit
which could help smaller parties find market niches and complicate the broader plans of auction proceeds in
some larger players. U.S. Treasury.
• Feb. 17, 2009
• 700 MHZ TUTORIAL. This note provides an overview of the spectrum, current licensing
Statutory deadline
structure, and positions of the players as they lobby the FCC, and expected next steps.
for TV broadcasters
to vacate the band.
All relevant disclosures and certifications appear on p. 12 of this report.
700 MHz: A Pivotal Auction — March 2, 2007 2 Stifel, Nicolaus & Company, Inc.

700 MHz Auction — Who, What, When, Where, Why

T he 700 MHz band has long been viewed as the best spectrum for wireless broadband because of its propagation char-
acteristics, particularly its ability to cover larger areas -- which reduces capital expenditures and makes a new-entrant
strategy more feasible -- and its ability to penetrate buildings. However, it has not been available for wireless broadband
use because TV broadcasters have used it for analog TV transmission.

Last year, Congress passed legislation setting a hard date in February 2009 for broadcasters to clear 108 MHz in the band,
and directed the Federal Communications Commission to hold an auction by January 2008. The key question for investors
is whether the 700 MHz auction -- the final major spectrum auction in the foreseeable future -- attracts at least one signifi-
cant disruptive new entrant in either the video or wireless broadband space or whether instead the telco/wireless (e.g., VZ,
T, S, AT) and perhaps cable (e.g., CMCSA, TWX, CVC, MCCC, CHTR) broadband incumbents deepen their spectrum
holdings and keep out new competitors.

Some observers have long viewed the 700 MHz auction as the last great hope for a new entrant to provide a widely avail-
able third pipe to the home in the foreseeable future. There are several factors, however, that we believe may decrease the
chance of a new entrant emerging from this auction to compete with cable and the Bells. Although the cap-ex require-
ments to build a new network in the 700 MHz band are considerably less than in other bands, it is still an expensive propo-
sition. We note that despite its participation in the proceedings at the FCC, News Corp. (NWS) recently cited the difficulty
and expense of building out a wireless broadband network as one of the reasons it decided to sell DirecTV (DTV). Clear-
wire and Sprint Nextel are building out a network in 2.5 GHz, but with spectrum they acquired for a song. To the best of
our knowledge no other countries are using 700 MHz spectrum for Wi-Max, focusing instead on the 2.3, 2.5, and 3.5 GHz
bands. Although the U.S. market is certainly large enough to provide scale in equipment production, there is no readily
available equipment and operators in the band will not be able to enjoy the cost efficiencies of a global scale, at least until
other countries follow the United States in transitioning the 700 MHz band from broadcast to broadband.

We believe that a key factor in determining participation, and thus, price, is whether the lower band is viewed as attractive
for an interactive broadband network, or whether, instead, it remains a source of one-way/video/broadcast services, such as
that being developed by Qualcomm’s (QCOM) MediaFlo. Based on our research, reasonable engineers agree to differ on
whether the higher power limits allowed in the band create a golden opportunity for deploying a broadband service or in-
stead create an unacceptable threat of interference. If only the upper band is ultimately deemed suitable for a two-way
broadband service, and assuming the FCC retains the current bandplan and Verizon has its sights on the largest block, then
that could leave only one remaining 10 MHz block for everyone else to fight over. This, in our view, would drive up the
price to the point that it would be difficult to justify a greenfield network deployment to compete in urban areas against
cable and the Bells, and it is unlikely that 10 MHz alone would be sufficient to compete head to head with the incumbents.

Congress and the FCC Set the Stage

To facilitate a digital TV transition, Congress and the FCC in the mid-1990s provided each TV broadcaster a second 6
MHz spectrum license. The plan was that broadcasters would offer both analog and digital signals during a transition pe-
riod, and that at some point, when a sufficient number of consumers were receiving digital signals, the broadcasters would
return their analog frequencies and provide enhanced programming such as high-definition TV, or multicasting, enabled by
the more efficient digital broadcast transmission standard. Congress, with the encouragement of broadcasters, modified the
FCC’s initial 2006 deadline for clearing the analog spectrum and instead allowed TV stations to continue to operate in both
bands until 85% of households in their local markets could receive digital signals. This loophole created a vast uncertainty
about when, if ever, the spectrum would be cleared.

Congress set several dates for the spectrum to be auctioned, none of which was honored because of the continued uncer-
tainty over broadcaster incumbency. Faced with another statutory auction deadline, the FCC adopted a bandplan and ser-
vice rules for a 2002 auction. At the eleventh hour -- in the face of vigorous opposition from the wireless industry to con-
ducting the auction without a firm deadline for the broadcasters to vacate the analog spectrum, and a face-off between the
FCC and Congress -- Congress released the Commission from the statutory deadline. It provided the FCC with some dis-
cretion in scheduling an auction, except for 18 MHz of spectrum, which it directed the agency to auction. The FCC held
two auctions, one later in 2002, and a second in 2003 to make available the licenses that didn’t sell in 2002.
700 MHz: A Pivotal Auction — March 2, 2007 3 Stifel, Nicolaus & Company, Inc.

