By Gregory J. Vogt, Visiting Fellow
The FCC has received criticism from a number of commenters
regarding incentive auction procedures the agency proposed
in a December 2014 Public Notice. Given that some procedures in the Notice were
inconsistent with a market-oriented auction design, there now is some welcome
news that the FCC may be listening more closely to the market.
Until now, a majority of Commissioners seemed too
dismissive of market concerns when they proposed complex auction procedures
designed to skew results toward favored bidders, i.e., any other bidder other
than AT&T or Verizon. The recent intimations, if they turn out to be true,
would be better news for consumers, who voraciously are demanding more
bandwidth for mobile broadband services which the incentive auction can remedy
in part. Consumers should hope that a majority of FCC Commissioners listen more
closely to the market talking.
The incentive auction is designed to permit broadcasters
voluntarily to give up over-the-air broadcast spectrum in the “reverse” portion
of the auction in exchange for part of the proceeds in the “forward” portion of
the auction among mobile broadband providers. That auction is currently
scheduled for early 2016.
The December 2014 Notice’s proposed auction procedures
were roundly criticized, including by two FCC Commissioners, in particular for
proposals that would establish “dynamic reserve pricing” and define “unencumbered”
spectrum. Chairman Wheeler reportedly went off script
at the National Association of Broadcasters’ (NAB’s) annual trade show to
indicate that “we got your message” concerning complaints about those two
issues. This remark appeared to be in line with comments made earlier in the
week by FCC incentive auction staff as well as Commissioner O’Rielly. The President
and CEO of the NAB, Gordon Smith, was
encouraged by Wheeler’s remarks that the FCC would consider simplifying the
rules and let the market function in the auction process.
I, too, am encouraged by the Chairman’s remarks, but only concrete
action will prove whether the Commission is actually listening to the market. The
FCC should continue its long-standing policy to auction spectrum in accordance
with free market principles. Free market auctions optimize the prices for
limited spectrum and ensure that it is efficiently allocated to the highest and
best use. Such a result is even more critical to the incentive auction because
it is intended to encourage significant voluntary contributions of spectrum by
broadcasters, which can then be repurposed to meet the critical consumer need
for mobile broadband.
Focusing on the need for market-based incentives in the incentive
auction is critical. Broadcasters are now more interested in this auction,
particularly after the unprecedented values achieved in the recent AWS-3
auction. Some analysts now estimate (summarized here) that the
incentive auction may yield $60 to $80 billion. The Congressional Budget Office
underscored
the critical nature of auction procedure decisions when it estimated a wide
potential range, from $10 to $45 billion, based largely on the auction’s unprecedented
and complex nature. These estimates are painting a rosier picture for the
incentive auction’s success.
The two key issues highlighted by the Chairman’s recent
remarks are:
First, a “dynamic reserve price” is a somewhat euphemistic
term used in the Notice to describe a methodology to reduce the going-in price
for certain spectrum to address “anomalies” or “hold outs.” Although the
Commission decided
last summer to set going-in reverse auction prices, the anti-market impact of
artificially manipulating potential prices undermines broadcaster incentive to
volunteer spectrum, which disserves the aim of the auction and ultimately
consumer interests. Broadcasters have
already identified 1100 TV stations potentially impacted. The process
complicates the auction and unfairly limits broadcaster gains.
Second, the Notice also proposed to define “unimpaired”
spectrum, i.e., spectrum in the national market that may not be used by up to
20 percent of the population. The 20 percent threshold is far too high,
creating serious questions on the value of such “unimpaired” spectrum. A
market-based design abhors the creation of spectrum of uncertain value, where
spectrum is potentially unusable in some large urban markets where spectrum is
needed most. The FCC should offer only unimpaired spectrum (in accordance with
a reasonable definition outlined above) to all bidders in order to simplify the
auction, increase market-oriented bidding, and thus improve bidding results.
I’ve said before, here
and here,
that creation of “reserve spectrum” available only to favored large, well-capitalized
international bidders contains unacceptable risks that the incentive auction
will fail. But given that the FCC has already made the erroneous decision to
create “reserve spectrum” for a favored few, it should not make matters worse
by adopting unworkable “dynamic reserve pricing” or create an unreasonably high
threshold for defining unimpaired spectrum. And it certainly should reject the renewed call
to increase the size of the “reserve spectrum.”
Both the FCC and Congress have already established the main goal
of the incentive auction: to encourage maximum broadcaster participation. The
Chairman’s recent indication that the FCC could be rethinking dynamic reserve
pricing and the definition of “unencumbered” spectrum are welcome news for
consumers. Now a majority of the Commissioners just need to listen to the
market talk.
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