Last week’s CLIP & Wiley Rein webinar, Balancing Competing Goals in the Spectrum Incentive Auction, will be available for ninety days at this link. My remarks during the webinar are printed below.
Thank you for joining the webinar, and special thanks to Wiley Rein, whose support has made this webinar possible. Wiley Rein is a special firm and I can’t thank them enough for co-sponsoring this event.
Based on history and my own experience with the 700 MHz auction, I’m going to talk about the factors that have led to auction successes and failures. Next, Tom [Dombrowsky] will lend his engineering expertise to consider the issues involved in the 600 MHz band plan, and Leslie [Marx] will discuss the appropriate design considerations for incentive auctions. Many may not know that Leslie played a critical role in the success of the 700 MHz auction. She led the auction design team and was the inspiration for several of its innovative design features.
Well-designed auctions are a powerful tool for assigning spectrum in a way that minimizes rent seeking and transactions costs while promoting rapid service to the public, and have largely been considered a success. The most recent example is the 700 MHz auction, which raised a record $19 billion for the US Treasury in 2008. At the time, some commenters said the primary goal of the auction should be to ensure new competition and recommended that the FCC exclude all incumbents from bidding. The FCC also viewed the auction as an opportunity for new entrants, but wisely rejected the notion that the public would be best served by excluding incumbent participation. As a result, Verizon used spectrum it won in that auction to build the world’s largest 4G network in record time, which sent pro-competitive ripples throughout the wireless market. Had the FCC excluded Verizon from participating, it is unlikely the US would have become the world leader in mobile broadband.
That doesn’t mean all auctions have performed flawlessly. The FCC often tries to advance multiple and sometimes conflicting goals through its auction rules.
For example, in an effort to fund the construction of a nationwide interoperable public safety network, the FCC required that the D Block in the 700 MHz auction be used as part of a public/private partnership. As a result, the D Block didn’t sell. The FCC’s Inspector General later concluded that certain restrictions placed on the D Block deterred potential bidders from trying to win the license in that auction.
Several auctions in the 1990s also failed due to FCC restrictions on the participation of large providers and preferences it provided to smaller providers in an effort to promote additional competition. A report prepared by the Congressional Budget Office in 2005 found that these FCC bidding preferences “did not ultimately result in widespread or long-term participation by small businesses” in the wireless market, but did have adverse economic and budgetary impacts. CBO concluded that the FCC preferences proved costly by leaving a sizable portion of the radio spectrum underutilized and reducing receipts to the Treasury. CBO found that the resulting delays in deployment reduced consumer access to wireless services and probably increased prices. It estimated that the consumer surplus losses approached $40 billion.
The US Treasury has lost approximately $26 billion overall in winning auction bids that were never actually paid.
These analyses tell us that auctions are more likely to fail when they limit the types of companies that can bid or the ways in which the spectrum can be used.
These considerations are particularly important for the incentive auction. Congress established specific goals and priorities for the incentive auction that may be in conflict with other potential policy goals. I expect it will be challenging for the FCC just to meet Congressional goals for the auction, which must assign additional spectrum for wireless broadband while reimbursing broadcasters and providing more than $7 billion in additional revenue to fund public safety and reduce the deficit.
As with past auctions, I expect many will ask the FCC to try to accomplish other goals as well. For example, the DOJ has already recommended that the FCC limit the amount of spectrum below 1 GHz that any single wireless provider can hold in order to ensure Sprint Nextel and T-Mobile obtain spectrum in the auction, which DOJ believes is necessary to promote competition. I have my doubts regarding DOJ’s competitive analysis. But, whether or not the DOJ plan would enhance competition, it conflicts with Congressional goals for the auction. As Leslie will explain later, excluding strong bidders from any auction is likely to lower auction revenues, and this downward effect on revenue is amplified in an incentive auction.
In the 700 MHz auction, the FCC rolled the dice with its D Block rules in a well-intentioned effort to help public safety and the dice came up snake eyes. As a result, Congress stepped in and adopted the incentive auction approach to fund the public safety network. The question the FCC must ask itself is whether it’s willing to roll the dice again and hope the DOJ plan doesn’t produce another snake eyes result that upsets the priorities established by Congress and leaves public safety unfunded. The history of auctions that attempt to satisfy multiple conflicting goals suggests the FCC is unlikely to throw a winning roll if it adopts the DOJ plan.
Before Leslie addresses the complexity of incentive auction design, Tom is going to talk about some of the technical complexities in the band plan. Tom?