Are Trump's cronies really getting "essentially ... a no-bid contract" on a 5G windfall, as CNN claimed?

Does the Trump administration plan to line supporters’ pockets through a 5G spectrum lease program run by the Department of Defense? Or is this an example of a conflict of interest at a media outlet whose parent has a vested interest in the outcome? Or both?

Late yesterday, CNN reported that the DoD and White House planned to use a process that “would essentially be a no-bid contract” to grant control of a massive amount of spectrum to Rivada, a wireless innovator. If true, the setup would certainly be of significant concern, especially to those involved in the emerging 5G industry, as well as to taxpayers:

Senior officials throughout various departments and agencies of the Trump administration tell CNN they are alarmed at White House pressure to grant what would essentially be a no-bid contract to lease the Department of Defense’s mid-band spectrum — premium real estate for the booming and lucrative 5G market — to Rivada Networks, a company in which prominent Republicans and supporters of President Donald Trump have investments.

The pressure campaign to fast track Rivada’s “Request for Proposal” (RFP) by using authorities that would preclude a competitive bidding process intensified in September, and has been led by White House chief of staff Mark Meadows, who was acting at Trump’s behest, sources with knowledge tell CNN. To push his case, Meadows has sometimes used as his proxy an individual identified by sources in the telecommunications industry as a top financial management official in the US Army.

Sources tell CNN that Trump was encouraged to help Rivada by Fox News commentator and veteran GOP strategist Karl Rove, a lobbyist for, and investor in, Rivada.

Untold billions are at stake. A government auction of 70 megahertz of spectrum in August went for more than $4.5 billion. The Rivada bid would be for 350 megahertz of spectrum — five times that amount.

It’s not difficult to believe that shenanigans might exist in government auctions of cell-system spectrum. Nine years ago, the Obama administration got caught in exactly this kind of corruption in the LightSquared debacle. That blew up into a scandal when an Air Force general accused the White House of pressuring him to change his testimony to protect one of its donors linked to the firm at the center of the spectrum-sale proposal. In that case, Barack Obama himself was at one time an investor in LightSquared, which eventually declared bankruptcy amid SEC investigations into potential fraud.

So yeah, it’s fair to be worried about the risk of cronyism in spectrum-assignment projects. That doesn’t appear to be the problem here, however, at least not at this point. As a source familiar with the process told me after this CNN story first emerged, that isn’t at all what is happening at the DoD or at Rivada.

In the 2011-12 case, the Pentagon opposed the spectrum sale because of its potential to interfere with GPS systems. They argued, eventually successfully, that the DoD needed to control its assigned spectrum for national-security reasons. And that is what makes this case different from the 2011-12 effort by LightSquared or the August auction. The DoD isn’t actually selling spectrum with this contract, nor will it be a no-bid situation, according to this source, who says that Rivada has made it clear it wouldn’t participate in a no-bid award. Instead, the government will keep overall control of the spectrum, as Donald Trump himself insisted on doing, while selecting one or more contractors to build and then manage the leasing of a new national 5G network’s bandwidth to retailers.

In short, the contract will take the building of the infrastructure of a national 5G network out of the hands of the retailers. Previous networks got built for private use by AT&T, Verizon, T-Mobile, Sprint, and other carriers, who have invested a great deal of capital into that infrastructure over the years and see that as a competitive advantage. That (reasonably) allows them to set prices for access to those private networks, not just to individual cell-phone users but also firms that exist on those networks — like Google and Amazon, for instance, and smaller regional resellers who can’t afford to build their own nationwide networks.

The DoD’s vision for 5G upends this model by building the network itself through a contractor rather than selling the spectrum at auction. The DoD retains control of the spectrum and the network in case of national emergencies, but otherwise this allows for much more competition in the retail arena by eliminating the need for massive capital investment by retailers in that new infrastructure. The costs will eventually go into the rates for bandwidth charges, of course, but the cost of entry into the new cellular/wireless data market will drop dramatically. That lack of necessity for massive capital spending upfront to build private 5G networks threatens the dominant market position of the current leaders — Verizon and AT&T, which oppose this plan.

It’s worth noting on that score that AT&T owns CNN, which the CNN article dutifully discloses. However, it doesn’t explain that AT&T opposes this policy or why. (For what it’s worth, my source thinks it very unlikely that the CNN story and take came directly from its parents’ HQ, but much more likely through AT&T allies closer to the White House. Hence, the “senior administration official” saying that it’s “really fishy.”)

