Broader Spectrum Licenses Could Increase Auction Revenues

On January 17, 2017, Scott Wallston, President of the Technology Policy Institute, published a blog entitled “Don’t Be Disappointed by the FCC’s Incentive Auction.” Mr. Wallston discusses why the success of the 2015 AWS-3 auction created unrealistic expectations for the broadcast incentive auction. He states that licenses restrict how bidders can use spectrum, therefore wireless-only spectrum will produce higher market values than TV broadcasting-only spectrum. Mr. Wallston commends the FCC for going forward with the incentive auction, but says if licenses allowed for a broader use of spectrum, we may see higher auction revenues. 

FCC Auction Staff -- Thanks for the hard work!

Often enough -- more than I would like -- I'm in the position of criticizing the FCC's leadership for what I consider to be a seemingly endless string of unduly regulatory decisions that fail to account for the increasingly competitive communications marketplace.

Not today.

I just want to stop what I'm doing, as the Commission's incentive spectrum begins, to praise the FCC's auction staff, and especially Gary Epstein, the chair of the agency's Incentive Auction Task Force, for the very hard work that has brought us to this point.

I don't know the extent to which the incentive auction will meet expectations (whatever they are) in order to be considered a slam-bang success. But it is a very important - yet very complicated endeavor. And for the sake of meeting the continued and growing need for more spectrum to meet rapidly expanding wireless broadband demands, I sure hope the auction is successful.

There are aspects of the auction design that I would have done differently. This is certainly true of some of the commissioners as well. Nevertheless, come what may, the FCC commissioners and staff deserve thanks for their hard work on the project over many long months.

And, most of all, Gary Epstein, Howard Symons, and all the FCC staff deserve our gratitude for their dedication to doing all that was required to get us to the starting gate!

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.

Are Industrial Policy Failures Looming in the Incentive Auction?

By Gregory J. Vogt

It seems like this frigid winter may be contributing to some ill political winds blowing in Washington “competition” policy circles. This is a distressing sign given that the current FCC Chairman’s proclaimed mantra is “competition, competition, competition.”

The ill winds are blowing in the form of calls for further changes to the incentive auction that would steer volunteered broadcaster spectrum toward particular mobile broadband bidders. Engineering competition to satisfy government whims is not “competition,” but only an example of failed industrial policy. History is littered with industrial policy disasters, from 1970s price controls to crony capitalism, and, yes, even infiltrating communications markets such as failed UNE policies and other competition-skewing policies.

For those not steeped in FCC-speak, the incentive auction is a legislatively mandated two-part auction where over-the-air broadcasters volunteer to give up their spectrum in exchange for a portion of the “reverse auction” price. The freed-up volunteered spectrum is to then be auctioned in the forward auction for mobile broadband use. The main aspects of the auction process were decided last summer, with details being hashed out in comments filed at the FCC last week.

A recent blog by John Legere, CEO of T-Mobile, calls the recent AWS-3 auction (that raked in over $44 billion) as a “disaster” for wireless users. If “the results” are the same in the incentive auction, he claims it would represent an “epic failure.” He argues that the FCC must establish auction rules that reserve for participants other than AT&T and Verizon at least 40 MHz of spectrum in every geographic market. All the while Legere claims that he is not seeking a government “handout . . . like the Twin Bells got.” Some Democrats on the Hill echo these sentiments in a less exaggerated fashion, but they nonetheless call for the FCC to “adjust” the auction procedures for competitive reasons.

These renewed calls for government control of mobile broadband markets are in sharp contrast to some relatively encouraging news of broadcasters’ increased interest in the incentive auction. These broadcasters recently projected that incentive auction revenues could exceed $80 billion. This eye-popping claim is remarkable, although it may not be outlandish given the surprise success of the AWS-3 auction. This interest, if it actually leads to greater volunteered spectrum, would indeed be good news for mobile broadband customers.

These same broadcasters warn, however, that incentive auction procedures should not further impede the market-oriented auction process by complicated procedures and artificial controls on bid prices, a predictable consequence of recent proposed bidding procedures, as I outlined here.

And as I indicated in detail here, the Commission has already too closely heeded smaller carrier pleas for auction favoritism by establishing complicated “reserve spectrum” rules that steer spectrum to other than the top two potential bidders. Unsatisfied with the enormously favorable “reserve” set-aside, T-Mobile is pressing for still more favoritism in a petition for reconsideration of the incentive auction rules filed last summer.

Make no mistake about it, skewing auction results will not produce more competition. It will only lower auction prices, and thus give smaller carriers an artificial cost advantage, a result which, as I noted here, actually occurred in Canada. Such a result if repeated here would not be good news for the incentive auction because it will suppress broadcaster’s expected revenues, and thus deter participation in the first place. Given that both Congress and the FCC have already decided that maximizing the amount of spectrum volunteered by broadcasters to be the most important feature of the incentive auction (despite what individuals in Congress now say), government should resist individual competitor requests that the auction should focus instead on “promoting competition.”