Finally, in February 2006, Congress imposed a “hard date” of February 17, 2009, for the broadcasters to cease broadcasting
analog TV and directed the FCC to begin an auction of the remaining commercial spectrum by January 28, 2008, and to
deposit the proceeds of the auction in the U.S. Treasury by June 30, 2008.

The Spectrum
A total of 108 MHz of spectrum at 698-806 MHz (TV channels 52-69) is to be reclaimed through the digital TV transition.
For historical reasons related to the DTV transition, the band is divided into the “Upper Band” at 746-806 MHz (TV chan-
nels 60-69) and the “Lower Band” at 698-746 MHz (TV channels 52-59).

698-806 MHz Band

698 746 764 776 794 806

Public Public
Safety Safety

Lower 700 MHz Band Upper 700 MHz Band

(Channels 52-59) (Channels 60-69)

Source: FCC and Stifel Nicolaus Regulatory Research

Upper 700 MHz Band. The government allocated 24 MHz from the Upper Band to augment public safety spectrum hold-
ings -- half of it for “narrowband” and the other half for “wideband” use. In 2000-2001, the FCC auctioned two blocks of
spectrum, totaling 6 MHz, to create “guard bands” to protect the public safety operations from interference from adjacent
commercial services. Nextel (now part of Sprint Nextel), Pegasus, and Access Spectrum won most of that spectrum.
Nextel subsequently relinquished its guard band licenses as part of the 2004 public safety spectrum swap. The remaining
30 MHz of spectrum at 747-762 and 777-792 MHz is allocated for commercial wireless use, very broadly defined.

Upper 700 MHz Bandplan

Nextel FCC
Nextel FCC
(Public Safety Pegasus, Access (Public Safety
Pegasus, Access Spectrum Swap) Spectrum Spectrum Swap)
Spectrum
747 MHz 762 MHz 777 MHz 792 MHz
752 MHz 782 MHz

A C B Public Safety A C B Public Safety

D D
60 61 62 63 64 65 66 67 68 69
764 MHz 776 MHz
746 MHz 788 MHz 794 MHz
758 MHz 770 MHz

Television Channelization

Block Frequencies (MHz) Bandwidth Pairing Geographic Area Type No. Of Licenses
A (Guard Band) 746-747, 776-777 2 MHz 2 x 1 MHz Major Economic Areas 52
B (Guard Band) 762-764, 792-794 4 MHz 2 x 2 MHz Major Economic Areas 52
C 747-752, 777-782 10 MHz 2 x 5 MHz 700 MHz EAG 6*
D 752-762, 782-792 20 MHz 2 x 10 MHz 700 MHz EAG 6*
* to be auctioned
Source: FCC and Stifel Nicolaus Regulatory Research
700 MHz: A Pivotal Auction — March 2, 2007 4 Stifel, Nicolaus & Company, Inc.

Geographic Areas for Licensing in the 747-762 MHz & 777-792 MHz Bands

Source: FCC and Stifel Nicolaus Regulatory Research

Under the bandplan developed in preparation for the aborted 2002 auction, the FCC divided the remaining unassigned spec-
trum into two licenses, one for 10 MHz (2x5) and the other for 20 MHz (2x10) of spectrum. The geographic size of both
licenses is the larger Economic Area Groupings, or “EAG” licenses, potentially allowing for post-auction aggregation to
create a de facto 30 MHz national license, if one party wins all the licenses. Allowable power limits are 1 kW (kilowatt)
ERP (effective radiated power), which corresponds to power limits in the PCS bands.

Lower 700 MHz Band. The FCC divided the 48 MHz of spectrum in the Lower Band into several blocks of paired and un-
paired spectrum licenses in increments of 6 MHz blocks to accommodate broadcast use, TDD (time division duplex) tech-
nology in the unpaired bands, as well as FDD (frequency division duplex) in the paired bands. The bandplan provided for
mostly the larger EAG licenses, but designated one of the larger 12 MHz licenses for the smaller MSA/RSA geographic
license to accommodate smaller bidders.

Lower 700 MHz Bandplan

Aloha Partners (Licenses
Aloha Partners cover 60% of the pops in the
QUALCOMM C block’s two channels.)
704 MHz 716 MHz 728 MHz 740 MHz
698 MHz 710 MHz 722 MHz 734 MHz 746 MHz

A B C D E A B C

52 53 54 55 56 57 58 59

Television Channelization
Block Frequencies (MHz) Bandwidth Pairing Geographic Area Type No. Of Licenses
A 698-704, 728-734 12 MHz 2 x 6 MHz 700 MHz EAG 6*
B 704-710, 734-740 12 MHz 2 x 6 MHz 700 MHz EAG 6*
C 710-716, 740-746 12 MHz 2 x 6 MHz MSA/RSA 734
D 716-722 6 MHz unpaired 700 MHz EAG 6
E 722-728 6 MHz unpaired 700 MHz EAG 6*
* To be auctioned
Source: FCC and Stifel Nicolaus Regulatory Research
700 MHz: A Pivotal Auction — March 2, 2007 5 Stifel, Nicolaus & Company, Inc.

