In July 2019, the Federal Communications Commission (FCC) ended a 57-year status quo when it determined that FCC Educational Broadband Service (EBS) spectrum licenses located in one of the largest and most valuable spectrum bands could be owned by parties other than educational institutions.1 The band comprises 190 MHz of highly desirable 2.5 GHz spectrum for broadband use. Starting in 1963, the FCC granted these spectrum licenses to schools and public television stations for TV broadcasting and data use by schools in 70-mile circles of coverage.2 A 2019 FCC order dramatically increased the potential sale value of the EBS spectrum. First, it allowed commercial firms, such as mobile operators and Fixed Wireless Access (FWA) internet providers to acquire the spectrum licenses directly from the educational institutions. Second, the FCC order eliminated the requirement that the spectrum be used for educational purposes, as the rule had been in place since the spectrum was given to the schools at no charge. Third, it removed term lease limitations. Following this order, the FCC completed an “overlay” 2.5 GHz auction (Auction 108) in 2022 to auction the “white space” areas, mostly in sparsely populated rural areas located between the exiting EBS 2.5 GHz licensed geographies, further solidifying the commercial utility of the band.
The 2.5 GHz spectrum, classified as “mid-band” spectrum, is considered the foundational layer for 5G mobile service. As an example of the potential value of the 2.5 GHz mid-band EBS spectrum, mobile operators spent more than $81 billion for 280 MHz of 3.7-4.0 GHz of mid-band spectrum at the FCC’s 2021 auction. The Brattle Group analysts called the spectrum band the “sweet-spot” of “frequency location in the upper mid-band with an optimum mix of coverage and capacity.”3
As an illustration of the sustained value of these EBS mid-band spectrum intangible asset licenses held by educational institutions, recent market analysis by NERA Economic Consulting suggests that there is a robust appetite for these EBS licenses. According to this study, the valuation of such assets can be substantial: NERA noted, as an explanatory example, that if the “circular EBS license area includes a population of 1 million residents and the EBS license is 22.5 MHz (four channels), the potential value of the license to a mobile operator, using a benchmark of $1.05 per MHz of population, is $23,625,000.”4 Because the EBS 2.5 GHz mid-band spectrum is highly desired by mobile operators and the licenses held by educational institutions may now be freely conveyed, as opposed to only leased, schools, colleges and public broadcast television EBS license holders have a unique opportunity to monetize these assets.
The combined EBS and Broadband Radio Service (BRS) spectrum band ranges from 2502 MHz to 2690 MHz, making it one of the largest spectrum bands suitable for mobile use. It sits in between the 2.4 GHz unlicensed band used by Wi-Fi and the 3.45 to 4 GHz used by the mobile carriers for 5G service. The FCC created the EBS band before the rollout of 1G cellular service in the early 1990s and far before the current demand for mobile internet. The FCC originally allocated the spectrum for one-way video links among school buildings. With a typical protected service area radius of 35 miles, each license covers approximately 3,848 square miles. Using an average U.S. population density of 94 people per square mile, the average EBS license covers an estimated 360,000 people. Historically, the FCC awarded educational institutions EBS channels of 23.5 MHz per channel in five groups.5 Thus, in an average license area, there could be 117 MHz of total EBS spectrum covering a population of 360,000, or 40.5 million MHz-Pops. This is a large amount of spectrum, as is now required to make the high-speed throughputs of mobile 5G possible.