Steering more spectrum to smaller carriers, and giving them exclusive access to unencumbered spectrum as proposed in the recent procedures public notice, is not real competition produced by markets, but only another form of a government subsidy. Contrary to Legere’s over-the-top rhetoric, AT&T and Verizon have paid for the vast majority of their spectrum, including buying and selling spectrum on the open market, for example in this transaction.

It should be remembered that smaller mobile carriers do not argue that they cannot compete for customers because they need more below-1 GHz spectrum. Such an argument would never hold water. Smaller mobile providers can only gain market share by convincing customers that they offer a superior product. If capacity and market “reach” were really the driving motivation of their arguments, these smaller carriers could have more actively participated in the many after-auction market sales of spectrum that continue to this day. Rather, the more obvious focus on skewing the incentive auction is to gain below-market priced spectrum.

Competition has been a bi-partisan policy goal for decades, particularly in the communications sector. Although the FCC too often dabbles in industrial policy because of the misguided notion that it can produce “better” consumer results than the market, there is no justification for interfering with the wireless market, which has been a raging success story. Recent T-Mobile revenue and customer gains attest to that proposition. The FCC should reject calls to “fix” competition in a market that is not broken.

Although T-Mobile’s John Legere says the AWS-3 auction results should “scare the hell out of” wireless consumers, I think consumers instead should all be jumping for joy that market forces actually work. Industrial policy does not work because government is incompetent in running markets. Now let’s hope that the FCC learns from the recent AWS-3 history lesson.

Here We Go Again: Don’t Eliminate the “Incentive” from the Incentive Auction

By Gregory J. Vogt, Visiting Fellow

This past June the FCC published the Incentive Auction Order, in conjunction with the Mobile Spectrum Holdings Order. Together, their intent is for broadcasters to volunteer spectrum in the “reverse” auction, to be then repurposed for mobile broadband use in the “forward” auction. The aim of the two-sided incentive auction is to achieve a significant win-win-win for consumers, government, and industry. But the forward auction design adopted in June, in my estimation, entails novel, risky, and complex elements that gives preferences to all bidders other than AT&T and Verizon, including to multi-billion dollar industry participants.

Sprint and T-Mobile filed petitions for reconsideration on August 11. T-Mobile, unsatisfied with the advantages it already achieved, filed a petition seeking changes to certain aspects of the forward auction design. Adopting bidding preferences such as those contained in the two June Orders creates a serious risk of producing lowered revenues, as I reported from an analysis in the FSF blog based on past auction experience. Lowering revenues will risk decreasing the amount of volunteered spectrum – the “incentive” in an incentive auction – in the same way as T-Mobile’s now-discredited Dynamic Market Rule, and thus should not be entertained. T-Mobile’s proposed changes would exacerbate these already serious downsides to the two Orders. Sprint now seeks more changes to the spectrum screen to further advantage itself.

In these two Orders, the FCC developed an extremely complicated structure which I describe only at a high level here. The structure reserved a portion of the 600 MHz spectrum for nationwide-provider bidders that do not possess at least 45 MHz of spectrum below 1 GHz spectrum in each geographic market. The maximum size of the “reserve” varies with the amount of broadcast spectrum available in a particular geographic market at the initial stage, 30 MHz for 100 MHz markets declining to 10 MHz for 40 MHz markets. The auction design establishes a two-component “trigger” which must be met before the reserve spectrum becomes available: a price/proceeds component and an expense component (legislatively mandated administrative expenses such as compensating broadcasters and FirstNet funding). Until both components of the “trigger” are met, any bidder may bid on all spectrum in a market. 

In its petition, T-Mobile argues that the amount of “market based reserve spectrum” is set too low and requests that the reserve be at least half of available spectrum. It also contested the formulation of the price/proceeds benchmark component of reserve spectrum trigger as unnecessary and subject to gaming.

The most important aim of the incentive auction legislation is to maximize the amount of broadcast spectrum repurposed for mobile broadband use. Although the FCC originally agreed with this conclusion, that goal is all but absent in the final rule, apparently side-tracked in the FCC’s effort to “fairly” allocate spectrum, with the reserve tipped heavily in favor of everyone but the top two market players. Although a last minute compromise preserved the ability of all the providers to obtain some spectrum in the forward auction, it is unknown whether the FCC struck the right “balance.” We won’t know until we see how much spectrum broadcasters actually volunteer. The good news is that, at least at this point, there are no vocal defections from the auction process from either broadcasters or potential bidders.

