Snatching Victory From the Jaws of Defeat: Incentive Auction Should Be Win-Win-Win for Consumers, Government, and Industry

By Gregory J. Vogt, Visiting Fellow

The upcoming incentive auction, where a projected 120 MHz of spectrum may potentially be reallocated from TV broadcasting to mobile broadband, is a vital part of the Obama Administration's original goal of reallocating 500 MHz of spectrum for mobile broadband use. As described in this blog, this effort holds the promise of improving consumer welfare, meeting government competition and financial needs, and addressing the wireless carriers’ need for more spectrum. As others have done in the past, a recent paper by William Lehr suggests that competition should be the most important policy that should govern auction design. Although competition is important, the end result sought by these policy conclusions is misguided.

Given the potential defeat caused by a growing shortage of mobile spectrum, the incentive auction could be a jaw-snatching victory, a veritable win-win-win for consumers, government, and industry. All policymakers agree that obtaining the maximum amount of repurposed spectrum is critical to achieving the purpose of the incentive auction. So with this rare bipartisan policy agreement, what could possibly stand in the way of a resounding success?

Informal government statements have clouded the ability to achieve this purpose.  Chairman Wheeler has not announced whether he will recommend that the Commission place restrictions on bidder participation. But he has implied that he might ensure “that multiple carriers have access” to spectrum, referring to the Justice Department’s rather tepid speculation that large mobile companies, such as AT&T and Verizon, might be motivated to horde spectrum in order to “foreclose” competition. And both T-Mobile and Sprint have encouraged these statements by urging the FCC to restrict the amount of spectrum that the largest mobile broadband providers could bid for in the incentive auction. 

It would be bad public policy to introduce into the incentive auction an additional condition of “fairly distributing” spectrum among multiple carriers rather than simply auctioning the spectrum to the highest bidder. Such government manipulation might well prevent the incentive auction from achieving its overarching goal of maximizing the amount of repurposed spectrum, a concern which some broadcasters have raised. 

FCC history demonstrates that auctions with significant conditions, such as one that would steer license grants to a subset of participants, lengthens the time between auction and license grant, embroils the FCC in contested legal proceedings, and largely fails to achieve the purpose for which the targeting was imposed.

First, the 700 MHz D Block auction contained a restriction that the spectrum be dedicated to jointly providing a First Responder network and private mobile spectrum, including a minimum bid amount. The cost uncertainties surrounding the obligation most probably caused the failure to achieve the minimum bid amount. That spectrum is still not used 17 years later, but it is now slated for exclusive government use by the Middle Class Tax Relief and Job Creation Act.

Second, the C block of the same auction contained an "open access" requirement that obligated the auction winner to permit any device or application to be operated on the spectrum. These requirements have been compared to the 1960s era Carterfone decision that imposed an all-device obligation on monopoly wireline telephone companies. At the time of the auction, it was persuasively argued that the eventual auction price was $3.1 billion (or at least 40 percent) lower than would have been achieved without the restriction. Of course, under the D.C. Circuit’s recent decision vacating the net neutrality anti-discrimination and no-blocking rules, such an “open access” restriction has yet to be legally justified, particularly given the competitive broadband market. 

Third, the entrepreneur block of the PCS auction (also termed the C block) was reserved for companies that had less than $125 million in annual revenues and $500,000 in assets to promote participation by small businesses. A study by Fred Campbell has shown that the restrictions produced 61 percent less revenues than later unrestricted PCS auctions achieved. This same study and another by Tom Hazlet and Babette Boliek demonstrated that the restriction seriously delayed license grants, and many licenses were tied up in bankruptcy for years. Over half of the licenses had to be returned to the government. And perhaps most significantly, Mr. Campbell’s study showed that the restriction did not increase the long-term participation of small businesses, which largely transferred their licenses to existing players in the after-market. This, of course, meant that taxpayers were not fully compensated for the spectrum because the entrepreneurs received part of the proceeds.

Fourth, even designated entity ("DE") participation in auctions have produced skewed bidding results, often delaying the results of auctions. Given that small companies most often choose to sell their licenses rather than remain in the market for the long-run, it is doubtful that the purpose of the designated entity rule is being fully achieved. Although I express no opinion here on whether promoting access to spectrum for truly small entities outweighs the detriments, neither T-Mobile nor Sprint come anywhere even remotely close to being a very small entrepreneur defined as a designated entity. 

The following is a summary of these auction results.

Auction with Conditions	Reduced Revenues	License Delays	Litigation	Purpose Achieved?
700 MHz F block (First Responder)	yes	yes	no	no
700 MHz C Block (open access)	yes	yes	no, but rule contested elsewhere	unclear
PCS C Block (entrepreneurs)	yes	yes	yes	no
Various auctions (DE)	yes	yes	yes	probably not

Broadcaster fears of achieving sufficient and timely auction payments likely will have a dampening affect on the amount of spectrum volunteered in the incentive auction. Because history demonstrates a high risk that significant bidder conditions will reduce government revenues, delay licensing, and fail to achieve their intended purpose, the government should stick to the goal all policymakers agreed to in the first place: promote the maximum amount of bidder participation. Refusing to adopt bidder restrictions is essential to meeting that goal. Failing to do so risks snatching defeat from the jaws of victory.

If it were up to me, I’d take the win.