Following the congressional directive when it cancelled the 2002 auction, the FCC auctioned the C and D block licenses
that year, and conducted a follow-up auction the next year for the same spectrum in those markets that were not bid upon
in 2002. Aloha Partners acquired 158 C block licenses at auction and an additional 81 licenses in the secondary market.
Aloha’s spectrum now covers 80% of the population in the top 100 markets. Aloha has not committed to a particular ap-
plication, but is conducting a wireless broadband trial in Phoenix and a mobile TV trial in Las Vegas. Qualcomm picked
up most of the D block, and is using it to develop its MediaFlo mobile video service, which it is licensing to Verizon and
Cingular.

The FCC allowed a far more generous power limit in the Lower Band, permitting 50 kW ERP, subject to certain specific
requirements to safeguard against interference to adjacent channels for high site systems. For low site systems the FCC
used the 1 kW limit that it applied in the Upper Band, and imposed an added power limit as a way to protect low power
neighbors from high-site systems. This was intended to allow both broadcast and two-way cellular type systems to coex-
ist.

Pros and Cons of 700 MHz. Because it is lower spectrum, the radio waves travel twice as far as higher frequencies such
as the PCS spectrum. This makes 700 MHz particularly attractive for any type of wireless service and significantly reduces
the capital expenditure needed to build out a network, which could make it more feasible for a new-entrant strategy. The
lower 700 MHz is particularly attractive for broadcast service since those frequencies can transmit at up to fifty times the
power as for traditional wireless frequencies.

The propagation characteristics of lower spectrum means the radio wave can penetrate buildings, foliage, and water drops,
which makes it more robust against weather and suitable for indoor reception/transmission. Again, this makes it particu-
larly well suited for broadcasting and as a ‘third pipe’ to the home alternative. The lower position in the band also elimi-
nates the need for line-of-sight transmission.

One downside, relative to the other, higher bands for service provided over a cellular network, is that the strength of the
signal means that a signal in one cell can interfere with a signal in an adjacent cell. There is technology to address this,
but it can operate to mitigate the cap-ex advantage cited above. In addition, the amount of bandwidth available in the 700
MHz licenses could mean that a third-pipe provider wishing to compete with telco/DSL or cable broadband could only
grab a small amount of the market before exhausting capacity except in low-density areas. Finally, the band does not cur-
rently have a global allocation for general wireless service, and instead is currently used primarily for broadcast services in
other countries.

The FCC Refreshes the Bandplan and Industry Begins to Maneuver

FCC Reexamines License Structure for Commercial Spectrum. Noting that the bandplan is now four years old and that
much has changed in the wireless industry in the meantime, the Commission opened a proceeding last August to recon-
sider the bandplan. In particular, the Commission is considering whether to substitute some smaller geographic licenses
for the larger regional ones, in response to petitions by rural carriers, and whether to divide the larger 20 MHz license in
the upper band into two smaller licenses. (In the AWS auction, which also saw a lag between the initial bandplan and the
auction, the FCC ultimately divided a 30 MHz license into a 20 and 10 MHz license.) The FCC also sought comments on
other aspects of the licensing structure, including whether to decrease power limits in the lower band and increase them in
the upper band; whether to extend the duration of the license; and whether to tighten performance standards used to dem-
onstrate adequate development of the spectrum in order to prevent warehousing.

FCC Reexamines Public Safety Spectrum Bandplan. Another major development in the intervening years -- following
9/11, Katrina, and congressional and commission studies -- has been the rising call for improved public safety communica-
tion systems. A number of factors coalesced to produce another set of proposals for the FCC to change the bandplan,
which spawned a series of additional agency proceedings each affecting the Upper Band. The FCC last March started a
proceeding to reconsider how best to structure the 24 MHz allocated to public safety in light of changes in technology and
operational needs.

Pegasus and Access Spectrum Propose Changes to Guard Band Licenses. Pegasus and Access Spectrum, two of the
three winners of guard band licenses discussed above, jointly filed two proposals with the Commission designed to
700 MHz: A Pivotal Auction — March 2, 2007 6 Stifel, Nicolaus & Company, Inc.

monetize their spectrum holdings in a manner that promotes public safety operators’ use of their spectrum. In September,
the FCC opened a proceeding to revisit the guard band licenses, and specifically sought comment on the Access and Pega-
sus proposals.

