Monday, November 25, 2013

Condition-Free Auctions Promote Economic Efficiency and Successful Outcomes

On November 19, the Digital Policy Institute hosted a webinar entitled, “Spectrum Auctions and Band Plans.” Panelists included Free State Foundation President Randolph May, Association of Independent Television Stations President Preston Padden, and National Association of Broadcasters Executive Vice President of Strategic Planning Rick Kaplan. The panelists, each with decades of experience regarding communications law and policy, discussed the proper approach the Commission should take to ensure the success of the upcoming spectrum auctions. The resounding message was the importance of achieving a successful auction in order to meet the constantly growing demand for increased spectrum.
Free State Foundation President Randolph May advocated an unencumbered, condition-free auction to maximize the highest and best use of spectrum as the statute authorizing the Commission to conduct auctions dictates. Mr. May reminded the audience that experience shows that when the FCC begins to deviate from the principle of an unencumbered auction the results are “not always pretty.” He cited as examples the flawed PCS C block and 700 MHz auctions.
In the PCS auction, the FCC extended long-term credit to financially weak bidders, with the apparent intention of encouraging small businesses and rural bidders. This manipulation of the auction resulted in a decade of bankruptcy litigation, delayed the availability of spectrum, and cost consumers over $65 billion according to some estimates. In the 700 MHz C block auction, the FCC required the winner of the 22 MHz C license to provide non-discriminatory network access for all devices and applications. This vague “open access” mandate lacked detail on the freedom of a new licensee to set prices or innovate and disincentivized bidding. This condition-encumbered C block sold for 29% of the price as comparable or even less valuable blocks. Additionally, in auctioning the D block in the same 700 MHz auction, the FCC imposed significant conditions on the use of the spectrum and imposed eligibility rules on bidding. The results of this auction were also unsuccessful, since the D license failed to sell even for a reserve price that was one-third of the average obtained for other comparable licenses. As Tom Hazlett, Professor of Law & Economics at George Mason School of Law stated, “this is evidence that regulatory rules and spectrum allocation procedures continue to distort markets.”
Preston Padden seconded these points, and reminded the Commission of another hurdle to a successful auction: The Commission does not currently have in its possession the spectrum it is purporting to auction. In addition to structuring a condition-free auction to encourage efficient bidding, the Commission must also incentivize broadcasters to relinquish their spectrum. He stated, “absolutely the best course is to rely on the market forces of an open auction as Congress intended.”
Voicing a different perspective, Rick Kaplan cautioned against rushing into the incentive auction, and emphasized the importance of other auctions, which must be executed before the FCC pressures broadcasters to give up their spectrum. He pointed to interference problems in previous auctions and urged the FCC to take its time to formulate the right band plan. Finally, he asked for those broadcasters that do not donate their spectrum to be held harmless, and stated that freeing up spectrum is not the only thing that defines a successful auction: “Success is having a wireless broadband ecosystem that works together – that means no interference.”
Although it is certainly important to auction spectrum in ways that support a reliable, interference-free wireless network, it is also crucial that the incentive auction take place soon and achieve success. In order for the U.S. to continue to be a world leader in broadband and the communications and technology sector, the FCC must ensure that there is sufficient spectrum available and that it is used efficiently. A report released by Deloitte last year examined spectrum strategy issues that may threaten U.S. leadership in mobile broadband. The report found that “demand for mobile services has accelerated, fueled by a multitude of innovative devices and an explosion in applications. Demand growth is likely to intensify as mobile broadband uses appear in a widening array of business and government segments,” and “a successful TV broadcast spectrum auction should be a top priority as a highly visible step toward meeting the 2020 goal of freeing up 500 MHz of spectrum for mobile broadband.” In light of these facts, Randolph May stated in the recent webinar that the incentive auction “should happen sooner rather than later because wireless needs more spectrum. It’s a good thing in terms of adding to our economy and benefiting consumers. In order to keep up with the rest of the world and serve our own nation’s interest, having more mobile and more spectrum is a good thing.”
Many recent reports continue to emphasize the importance of conducting a condition-free auction to maximize revenue and to ensure the highest and best use of spectrum. I cited several of these in my September 25 Perspectives, “No Picking Favorites,” as did Free State Foundation Visiting Fellow Greg Vogt in his August 13 piece, “Achieving Unanimity.” There seems to be widespread agreement that imposing eligibility constraints on the incentive auction will threaten the success of the auction.
FSF President Randolph May summarized these key issues in the recent webinar:
We have to get it right. My hope would be that we have an opportunity, particularly with the newly reconstituted Commission, that this [incentive auction] be a top priority…. I do think there’s widespread agreement that if it can be done properly and consistent with rule of law principles it is possible to repurpose spectrum while also conducting an auction in which broadcasters aren’t coerced but participate voluntarily. I think its ultimately important, especially given the fact that the wireless market is competitive and that we don’t have a problem with concentration, that we don’t have an incentive to game the auction to reach preconceived results. The FCC should conduct an unconditioned auction.
Although panelists at the webinar at times reflected divergent perspectives of various stakeholders and observers in the communications sector, there was general agreement that the success of the incentive auction should be a top priority for newly appointed Chairman Wheeler and the Commission. Promoting the availability and reliability of spectrum will fuel the continued growth and development of the digital marketplace, respond to consumer demands, and help the U.S. maintain its mobile broadband leadership.