The merits of open and competitive spectrum auctions

Anna-Maria Kovacs

Anna-Maria Kovacs

One of the most important provisions of the recently enacted The Middle Class Tax Relief and Job Creation Act of 2012 authorizes the Federal Communications Commission (FCC) to conduct long-awaited spectrum incentive-auctions. This is an enormous accomplishment for Congress and a vital and welcome challenge for the FCC, which has repeatedly highlighted the need for more spectrum. 

Implemented effectively, this legislation will give Americans throughout the country an interoperable public-safety network, spectrum that can keep up with explosive demand for broadband, and tens of billions of dollars to fund the public-safety network and reduce the deficit. 

Essential to the success of the legislation are open and fully competitive auctions that maximize proceeds and make spectrum available to any wireless carrier by allowing all willing bidders to participate without onerous conditions.

Wireless broadband is essential to economic growth, job creation, and the health, education, and entertainment of individual Americans. Consumers' appetite for broadband-on-the-go is voracious, and their wireless providers need ever-greater amounts of spectrum to keep up with it. 

Ironically, today, the two largest wireless providers--AT&T and Verizon--have the lowest amount of spectrum per subscriber in the industry, each at roughly 60 percent of the industry average. Despite the highest capital investment per subscriber in the industry, there are limits to the extent they can increase the efficiency of their use of existing spectrum. Thus, it is critically important that the upcoming incentive auctions permit them to bid for more spectrum, which they can use to preserve and enhance the service quality and affordable prices they provide to their subscribers as those subscribers' need for bandwidth grows. 

If AT&T and Verizon became spectrum-starved, the bandwidth they could make available to each subscriber would decrease even as their costs rose, resulting in higher prices and tighter constraints on data services. That would penalize their subscribers. But their competitors' subscribers might fare no better. Even if other national and regional competitors were able to buy spectrum at deep discount in an auction that excludes AT&T and Verizon, they would have little incentive to pass the savings along. Instead of improving their own service quality or minimizing their prices, competitors would be encouraged to shelter under the degraded price and service umbrella forced on the largest carriers by rationed spectrum. Instead of improving broadband service for all Americans, the auction would become a windfall for selected carriers who would have every incentive to maximize cash flow rather than capital investment and increase margins rather than lower prices. 

An auction open to all can promote competition, as Auction 73, the auction of 700 MHz spectrum in 2008, showed. It resulted in $19 billion in proceeds yet provided small players with a disproportionate amount of spectrum. 

Sprint and T-Mobile, the third and fourth largest wireless carriers, chose not to participate in the 700 MHz auction, yet spectrum did not all go to AT&T and Verizon, the two largest carriers who bid. Small players were not crowded out of the market. They not only won more than their proportionate share, they paid far less for it. In fact, 28 percent of the spectrum was sold to companies that collectively represented less than 10 percent of the subscribers in the market at the time and paid only 14 percent of the auction proceeds. The small players also did well financially, paying on average $0.64 per megahertz per covered person (MHz/POP), while AT&T and Verizon paid an average $1.51 per MHz/POP. 

Given the low valuations the small players were willing to pay, the auction would have raised less than half the amount it actually raised if AT&T and Verizon had been excluded from the 700 MHz auction.

Even more important than their role in raising auction proceeds has been AT&T and Verizon's use of the spectrum they bought. Although the spectrum was not cleared by broadcasters until mid-2009, Verizon and AT&T have both already used it to bring LTE, the most advanced wireless technology, to millions of consumers.

The other lesson of the 700-MHz auction was that onerous conditions reduce auction proceeds. The C-block should have been highly desirable because it was a wide swath of spectrum sold in large regions that would be easy to assemble into a national footprint, but the open-access condition attached to this block repelled bidders and lowered its value. For similar spectrum, the B-block's purchase-price at $2.68 per MHz/POP was 353 percent of the C-block's at $0.76 per MHz/POP. The condition-free B-block became the key contributor to the proceeds raised in the 2008 auction. It attracted 52 buyers and brought in $9.1 billion, nearly seven times its $1.3 billion reserve price. 

Fulfilling the promise of this legislation requires optimal use of the spectrum it frees up. The spectrum must both raise funds and go into use quickly. Without funding, the promised public-safety network can't be built and taxpayers can't benefit from deficit reduction. Without rapid conversion of spectrum into infrastructure, neither the economy nor consumers can benefit from greater broadband deployment.

History tells us that those goals are best achieved through auctions that are free of extraneous conditions and are open to all bidders. The FCC can't predict which companies will choose to participate, but it can make it possible for all those who are ready and willing to invest in America to do so freely.    

Americans need the extra mobile bandwidth, the interoperable public-safety network, and the deficit reduction this legislation have made possible. The FCC can best deliver all of those through open and competitive auctions.

Anna-Maria Kovacs is a Visiting Senior Policy Scholar at the Center for Business and Public Policy at the McDonough School of Business at Georgetown University. She has covered the communications industry for more than three decades as a financial analyst and consultant.