Kovacs: Key lessons from the 700 MHz auction and what those mean for the next one

Anna-Maria Kovacs

Anna-Maria Kovacs

As the FCC contemplates rules for the next auction of broadcast spectrum, there are two key lessons worth recalling from the last one, Auction 73, the 2008 auction of 700 MHz spectrum. That auction--which was open to all bidders--was very successful, both in raising $19 billion for the Treasury and in putting spectrum into the hands of small bidders. 

  • The FCC can't force bidders to participate. To ensure enough bidders, it must leave the door open to all potential bidders. 
  • Small bidders can do very well in an auction against the largest players, as long as some of the available spectrum is divided into small enough areas to match their needs.

The first lesson is that the FCC can't force companies to participate.  Sprint and T-Mobile, two of the four national carriers who together represented 32 percent of the wireless industry's subscribers at the time, chose not to participate at all in Auction 73 and one or both may make the same choice this time. Indeed, while all four of the national carriers currently appear very interested in participating in the auction of 600 MHz spectrum, there is no guarantee that any one of them will do so when the auction occurs. Changes in company ownership, changes in companies' strategies and financial circumstances, and changes in the broader environment can all impact companies' willingness and ability to participate, right up to the last minute. 

Frontline Wireless, for example, was very interested in the 700 MHz D-block and initially qualified for Auction 73. Rules for the D-block were designed with the expectation that Frontline would bid and would work with public safety to develop a national broadband public-safety network. However, Frontline withdrew for lack of funding shortly before the auction as the U.S. financial environment tightened. The D-block had no buyer in Auction 73. The FCC's best defense against changes it can neither predict nor control is the widest possible field of bidders in the auction.

The second lesson is that small bidders can do extremely well in an auction against the larger carriers. Auction 73 was open to all bidders. There were 214 qualified bidders and 101 winners in Auction 73. 

Of the 101 winners, 99 were small bidders representing in total less than 10 percent share of industry subscribers. They provided 14 percent of auction proceeds in exchange for 28 percent of MHz POPs (megahertz per unit of population). They won a disproportionate amount of spectrum, at low prices.

These winners included regional wireless operators such as MetroPCS (now merged with T-Mobile), Cellular South (rebranded as C Spire Wireless), and Cincinnati Bell, various small phone companies and cable companies, various designated entities, as well as equipment manufacturers, who collectively represented well below 10 percent market share in the wireless market at the time. 

The small-bidders' winnings included a variety of markets, urban as well as rural. They won licenses primarily in the A, B and E blocks. The small bidders won 4.1 billion MHz POPs for $2.6 billion, an average price of $0.64 per MHz POP.  By contrast, AT&T, which had 27 percent share of subscribers at the time, won only 14 percent of the MHz POPs but paid 36 percent of the auction proceeds.

One of the keys to the success of the small bidders was the availability of spectrum that covered areas that matched their needs. They did not have to pay for licenses that were too big for them to fund, either in terms of initial license cost or ultimate build-out cost.

As the FCC designs its next auction of broadcast spectrum, it can benefit from the lessons of the last one. Between the time the rules are set and the auction occurs, both company and macro changes can occur, nullifying the FCC's intended results. The best way to ensure an auction that both maximizes revenues and enables small competitors to win spectrum is to welcome all bidders, while auctioning at least some spectrum in areas small enough to be attractive to small bidders.

Anna-Maria Kovacs, Ph.D., CFA, is a Visiting Senior Policy Scholar at Georgetown University's Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.

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