Monday, June 01, 2015

Why Were the U.S. and Canada AWS-3 Auction Results So Different? The Bidder Preferences

By Gregory J. Vogt, Visiting Fellow
As the FCC considers whether it should change its rules applicable to the 600 MHz incentive auction, it is useful to reflect on other governments’ experience. When Canada’s recent AWS-3 spectrum auction contained set-asides for a subset of bidders, it produced results far lower than the U.S.’s AWS-3 auction. This comparison should give U.S. policy makers pause as well-heeled wireless broadband providers with nationwide footprints in the U.S. continue to pursue ever-increasing, bidder preferences in the 600 MHz auction.
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 2016. The FCC already decided to create “reserve spectrum” (up to 30 MHz) available only to bidders with less than about a third of below-1 GHz spectrum in a geographic market. These now-favored bidders – or you could say “non-bidders” in previous auctions in which, for their own reasons, they chose not to bid – are urging the FCC to increase this preference and “guarantee” such a block in all geographic markets.
I’ve said before, here and here, that no bidding preferences would be more consistent with the intent of the incentive auction: to encourage a maximum number of broadcasters to participate. If broadcasters doubt they will receive significant amounts for their spectrum, they are less likely to participate. Past U.S. auction results have appeared to produce lower auction receipts when significant bidder restrictions were applicable. Receipts from foreign auctions that have favored certain bidders have not fared well in the past either. I’ve noted those factors here.
For a more recent example, look north of the border. The Canadian government reported that its March 2015 AWS-3 auction yielded only $2.2 billion. The largest carrier opted out of participation altogether. In stark contrast, the U.S.’s AWS-3 auction ending in January 2015 garnered close to $41.3 billion, net of bidding credits. Granted, there were some significant differences between the band plans in the two respective countries’ auctions, and territorial and market differences exist as well. Nonetheless, the two countries’ results are so strikingly different that they inevitably cast serious doubts on the ability of a “set-aside” to generate sufficient auction receipts.
In fact, the Canadian government specifically intended that a major goal of its AWS-3 auction was to inject more competition in the market, rather than obtaining auction revenues. Thus, it set-aside a block of 30 MHz available only to bidders that were smaller than the “big three,” who currently have roughly a 90 percent market share. All other bidders had to vie for two 10 MHz blocks.
The skewed Canadian auction resulted, according to one assessment, in a cost of about 11 cents per MHz/Pop for the favored bidders, while Telus paid $3.02 per MHz/Pop and BCE paid $2.96 per MHz/Pop (numbers two and three in the market). These anemic auction results for the favored bidders pale in comparison to the results in the U.S. AWS-3 auction, which achieved roughly $2.21 per MHz/Pop on average according to one report.
But the goal for the U.S. incentive auction, to maximize volunteered broadcast spectrum, is very different from Canada’s goal. Although the FCC states that its “reserve spectrum” will not depress auction prices, this claim is doubtful given the lopsided eligibility contemplated in the FCC rules. The intent of the two bidder restrictions is the same: to steer spectrum to favored bidders.
T-Mobile attempts to justify its favored status by alleging that AT&T and Verizon did not pay for their low-band spectrum. AT&T has rebutted that argument when it states that it paid for the vast majority of its spectrum through government auctions and purchases in the after-market. Besides, a government “adjustment” of carrier cost structures artificially by skewing a single auction, like what occurred in Canada, would be an extremely blunt instrument destined for failure. It certainly will not harness market factors to increase competition.
In fact, skewing spectrum auction results does little to reconfigure market shares among competitors, a result that has reportedly been borne out in Canada’s lengthy attempt to change the Canadian market structure. Competition for subscribers is based on a number of consumer-driven factors including price, terms and conditions, coverage, and service quality. Although theoretically, lower costs should achieve lower prices, there is no government requirement that smaller competitors lower their prices based on lowered costs. Smaller competitors in the U.S. often simply pocket the cost savings, pricing very close to what the larger players charge, regardless of their underlying lower relative costs. So a skewed auction might look like a political win (justified as promoting “competition”), while it only results in reduced auction receipts for the government, with no change to the market shares in the industry.
The results of a skewed auction could prove catastrophic for the U.S. incentive auction. If broadcasters believe that the potential outcome of the incentive auction is relatively low, they may well just hang on to their spectrum. In that case, the government, broadcasters, mobile providers, and consumers will all lose. The only winners would be well-financed foreign corporations which see reduced bid prices. This obviously would be bad public policy.
These arguments must be weighed in the context of the Administration’s recent boast that it has made “substantial progress” in allocating 500 MHz of spectrum for mobile broadband use. But it still lists the incentive auction as a potential source of between 42 and 144 MHz. If the top end of this range is to be achieved, which already far exceeds the 80 MHz that FCC sources have previously estimated as the potential yield in this auction, FCC policies must focus more on encouraging broadcaster participation rather than trying, likely unsuccessfully, to “manage” competition.
So comparing the Canadian and U.S. AWS-3 auctions should convince FCC regulators to abandon the skewing effect of its policies for the incentive auction. At the very least, the Commission should not further tip the scales toward its favored bidders.