But the forward auction design is a far cry from a free-market model characteristic of most spectrum auctions, which are routinely designed to maximize auction receipts. The forward auction picks winners and losers unrelated to a sound economically-based competition model like that normally attendant to an accepted competition analysis. Here, unless “smaller” carriers are capacity-constrained, which no one has alleged or proved, there simply is no significant anti-competitive situation that needs to be corrected. The necessity of adopting a first-ever minimum six-year holding period for awarded reserve spectrum only reinforces the conclusion that the forward auction design lacks market-driven incentives. Why would the government preclude T-Mobile from selling reserve spectrum unless it has doubts either that T-Mobile was unable to obtain needed spectrum in the first place or the mechanism will lead to lower-than-market prices? T-Mobile’s reconsideration plea for additional reserve spectrum merely seeks to exacerbate this government-made market.

The request should be rejected for four additional reasons. 

First, T-Mobile’s proposal risks further depressing auction receipts. Achieving receipts maximization is critical to producing the incentive for broadcasters to volunteer spectrum. The incentive is already at risk: the original estimate of up to 120 MHz of volunteered spectrum has declined to what government now admits will likely only achieve 85 MHz. The incentive should not be diminished further.

Second, T-Mobile’s requested modifications are anti-competitive. By increasing the amount of the reserve, and eliminating the price/proceeds component of the trigger, smaller bidders could be able to obtain spectrum without fully competing even with each other (let alone AT&T and Verizon) because there would be far more in the reserve than the 20 MHz block most competitors say they need. Thus, bid prices for reserve spectrum could be less than for unreserved spectrum, a result I note here actually occurred in Canada, because smaller carriers can make strategic bids based on the knowledge that high bidders may be excluded from competing for the reserve and there would be more than enough reserve spectrum to go around.  Reduced costs for spectrum in turn could create a competitive imbalance in the mobile broadband market due to unbalanced cost structures.

Third, T-Mobile’s claim that AT&T and Verizon might game the trigger is speculative at best because the combination of blind-bidding and delayed creation of the reserve until the final stage rule is achieved, completely undermine any incentive to manipulate the trigger. A low bid by one large provider to avoid invocation of the trigger could simply be a white flag that ends up handing spectrum over to the other major player.

Fourth, although I agree with T-Mobile that setting a complicated price/proceeds trigger is relatively arbitrary and creates other risks to the bidding process, eliminating that component of the trigger would exacerbate disincentives to participate, not improve them.

As to the modified spectrum screen, the FCC added mobile broadband spectrum to achieve a more complete product market definition in transaction analyses. Sprint, which holds significant spectrum added to the screen for the first time, seeks to blunt this reform by asking the FCC to weight differently low-, mid-, and high-band spectrum, effectively straight-jacketing the FCC when using the screen. Although unrelated in a direct sense to the spectrum auction, the request does represent another attempt by competitors to skew competitive analysis in their favor. The FCC has already announced it will take into account the potential competitive impact of certain types of spectrum, such as that below 1 GHz. Since that decision alone unjustifiably favors Sprint, it should just declare victory without seeking further undeserved advantages.

Although I do not support the Rube Goldberg contraption that the forward auction design entails, or the complications to the new spectrum screen already adopted, the FCC should reject further manipulations the parties now request. The FCC must preserve the incentive to volunteer a maximum amount of broadcaster spectrum if there is to be a chance of achieving the win-win-win situation the incentive auction was intended to produce. And it should reject strict formula-based reviews of transactions, relying instead on a fact-based competitive analysis.

Conditioning the Incentive Auction Unlikely to Increase Mobile-Broadband Competition in Rural America

On May 1, the Georgetown Center for Business and Public Policy released a new economic policy study by Anna-Maria Kovacs titled, “Regulation in Financial Translation: Will the Incentive Auction Increase Mobile-Broadband Competition in Rural America.” Ms. Kovacs finds that even if the Federal Communications Commission imposes restrictions on large providers, namely AT&T and Verizon, rural communities will mostly likely not benefit from the incentive auction.

Chairman Wheeler has stated that because AT&T and Verizon control a majority of low-band spectrum, which can travel greater distances than high-band spectrum supposedly for less cost, limiting those large providers will induce smaller wireless competitors to bring service to and compete in rural areas. However, even if Sprint, T-Mobile and other smaller competitors are given access to low-band spectrum at below-market prices, the lack or revenue potential in those targeted rural markets will remain a great disincentive. And, neither provider has indicated a willingness or plan to serve rural areas. If limited in the incentive auctions, AT&T and Verizon, who often provide the only service available in rural areas, will lack the capacity to meet rural subscribers’ demands.

The full study is available here and is worth a read.   

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.