Pegasus/Access Spectrum Broadband Optimization and Commercial 700 MHz Proposals

Current Bandplan: Public Safety Public Safety

C D B N G WB/ G N A1 C D B N G WB/ G N
A1 5 10 MHz B B BB B B 5 10 MHz BB
2 2 B B B B
MHz 3 1 4 1 3 MHz 3 1 4 1 3
MHz MHz

60 61 62 63 64 65 66 67 68 69

Broadband Optimization Plan: Public Safety Public Safety

C D A BB G N N G C D A BB G N N G
5 MHz 10 MHz 1.5 5.5 B B B B 5 10 MHz 1.5 5.5 B B B B
MHz 1 3 3 1 MHz MHz 1 3 3 1

60 61 62 63 64 65 66 67 68 69

Commercial 700 MHz Plan:

Commercial Public Safety Commercial Public Safety

BB BB BB BB G N N BB BB BB BB N N G
G G
5.5 5.5 5.5 5.5 B B B 5.5 5.5 5.5 5.5 B B B
B B
MHz MHz MHz MHz 1 3 3 MHz MHz MHz MHz 3 3 1
1 1

60 61 62 63 64 65 66 67 68 69

Source: Lawler, Metzger, Milkman & Keeney and FCC

The first, the Broadband Optimization Plan (BOP) would (1) consolidate the narrowband spectrum at the top of the public
safety allocation, (2) allocate three of the four MHz of the B Block (formerly Nextel’s spectrum that had been turned over
to the FCC) to public safety (3) provide for internal guard bands to separate the narrowband from public safety and com-
mercial broadband operations, (4) allocate the remaining one MHz of spectrum to Pegasus and Access Spectrum and re-
locate their guard band spectrum adjacent to the commercial D block as paired 1.5 MHz spectrum, and (5) remove the
restrictive guard band operational restrictions (e.g., no cellular architecture).

The second, the Commercial 700 MHz proposal, is more ambitious. It would reorganize 16.5 MHz of paired spectrum
(from the C and D blocks and part of the guard band) into three 5.5 MHz blocks of paired spectrum. It would proposes to
auction three licenses (two with 11 MHz, and one with 8 MHz) using “package” or “combinatorial” bidding. This bid-
ding structure has been discussed for years, but only implemented in minor auction. It allows bidders to define a particu-
lar spectrum package ahead of time or pick from a set of packages pre-defined by the FCC, which avoids the “exposure
risk” of being unable to assemble a particular package and then being stuck with some but not all of the necessary li-
censes. In addition, the proposal would provide bidding credits to auction winners of the spectrum adjacent to the public
safety allocation in exchange for allowing public safety free access to their infrastructure.
700 MHz: A Pivotal Auction — March 2, 2007 7 Stifel, Nicolaus & Company, Inc.

We believe the first proposal has a decent shot of obtaining FCC approval. The BOP proposal has attracted wide support
from the public safety community, which is key, and a number of parties agree that the narrowband and broadband spec-
trum should be consolidated. But, working against the plan, there is some question whether additional statutory authority
is required for the FCC to adjust the position of the auctioned spectrum, and Verizon Wireless (VZ-VOD) has recently
filed in opposition. The advantage to Pegasus and Access Spectrum is an increase in their spectrum block size from 2 to 3
MHz, with a concomitant reduction in geographies, and perhaps more importantly, it would apply the same technical rules
to their spectrum that apply to the remainder of the commercial spectrum in the upper 700 MHz band. We currently view
the second proposal as a long shot. Without support from some influential players, we believe the FCC is unlikely to un-
dertake such a significant rejiggering of the bandplan.

Cyren Call Proposes to Redeploy Upper 700 MHz Band. Morgan O’Brien, co-founder of Nextel, launched an even more
ambitious proposal last year, so ambitious in fact that it left observers wondering what his fallback strategy is. Citing the
need for public-private partnerships to fill the financial gap that has prevented local public safety organizations from build-
ing interoperable broadband systems for first responders, Mr. O’Brien has proposed reallocating the upper band’s entire 30
MHz of commercial spectrum and instead auction it to a trust to hold and develop a joint public-safety/commercial-use
system to provide interoperable broadband service. The FCC eventually put out the proposal for public comment, but im-
mediately dismissed it on the grounds that the agency can take no action unless Congress passes legislation overturning the
earlier congressional mandate to auction the spectrum.

Although public safety has rallied behind this proposal, and Sen. John McCain (R-AZ) recently announced plans to intro-
duce legislation to back Cyren Call, the Cyren Call proposal has met a chilly reception on Capitol Hill. Currently, we do
not expect Congress to pass legislation to adopt the proposal.

