The Federal Communications Commission declared the auction of spectrum in the H block "successful" because (1) it licensed spectrum that could be used to provide mobile wireless service to the public, and (2) it "raised $1.564 billion from spectrum that used to be viewed as almost worthless." In truth, however, the H block auction was a failure.
Though the auction did license spectrum in exchange for payment, that is not the criteria for a successful spectrum auction — virtually all spectrum auctions would meet this criteria, including the obviously failed C block auction in the PCS band.
To be truly successful, an auction must fulfill the fundamental purpose auctions are intended to serve. Congress authorized the use of "competitive bidding" to assign spectrum to the applicant who values it most highly, who is presumed to be the applicant most likely to provide quality service to the public in a timely manner, while minimizing rent seeking and transaction costs. An auction can serve this purpose only if it actually results in competitive bidding, which is why Congress prohibited the FCC from selling spectrum in the absence of competing applicants.
Based on bidding data and the unusual circumstances surrounding the adoption of its reserve price, the H block auction bears more resemblance to an impermissible "retail sale" of spectrum at a pre-determined price negotiated by the FCC than a "system of competitive bidding" designed to determine which applicant values the H block most highly. As I've previously explained in detail, the FCC illegally established an artificially high reserve price of $1.564 billion for the H block as part of a pre-auction bargain with DISH Network, who had committed to pay this price only if the FCC increased the value of DISH's spectrum holdings in other bands. The FCC granted DISH's wish, and a result, DISH "won" all of the H block licenses.
The bidding data indicates that DISH Network's bids were driven by the FCC's agreement to increase the value of DISH's spectrum holdings in exchange for the company's H block price commitment, not the price discovery process that ordinarily occurs in spectrum auctions. Because competitive bidding for the H block ended before the reserve price was met, DISH was forced to raise its own provisionally winning bids in the auction's final rounds to meet its reserve price commitment even though DISH was the only active bidder. In the H Block auction's final bidding rounds, DISH was bidding in "competition" solely with itself. If the auction had been designed to produce an efficient outcome rather than generate a specified amount of revenue, the auction would have closed before those rounds occurred, and the auction would have generated less than $1.564 billion in bids.
The failed H block auction demonstrates the need for Congress to impose clearer limits on the FCC's current carte blanche authority over commercial spectrum policy.
First, the FCC has proven it is incapable of valuing spectrum with a reasonable degree of accuracy. In its order establishing the H block auction rules, the FCC found that the H block spectrum was worth at least $1.564 billion. But, as noted above, if the agency had not set the reserve price at this amount, the spectrum would have sold for less than the agency's minimum price estimate.
The FCC's inability to value spectrum with a reasonable degree of accuracy could adversely impact more than reserve prices. The FCC is considering whether it should revise its spectrum aggregation limits to reflect its own judgements regarding the value of different spectrum bands in the marketplace and is expected to decide the issue within the next few months.
If the FCC decides to base its spectrum ownership limits on FCC spectrum valuations, it would likely result in counterproductive market distortions. There is no reason to believe the FCC can more accurately value spectrum when setting ownership limits than when it is setting reserve prices. The FCC's inability to accurately determine spectrum values or make reliable predictive judgments about the needs and efficiency of potential spectrum users is why Congress required the use of auctions in the first place. If the FCC could already do these things, it wouldn't need to hold spectrum auctions at all.
Second, the auction provision has proven insufficient to minimize rent seeking opportunities involving spectrum. In a series of decisions over the last decade, the FCC has interpreted the auction provision so broadly that it no longer imposes any meaningful constraints on the agency's spectrum licensing authority. Among other things, the FCC has determined, either expressly or impliedly, that it has the authority to:
- Choose among multiple applicants for a license without holding an auction by refusing to formally "accept" competing applications for filing (800 MHz Order);
- Authorize existing licensees to provide entirely new radiocommunication services without auctioning the new service rights (LightSquared Waiver Order);
- Expand the auction process to include the establishment of service rules for the spectrum being auctioned (700 MHz 2d Order); and
- Expand the auction process to include the modification of service rules for spectrum that isnot being auctioned (H block auction).
The H block auction is a startling example of the FCC's ability to use auctions as just another means to achieve its desired market outcomes. A statement by Reed Hundt, a former FCC Chairman and Administration insider, indicates that the FCC imposed the artificially high reserve price on the H block spectrum to enhance the agency's ability to impose bidding restrictions on Verizon and AT&T in the upcoming broadcast incentive auction. At an event discussing the incentive auction last fall, Hundt said the FCC has "figured out" that, if it conducts the H block and AWS-3 auctions before the incentive auction, the FCC could use the revenue from those auctions to pay down the $7 billion Congress directed the FCC to deposit in the fund for First Net, a nationwide interoperable public safety network. If this amount were paid down before the incentive auction is held, it would enable the FCC to restrict bidding in the incentive auction with little or no risk that its restrictions would result in First Net remaining unfunded. It thus appears that, when the FCC established the H block's artificially high reserve price, it considered the resulting potential for the H block auction to fail an acceptable risk in light of its broader strategy for the incentive auction.
Congress didn't authorize spectrum auctions to provide the FCC with yet another mechanism for manipulating the structure of the wireless market through its spectrum licensing authority, but that hasn't prevented the FCC from using auctions for that purpose. Unfortunately, there is ample evidence that when the FCC elevates market structure ends over spectrum auction means, the result is more likely to be a government failure than an auction success.
Fred Campbell is Executive Director of the Center for Boundless Innovation in Technology and a former chief of the FCC's wireless bureau.