The article also fails to note that the conceptual DoD plan for a wholesale network has advocates in the tech industry, some of whom — like Google’s Eric Schmidt — could hardly be considered a Trump crony. They want lower pricing for access to 5G, and perhaps to even be a player in the retail end, as well as to catch up to China’s 5G development as fast as possible. In some ways, this is a battle between Big Tech and Big Telco, but the DoD plan would also allow a lot of smaller operators to compete on pricing and service as well. Not all of those would survive, but they would at least have equal access to the market at the beginning.

That’s not to say that there isn’t a rational counterargument to this plan. Government operations aren’t known for their efficiency, and the DoD’s track record in contracting with the private sector isn’t exactly spotless or failure-free, either. The telcos have a big interest in investing their capital into 5G development, and it might be more efficient in some ways to let them build competing private networks. But let’s not kid ourselves into thinking that those telecoms don’t have their own lobbyists and their own influencers at work in this decision, too.

What about Rivada? The DoD wants to open bidding on the project, my source says, not limit it. Using the public request for information (RFI) and request for proposal (RFP) processes would tend to confirm that, although it doesn’t preclude covert pressure to do otherwise; if the DoD and administration wants to no-bid the project, there are quieter ways to accomplish it. The Pentagon might end up with a consortium of different bidders in the end to build and manage access to the new 5G spectrum. My source confirmed CNN’s reporting on Rivada’s refusal to deal with a no-bid situation (noted further into the CNN article), for both ethical and practical considerations. Rivada execs “would spend the next two and a half years in front of the House Oversight Committee” if they accepted a no-bid contract, my source pointed out.

Rivada, by the way, has published the executive summary of its response to the DoD’s RFI that starts the process of bidding. They argue that this will eventually benefit the current market leaders by relieving them of capital expenditures, but whether the telcos buy that argument is left to the imagination:

By utilizing a purely wholesale business model (subject to DoD pre-emption), the network operator avoids costs associated with branding, retail marketing, sales, retail operations and customer management. The Commercial Wholesale Network Operator will lower prices, drive increased utilization, improve access to 5G and provide enhanced coverage to underserved areas. By reducing the costs of the network build and operations, eliminating all retail expenses, and operating through an open access wireless sales model, broadband capacity would be sold dynamically at the lowest possible price over cost. In turn, these would unleash the ability to sell capacity to (i) other cellular Mobile Network Operators (MNOs) that need extra capacity, (ii) existing and new MVNOs (potentially including DoD as an MVNO to its employees or more broadly to federal employees), and (iii) other providers of innovative new products, services and solutions that will increasingly “bundle” broadband connectivity with the product, service or solution (rather than requiring the end user to subscribe to the connectivity services of a retail carrier in order to access the digital product, service or solution).

A wholesale network would not compete with any existing retail carrier business in any geographical area. Rather, it would provide those existing 5G carriers with quick and flexible additional 5G capacity if they needed it, either on a short-term or long-term basis.

Rivada calls its model for providing network capacity to wholesale customers the Open Access Wireless Market (OAWM). Conceptually it is similar to the open-access wholesale electricity markets that have been in operation for decades, and have helped drive down costs and increase investment in that sector.

As mentioned above, the RFI starts the contract process by identifying potentially qualified bidders. The DoD will use those to craft its RFP, which is where game-playing sometimes does take place. Contracting agencies can write RFPs so specifically that only one (favored) provider can qualify for the bid. On a project of this scope and with so much potential for revenue at stake, however, any attempt to rig the process would immediately generate very public screaming. (Unlike other DoD projects, there won’t be other such contracts for consolation prizes down the road, and the bidders won’t have any incentive to stay quiet, as they do on military systems.) It’s far more likely that this ends up being portioned out to several bidders on different phases anyway, as the scope of building a new national 5G infrastructure is so gigantic that it will exceed the current capabilities of any one company, with the exceptions of AT&T and Verizon — and they’re not going to build one if they can’t regulate it for the DoD afterward. If that’s what the DoD wanted, they’d just sell the spectrum or do a no-bid deal up front with the big players.

And since we haven’t yet seen the RFP, we’re nowhere near the stage where the DoD can simply hand off the project to anyone.

Is Rivada the right partner for the DoD? That is what the bidding process is designed to discern. Anyone familiar with DoD procurement knows there are all sorts of reasons to be skeptical about how well that might work out. However, contrary to CNN’s report, this is not a spectrum sale, the DoD will remain in control of the spectrum through its selected contractor(s), it’s almost certainly not going to be a no-bid contract, and it’s actually a plan that has wide conceptual support outside of the telcos. It will be interesting to see who else jumps into the RFI/RFP pool — and whether that includes the big telcos at some point.

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