And the FCC Initiates a Proposal to Promote Deployment of Interoperable Public Safety Systems: The Ninth Notice of
Proposed Rulemaking (NPRM). On Dec. 20, 2006, the FCC initiated another rulemaking, proposing an approach to pub-
lic safety allocations in the 700 MHz band that echoes the Cyren Call proposal, and is widely viewed as having been devel-
oped by Verizon Wireless. The agency proposes to (1) allocate half of the public safety spectrum from “wideband” to
“broadband” use; (2) assign this spectrum on a nationwide basis to a single national public safety broadband licensee; and
(3) permit this licensee to operate on a secondary basis on all other public safety spectrum and to use its assigned spectrum
to provide broadband service to public safety entities for a fee. The public safety community has not lined up behind this
proposal, preferring instead Cyren Call’s.

And, Finally, Frontline Submits an Alternative Commercial-Public Safety Proposal. Frontline Wireless, a privately held
company headed by former FCC Chairman Reed Hundt and former WRC Ambassador Janice Obuchowski, and Haynes
Griffin, founder of Vanguard Cellular, recently submitted a proposal to the FCC designed build off of the FCC’s proposal
to address the need for public safety entities to have interoperable broadband systems and in addition allowing “open ac-
cess” to the network. Frontline recommends the FCC divide the larger D block into two 10 MHz blocks, and auction the
newly created E block as a single nationwide license with the condition that the winning commercial bidder build a nation-
wide broadband network to the specifications of public safety and give public safety agencies priority access to the com-
mercial spectrum during emergencies. In contrast to the Cyren Call proposal, we believe the Frontline proposal would not
require legislation. Time constraints are a factor, but it is too early in the process to predict how it will ultimately fare.
(Disclosure: Blair Levin was Mr. Hundt’s chief of staff at the FCC.)

Industry Positions
As just outlined, there are several FCC proceedings that affect the 700 MHz spectrum. (This is apart from numerous pro-
ceedings at the Commerce Department and the FCC that affect the digital TV transition side of the equation, including as-
signing broadcast stations to their new locations, notifying customers of the change and providing converter boxes.) Indus-
try has actively weighed in. We summarize the positions.

Wireless Carriers. Verizon Wireless and AT&T/Cingular favor the existing bandplan and urge the Commission to refrain
from making changes or delaying the auction. In response to some parties urging the Commission to replace the permis-
sive “substantial service” performance requirement with a “keep what you use” renewal rule, Verizon has proposed safe
harbors that if satisfied would fulfill the substantial service standard.
700 MHz: A Pivotal Auction — March 2, 2007 8 Stifel, Nicolaus & Company, Inc.

T-Mobile (part of DT) has urged the FCC to structure the auction to give opportunities for entities of all sizes to win spec-
trum licenses. Specifically, it urges the commission to disaggregate one of the larger spectrum blocks, preferably the larger
D block, and also to use smaller geographic areas for some blocks.

Rural and Regional Carriers. A group representing a number of rural and regional carriers -- including Alltel (AT), U.S.
Cellular (USM), Leap (LEAP), MetroPCS, and Dobson (DCEL) -- submitted an alternative plan, the “Balanced Consensus
Proposal,” which calls for 22 MHz of the spectrum to be auctioned in small CMA licenses, 20 MHz as mid-sized EA li-
censes, and 18 MHz for large regional EAG licenses.

Cable-Sprint Nextel Consortium. SpectrumCo, the consortium of major cable operators (Comcast, Time Warner, and Cox)
and Sprint Nextel, was a major bidder in last year’s AWS auction, and has lobbied extensively in the FCC’s 700 MHz pro-
ceedings, perhaps suggesting interest in participating in this auction as well. Consistent with their strategy in the AWS auc-
tion of amassing a nearly nationwide 20 MHz footprint by assembling many smaller licenses, they urge the FCC to struc-
ture the licenses in a variety of sizes, both in terms of spectrum size and geographic coverage. Specifically, they ask the
FCC to divide the 20 MHz block in the upper band into two 10 MHz blocks, which mirrors the proposal of the Balanced
Consensus Proposal. And, in the lower band, they ask the FCC to auction the A block on an EA basis; the B Block on a
CMA basis (in order to facilitate aggregation opportunities with the adjacent C block); and the E Block on an EAG basis
(similar to the adjacent D block). They recommend the flexibility this provides bidders, noting they began bidding in the
AWS auction by bidding on the larger REAG licenses (which, like the EAG structure, divides the continental United States
into 6 licenses), but shifted their focus as the auction proceeded to smaller and then to medium-sized licenses.

DirecTV, EchoStar. The DBS companies (DISH, DTV) famously paired up in the AWS auction, positioned themselves
to bid heavily in the auction, started the auction with the largest bids, and then dropped out very early, amid various theo-
ries why. Despite (because of?) the backdrop of changing control of DirecTV, they have once again jointly filed comments
with the FCC. Citing the difficulty in obtaining a nationwide license in the AWS auction, they propose the FCC allocate at
least one nationwide license in the 700 auction, and also permit “package” or “combinatorial” bidding that allows bidders
to bid on combinations or groups of licenses in a single bid. They have also urged higher power limits in the upper band,
and tightened performance requirements that guard against winning bidders warehousing their spectrum.

