Tuesday, August 13, 2013

Achieving Unanimity: Getting to "Yes" for Incentive Auctions

By Gregory J. Vogt, Visiting Fellow

The need to allocate more spectrum for mobile broadband has achieved rare, near unanimity in Washington. As the FCC implements the 600 MHz band incentive auction, however, there is a lot of chatter concerning limiting eligibility to bid on the voluntarily contributed broadcast spectrum. Achieving a “yes” on the incentive auction bargain must include rejecting such limitations because they are antithetical to the reverse auction bargain and violate free market principles.

Incentive auction legislation encourages broadcasters to voluntarily contribute spectrum in exchange for a portion of the auction revenues from the “forward auction” portion of the process. The FCC’s implementing NPRM recognizes this goal as critical to net as much as 125 MHz spectrum. Although the FCC never proposed a spectrum cap for bidders, it does ask whether some limitation should be imposed on the overall amount of 600 MHz spectrum that can be acquired by a particular bidder in the forward auction.

Smaller mobile players have been promoting bidding limitations to gain more spectrum for themselves. For instance, T-Mobile has proposed that the FCC set a “target price” on the overall receipts in the forward auction, accompanied by strict spectrum caps for large mobile providers. This is dubbed by its proponents the “Dynamic Market Rule.” In support of limitations, Sprint has argued that, based on spectrum auctions in Europe, restricting bidders may have no impact on eventual auction prices, but its paper is riddled with caveats.

Placing limitations on bidder participation is unwise. First, it almost certainly will tend to depress expected revenues, a consequence that harms taxpayers at a time of significant budget deficits. A recent study has shown that restricting potential bidders in auctions around the world probably did reduce potential receipts. The failure to achieve the reserve price in the 700 MHz D Block auction, which most probably occurred because that block was subject to a significant condition on use, should be a lesson for conducting any auction.

Second, perception that revenues will be depressed will in turn deter broadcaster willingness to volunteer spectrum, undermining the principal aim of the reverse auction to repurpose, in the FCC’s words, a “maximum amount of spectrum.”

Third, bidder limitations will skew the competitive market by granting advantages to individual market participants. Availability of insufficient mobile spectrum will harm consumers by inevitably reducing service quality and driving up broadband prices. And even though the FCC has provided some bidding credits in other auctions for small designated entities, a practice itself that raises serious issues, the agency has never adopted bidding advantages for multi-billion dollar entities with significant, highly capitalized foreign ownership.

Fourth, there is no showing that promoting competition requires handicapping certain bidders in the forward auction. Although the Justice Department speculated that a dominant firm might want to foreclose competitors from acquiring more spectrum, it makes no specific recommendations to the FCC to limit forward auction participation. Larger mobile carriers argue that limiting bidders is unnecessary because the chance of a foreclosure strategy is remote. In the end, concerns about undue market concentration should be left for adjudication by the antitrust authorities in other forums. And it should not be forgotten that the promotion of wireless broadband will strengthen competition in the overall multi-platform broadband marketplace. It is a mistake for the FCC to continue to look at wireless broadband as if it is a standalone segment separate from the broader marketplace.

Fifth, auction handicapping proposals are seriously flawed. Although the “Dynamic Market Rule” proposal is advertised as a mechanism to prove that limiting participation in an auction does not affect bid prices, its design proves that it is intended to steer spectrum to a smaller bidder, hardly a “dynamic” result. And there is no discussion as to how the FCC will decide what the “right” target price would be, i.e., what unrestricted bidding would produce as the maximum price. It would be exceedingly difficult, if not impossible, to identify the “right” target price before the auction. And the fact that failure to meet the target price would cause the rules to be adjusted to permit larger mobile bidders to win small blocks of spectrum until the target price is reached not only concedes the design failure, but compounds the problem by granting the spectrum to the favored bidder anyway. As Mike Myers’ Linda Richman would say on Coffee Talk, "the Dynamic Market Rule is neither dynamic, nor is it a market, discuss amongst yourselves."

The Commission should not risk meeting the near unanimous desire to repurpose a “maximum amount of spectrum” for mobile broadband use by tilting the auction scales toward particular bidders. Getting to “yes” on the incentive auction bargain depends on more robust participation by all willing bidders.