Federal auctions of radio spectrum are so rare that companies like Verizon, Sprint, and Echostar normally line up to frantically bid for dwindling airspace.

But Thursday's sell-off of U.S. airwaves that could be used for innovative new services has bidders worried that it may be difficult to make a profit because of some unusual requirements.

The U.S. Federal Communications Commission is selling what may well be the last slice of available radio spectrum, airwaves freed up by the pending switch of television broadcasting from analog to digital. But the rules for acquiring the most attractive segment require a commercial buyer to share the airspace with public safety agencies.

In fact the requirements, which have commercial bidders wondering whether they can co-manage a wireless network with a government bureaucracy, may have already caused one potential bidder to withdraw. Frontline Wireless, a venture-funded consortium and the primary applicant for D Block, the 10 MHz slice of spectrum earmarked for a public-private partnership, pulled out of the auction almost two weeks ago.

The U.S. government is selling off five blocks of spectrum, labeled A to E, that are being freed up as television broadcasting moves from analog to digital in 2009. D Block is the only segment that grants the licensee national coverage.

While Frontline did not give a reason for its departure, the general consensus is that the consortium, which included VCs such as John Doerr and Ram Shriram, was unable to raise the auction's $1.33 billion down payment in the current economic climate, despite the inherent value of the spectrum.

"It is very difficult for a company to come up with a viable business model that is reliant on a political decision-making process that requires it to offer services to the government that could be below cost," said Tim Farrar, president of Telecom Media and Finance Associates.

With financing more difficult to acquire during the stock market meltdown, Mr. Farrar said, business models that have the high level of uncertainty inherent in D Block become very hard to fund in any condition.

But another analyst believes that the D Block could actually work in the favor of the telecom incumbents that participate in the auction. They could use the uncertainty generated by Frontline's departure to get the spectrum at bargain prices.

"I believe that the opportunity now exists for somebody to buy the D Block spectrum at an attractive discount because there will be fewer players competing for it," said Joe Nordgaard, director of wireless consulting firm Spectral Advantage.

The telecoms could bid on the spectrum as a backup strategy if they fail to get a substantial swath of one of the other blocks of spectrum, he said.
Approximately 1,200 licenses will be auctioned in the five blocks--but only the D Block will earn the successful bidder a single nationwide license. That places a tremendous capital burden on the buyer to build a nationwide network within a relatively short timeframe.
Incumbent wireless operators tend to pick and choose swaths of spectrum that either enhance their current holdings or block a competitor or new entrant from getting a crucial piece of spectrum.

Or a carrier can bid up the price of a swath of spectrum to make it more expensive for a rival or a new entrant. A very high price could push profitability for the new entrant further out into the future or even make it impossible to operate.

For instance, incumbents could bid-up the C Block spectrum on which newcomer Google is expected to bid. Whatever happens with the D Block, Mr. Nordgaard said, the spectrum is very valuable because of its nationwide reach and its capacity to penetrate indoors.