Edge, High-Tech, Equipment. High-tech companies have had their eye on the 700 MHz spectrum, both because it would
stimulate spending on equipment, and, we believe, because it presents the possibility of a third pipe, which would induce
more competition between facilities owners to improve performance as well as provide some market antidote to some of
the concerns of discriminatory treatment that underlie the net neutrality debate. They were instrumental in pushing Con-
gress to set a hard date, and some -- Alcatel-Lucent (ALU), Cisco (CSCO), Texas Instruments (TXN) -- have grouped
together to form the “High Tech DTV Coalition” to continue to urge Congress and the FCC to stay on track with the cur-
rent auction dates.

Motorola (MOT) has been the most active equipment manufacturer, and in general advocates that the FCC license the
spectrum (A) in wider spectrum blocks in order to minimize the amount of spectrum that must be devoted to guard bands,
and (B) in larger service areas because of the high capital requirement and transaction costs associated with aggregation.

Qualcomm urges the commission to retain the status quo, particularly the existing power limits in the lower band where
Qualcomm is developing its one-way MediaFlo service. In its role as 3G CDMA developer, Qualcomm urges the FCC to
retain the larger 20 MHz license in the upper band, echoing the position of Verizon.

Citing the special physical characteristics of the 700 MHz spectrum, Tropos Networks urges the FCC to adopt smaller li-
cense service areas in order to promote development of rural broadband services, and it recommends that Blocks A and B
in the lower band be designated for contention-based unlicensed operations.

Aloha Partners. Aloha Partners, currently the largest owner of 700 MHz spectrum, has cautioned the Commission to al-
low at least six months between the announcement of the auction rules and the deadline for filing auction applications.
Aloha’s position is supported by Metro PCS, U.S. Cellular, and the Rural Cellular Association. They indicate that they
need the six-month period in order to raise funding for the auction. Aloha says that if the FCC announces the auction rules
in April and sets the auction application deadline for July 1, there will be insufficient time to raise funds for the auction,
700 MHz: A Pivotal Auction — March 2, 2007 9 Stifel, Nicolaus & Company, Inc.

which will result in less-active auction participation and fewer participants in the auction. If upstarts are unable to raise the
funds they need, the 700 MHz auction could be significantly less competitive and result in a real bargain for carriers like
Verizon.

Next Steps
Broadly speaking, the FCC must take the following steps to auction the spectrum:

• Complete at least the rulemaking that sets the service rules and bandplans for the licenses, defining the spectrum block
sizes, the geographic service area, the power limits, and the performance requirements. Because of the interconnection
between the guard band location and the commercial spectrum in the upper band, it must probably also complete the
guard band proceeding containing the Pegasus/Access proposals and the Frontline proposal. It also would require ac-
tion in response to the Eighth NPRM in the public safety docket. The FCC could defer action on the second public
safety spectrum proceeding (the Ninth NPRM) until after the others, or even until after the auction.
• Initiate and complete a proceeding setting the auction rules. This is standard operating procedure in any auction. The
FCC must set minimum bids, define bidding credits, if any, decide whether the auction will be transparent or
“blind” (anonymous while it’s going on), and determine the structure of the bidding rounds. Unless the FCC agrees to
adopt the combinatorial/package bidding proposed by Pegasus/Access and DirecTV/EchoStar, this should be fairly
straightforward, but will take some time.
• Schedule the commencement date for the auction, conduct the usual pre-auction seminars, collect “short-form” applica-
tions and down payments.
• Hold the auction. If the Commission retains the current license structure, we would expect the auction to begin in the
fall and conclude within 30 days or so. However, if the license structure is changed to include smaller markets, we
would expect the auction to begin in the fall and take 60-90 days.
• Collect and review the long-form applications and full payments from the winning bidders. (We’ll go out on a limb
here and predict there will be no installment plans available.)

Remaining Risk Factors

Given the twisted history of this spectrum auction, there is residual background concern over when the auction will occur.
Many industry analysts believe that the auction may be delayed. However, we believe that is unlikely to happen because
the FCC wants to make sure it meets the congressional deadline for depositing auction revenues in the Treasury. In addi-
tion, several major carriers also support an earlier start date. We believe that it will not be derailed and will most likely
commence in September-November 2007. That said, we note certain risk factors that we will continue to monitor.

The Broadcasters’ Departure. The most likely risk, in our view, is that the digital TV transition does not move quickly
enough, the public begins to grumble, and either Congress postpones the auction or broadcasters don’t clear out by the
deadline. We do not anticipate wholesale intransigence by broadcasters, but there is much technical work remaining to be
done before they can vacate the spectrum. We believe the most likely outcome, based on the situation on the ground today,
is that the auction moves forward as scheduled, and there are some pockets of problems with broadcasters that could affect
some markets.

