Tuesday, April 28, 2015

Could the FCC Be Listening to the Market Talk?

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.