In 1985, the FCC relaxed the 100% educational requirement, allowing 95% of capacity to be used for non-educational purposes.6 Then, in 2004, the FCC recognized that the band was ideal for mobile service. At that time, the FCC reconfigured the channels and permitted mobile providers to lease them. Thereafter, providers such as Sprint and Nextel began to actively lease EBS licenses from schools and colleges with long-term agreements for their growing mobile services. By 2020, approximately 93% of the 2,193 EBS licenses were leased to third parties. The 2019 FCC EBS Order again reconfigured the spectrum for 5G service, facilitating the transition from leasehold interests to direct ownership for commercial operators.7
Spectrum license valuations are complex appraisals of intangible assets with indefinite lives.8 There are many inputs to consider, such as prior FCC auction results, international benchmarks and private secondary market sales. As with the sale of any major asset, governing boards of directors are obligated to obtain fairness opinions as evidence that they have met their fiduciary duty and negotiated an equitable price for a sale. The Delaware Supreme Court held, for example, in the Van Gorkom case, that a board failed to inform itself because it did not obtain a valuation before making a decision on a merger. The court held the directors personally liable for monetary damages.9 The court explained that without a fairness opinion, a board cannot properly assess the fair value of its principal assets.10 The board has a fiduciary duty to inform itself through a professional valuation to validate that the price offered by a buyer is adequate. Thus, a fairness opinion obtained from a specialized valuation firm lowers a board’s risk of liability by proving the exercise of due care.
Because EBS spectrum licenses are highly valuable assets of educational institutions, state attorneys general or aggrieved parties may demand a fairness opinion to ensure that the licenses are not sold for less than their fair market value.
An independent valuation should demonstrate that the transaction price is fair and should deliver a range of high and low potential values. The opinion does not address the underlying business decision. There are three approaches for valuations: Income, Market, and Asset approaches. The Income Approach uses a discounted cash flow method, estimating the projected future income from the spectrum, discounted to its present value. The Market Approach examines comparable prices of spectrum sold in auctions or in private sales, such as the FCC’s spectrum auctions. The Asset Approach, or Balance Sheet Approach, uses book value or replacement cost. The Market Approach is the most common method used for valuing spectrum licenses.
A fairness opinion must be thoroughly undergirded by facts. In ACP Master v. Clearwire (2017),11 the Delaware Court of Chancery rejected an expert’s opinion concerning the sale of 2.5 GHz spectrum because it was based on an extraordinary number of assumptions. One assumption improperly converted a single, regional spectrum purchase into a national spectrum price. In another case, Sunbelt Beverage, the court rejected an expert’s valuation as “a mere afterthought, pure window dressing,” because the comparable companies selected were too dissimilar.12 Several appraisal organizations have developed standards for valuing intangible assets, such as the American Society of Appraisers and the American Institute of Certified Public Accountants. These standards include the Uniform Standards of Professional Appraisal Practice (USPAP). Spectrum appraisals should strictly adhere to these professional practices.
EBS licenses held by educational institutions are extremely valuable assets in high demand by mobile companies. Spectrum appraisal is a specialized area of valuation. Board members of educational institutions should protect themselves against possible liability for failure to exercise due care by obtaining professional valuations and fairness opinions before entering into negotiations to sell EBS spectrum assets.
A critical factor in the current valuation of EBS assets is the temporal nature of the existing leases. Historically, FCC regulations restricted the maximum duration of EBS spectrum leases to a term of 30 years. Many educational institutions entered into these long-term “de facto transfer leases” with commercial operators, such as Clearwire and Sprint (now T-Mobile), following the 2004 band reconfiguration. Consequently, a substantial volume of these leases is scheduled to expire between 2030 and 2040.
As these 30-year terms approach their conclusion, the “reversionary interest” held by the school or college likely increases the value of the licenses to the leaseholder. Upon expiration, the mobile operator loses its contractual right to utilize the spectrum, and full operational control of the spectrum reverts to the licensee. This creates a looming “spectrum cliff” for mobile carriers who have integrated this 2.5 GHz mid-band capacity into their 5G networks. Educational institutions must recognize that the leverage in negotiations shifts significantly as the lease expiration date nears. Governing boards should audit their existing lease agreements to identify exact expiration dates, as the window for maximizing the value of a sale or a lease renewal typically opens several years prior to the actual termination of the current contract. In addition, negotiations with mobile carriers over the sale of the EBS licenses are complex, and legal counsel, such as that provided by Phillips Lytle LLP’s attorneys, should be used.
The spectrum licenses held by schools are now multimillion-dollar assets in high demand. Because spectrum valuation is a highly specialized legal and financial field, school and public television board members should protect themselves and their institutions by securing a professional fairness opinion and legal counsel before entering into negotiations for the sale of these valuable spectrum license assets.
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