Pending Legal Challenge to Small Business Credits. The FCC tightened the rules governing small business bidding cred-
its for the AWS auction, and a legal challenge is still pending before the Third Circuit. It is unlikely the challenge will be
resolved before the Commission sets the auction rules for the 700 MHz auction. This creates some complication for the
agency regarding what “DE” (small business) rules to apply to the auction, and also stands as a caution that there is a limit
to how far they can go in altering rules on the eve of an auction.

Constitutional Challenge. A prominent public interest group, Public Citizen, filed a constitutional challenge to the budget
bill that contained the hard deadline for the broadcasters to vacate the spectrum. We do not expect the D.C. Circuit, which
heard oral argument on February 9, to strike down the statute. (See “Court Appears Unlikely to Upset DTV Deadline and
700 MHz Auction,” published Feb. 9, 2007).
700 MHz: A Pivotal Auction — March 2, 2007 10 Stifel, Nicolaus & Company, Inc.

Cyren Call Proposal. We’ll never say never, given the public safety support, Morgan O’Brien’s track record, and the po-
tential for an intervening public safety crises that changes policy sentiments, but we continue to believe this alternative
proposal will not gain sufficient traction either to postpone the auction or to commandeer the upper 30 MHz of spectrum.

At What Price?
The more-than-$64,000 question that always circles around an upcoming auction is what price the spectrum is likely to
fetch. The Congressional Budget Office has estimated the 60 MHz of spectrum in the 700 MHz auction will bring in $10-
$15 billion. The CBO was quite accurate in its AWS forecast of $15.0 billion versus the $13.7 billion actually received.
CBO used the same methodology for the 700 MHz auction. This would equate to around $0.55 per MHz pop.

Spectrum prices have fluctuated significantly over the past

several years:
AWS Auction Regional Licenses
• 1994-95 PCS Auction $0.52/MHz/pop
• 1995-96 PCS C Block $1.35/MHz/pop (auction
Northeast Winning Bidder Net Bid $/MHz/POP terms inflated the number)
• 1996-97 PCS D-E-F Block $0.33/MHz/pop
D (10 MHz) MetroPCS $ 552,694,000 $ 1.10 • 2000 Auction 35 $4.00/MHz/pop (eventually
E (10 MHz) T-Mobile $ 472,553,000 $ 0.94 canceled due to litigation)
• 2005 Auction 58 $0.90/MHz/pop
F (20 MHz) Cellco/Verizon $ 1,335,374,000 $ 1.33
• 2006 AWS Auction $0.53/MHz/pop
Southwest With the caution that in auction pricing the past is rarely
D (10 MHz) T-Mobile $ 236,549,000 $ 0.48 prologue, we believe the most reasonable benchmark is the
recent AWS auction. The key feature of that auction, as
E (10 MHz) T-Mobile $ 310,995,000 $ 0.63

F (20 MHz) Cellco/Verizon $ 572,446,000 $ 0.58 AWS Auction Top Bidders by Average
$ / MHz / POP
Great Lakes Average
$ per
D (10 MHz) Denali $ 274,083,750 $ 0.47 Rank Bidder
MHz / POP
E (10 MHz) T-Mobile $ 356,780,000 $ 0.61 1 MetroPCS AWS, LLC $ 0.96
2 Cellco Partnership d/b/a Verizon Wireless $ 0.73
F (20 MHz) Cellco/Verizon $ 615,923,000 $ 0.53
3 T-Mobile License LLC $ 0.63
Mississippi Valley 4 Cingular AWS, LLC $ 0.55
5 FMTC Wireless, Inc. $ 0.54
D (10 MHz) T-Mobile $ 110,586,000 $ 0.35
6 CTC Telcom, Inc. $ 0.51
E (10 MHz) Barat Wireless $ 79,376,250 $ 0.25 7 Hill Country Telephone Cooperative, Inc. $ 0.47
F (20 MHz) Cellco/Verizon $ 274,995,000 $ 0.44 8 Denali Spectrum License, LLC $ 0.47
9 SpectrumCo LLC $ 0.45
Central 10 Cricket Licensee (Reauction), Inc. $ 0.44
11 Centennial Michiana License Company LLC $ 0.35
D (10 MHz) Cingular $ 134,954,000 $ 0.33
12 Cincinnati Bell Wireless LLC $ 0.34
E (10 MHz) Cricket/Leap $ 122,284,000 $ 0.30 13 Chester Telephone Company $ 0.33
F (20 MHz) T-Mobile $ 470,290,000 $ 0.58 14 Atlantic Seawinds Communications, LLC $ 0.32
15 Cellular South Licenses, Inc. $ 0.31
16 Plateau Telecommunications, Inc. $ 0.31
West
17 Iowa Telecommunications Services, Inc. $ 0.30
D (10 MHz) MetroPCS $ 355,726,000 $ 0.71 18 Chequamegon Communications Cooperative, Inc. $ 0.30

E (10 MHz) Cingular $ 362,757,000 $ 0.73 19 Mediapolis Telephone Company $ 0.25

20 Palmetto Rural Telephone Cooperative, Inc. $ 0.25
F (20 MHz) T-Mobile $ 894,590,000 $ 0.89
Source: FCC data and Stifel Nicolaus Research
Source: FCC and Stifel Nicolaus Research
700 MHz: A Pivotal Auction — March 2, 2007 11 Stifel, Nicolaus & Company, Inc.

