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.