AWS Auction Top Licenses by $ / MHz / POP

License $ / MHz/
Rank Market Bidder Population Winning Bid
Block POP
1 Washington, DC-MD-VA A Cricket Licensee (Reauction), Inc. $ 1.59 4,182,658 $ 133,150,000
2 Chicago, IL A T-Mobile License LLC $ 1.57 8,091,720 $ 254,821,000
3 Chicago-Gary-Kenosha IL-IN-WI C Cingular AWS, LLC $ 1.57 10,328,854 $ 162,082,000
4 NYC-Long Is. NY-NJ-CT-PA-MA-VT C MetroPCS AWS, LLC $ 1.42 25,712,577 $ 363,945,000
5 Northeast F Cellco Partnership d/b/a Verizon Wireless $ 1.33 50,058,090 $ 1,335,374,000
6 Norfolk-Virginia Beach, VA-NC A Cingular AWS, LLC $ 1.28 1,041,276 $ 26,586,000
7 New York-Newark, NY-NJ A T-Mobile License LLC $ 1.23 16,134,166 $ 396,232,000
8 Northeast D MetroPCS AWS, LLC $ 1.10 50,058,090 $ 552,694,000
9 Chicago-Gary-Kenosha IL-IN-WI B SpectrumCo LLC $ 1.10 10,328,854 $ 228,041,000
10 Tampa-St. Petersburg FL C Cingular AWS, LLC $ 1.08 2,395,997 $ 25,888,000
11 Memphis, TN-AR-MS A Cingular AWS, LLC $ 0.98 1,106,808 $ 21,676,000
12 Iowa City, IA A Iowa Telecommunications Services, Inc. $ 0.97 111,006 $ 2,164,000
13 Trenton, NJ A T-Mobile License LLC $ 0.96 350,761 $ 6,730,000
14 Northeast E T-Mobile License LLC $ 0.94 50,058,090 $ 472,553,000
15 NYC-Long Is. NY-NJ-CT-PA-MA-VT B SpectrumCo LLC $ 0.91 25,712,577 $ 468,178,000
16 Wash.-Balt. DC-MD-VA-WV-PA C Cingular AWS, LLC $ 0.91 8,403,130 $ 76,066,000
17 West F T-Mobile License LLC $ 0.89 49,999,164 $ 894,590,000
18 Iowa 13 - Mitchell A FMTC Wireless, Inc. $ 0.89 66,106 $ 1,179,800
19 Wash.-Balt. DC-MD-VA-WV-PA B SpectrumCo LLC $ 0.88 8,403,130 $ 148,708,000
20 Memphis TN-AR-MS-KY C Cricket Licensee (Reauction), Inc. $ 0.88 1,882,332 $ 16,538,000
Source: FCC data and Stifel Nicolaus Regulatory Research

well as other recent spectrum auction prices has been how widely the price/MHz/pop diverge depending on whether it is
an urban or rural market, with the AWS auction ranging from $1.59/MHz/pop to $0.03/MHz/pop.

Beyond the state of the marketplace and broader economy, the most important factors in setting the price for the 700 MHz
auction will be the level of participation. That depends of course on potential bidders’ business plans, whether the FCC
carves up the licenses into smaller sizes, whether the Lower Band is viewed as suitable only for a one-way, primarily
broadcast service, whether the FCC attaches any additional conditions to the licenses, whether the FCC accelerates the
auction start date, and whether any deep-pocketed new entrants decide to enter the fray.

As this note was in the final editorial process, Sprint Nextel CEO Gary Forsee reportedly stated that his company had no
current plans to participate in the 700 MHz auction. It may very well turn out that Sprint Nextel does not participate in
the auction. Taking their 800 MHz, 1.9 GHz, and 2.5 GHz licenses combined, they currently have deep spectrum hold-
ings and are committed to a number of tasks that will draw on their cash. That said, we note that the name of the pre-
auction game is typically either silence or feints, or both, and we are reminded of Verizon Wireless’s early public state-
ments that they did not intend to participate in the AWS auction.
700 MHz: A Pivotal Auction — March 2, 2007 12 Stifel, Nicolaus & Company, Inc.

Important Disclosures and Certifications

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curately reflect our personal views about the subject securities or issuers; and we, Blair Levin, Rebecca Ar-
bogast, and David Kaut, certify that no part of our compensation was, is, or will be directly or indirectly related
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