Why T-Mobile’s “Dynamic
Market Rule” Won’t Work

Posted by: Joan Marsh on August 13, 2013 at 5:24 pm

Today, AT&T is filing an analysis by two esteemed economists, Yeon-Koo Che and Philip A. Haile, of T-Mobile’s “Dynamic Market Rule” proposal for the 600 MHz Auction.    The proposal entails a complex bidding scheme that is premised on T-Mobile’s claim that low band spectrum should be subject to its own separate cap, above and beyond the spectrum screen that the FCC has relied on for years. 

As AT&T has shown, this premise is flawed for two main reasons.  First, the purported advantage of low band spectrum – that it allows more coverage and better building penetration with fewer cell sites – has been overtaken by marketplace realities under which capacity not coverage drives network deployment.  Carriers deploying low band and high band spectrum alike must squeeze as many cell sites as they can into their networks to meet exploding demand for data services.  Second, to the extent this is less the case in rural areas, those areas are not spectrum-constrained and the lower cost of building out low band spectrum in such areas is offset by the higher cost of the spectrum itself. 

Given this, any analysis of T-Mobile’s proposal must begin with the proposition that the spectrum caps on which that proposal is built are wholly unnecessary.  But this is not the only point that should concern policymakers.  Such caps will also suppress auction revenues, potentially to the point of auction failure, ultimately reducing the amount of spectrum freed up for mobile broadband use and undermining the auction’s ability to meet critical statutory goals.

Recognizing this defect, T-Mobile’s proposal permits all carriers, even those that exceed its new low band cap in a specific market, to nonetheless bid at the outset for a single 5 MHz block, subject to a series of complex contingencies.  If the auction fails to yield sufficient revenue to meet the initial clearing target set by the FCC, the cap would be incrementally relaxed and the bidding would start anew.  If the auction failed again under the revised cap, the cap would be adjusted again.  And so on.  Once no further relaxations are possible, the initial clearing target would be reduced, the most stringent cap reinstated and the entire multi-step process would begin again. 

While T-Mobile maintains that this approach would ensure that its proposed caps are not the cause of auction failure, the proposal would in fact introduce complexities, distortions, and risks that would reduce auction revenues and almost certainly doom the auction. Drs. Haile and Che outline those defects in our filing today.   Among other problems, the proposal would exacerbate existing exposure risks and introduce significant new ones for bidders subject to the shifting caps.  For example, faced with the possibility that they might be limited to a single 5 x 2 MHz block of spectrum – an allocation, notably, that even T-Mobile admits is insufficient for today’s LTE deployments – bidders so constrained would likely devalue the spectrum blocks or choose not to bid at all.   And, as Drs. Che and Haile explain, T-Mobile’s “redo” proposal would do little to counter this bid suppressing harm.  

T-Mobile’s proposal also would create incentives and opportunities for manipulation that would not otherwise exist, and add enormous and potentially crippling complexity to an already complex and uncertain auction mechanism.  

Even if T-Mobile’s proposal did not result in complete auction failure, its proposed caps would suppress auction revenues, reducing the amount of spectrum freed up for mobile broadband use as well as funds generated for FirstNet and to pay down the national debt.  That is because strict limits on participation by otherwise qualified bidders will make the auction less competitive and will yield less revenue.  Indeed, if T-Mobile’s proposed spectrum cap was strictly enforced, Verizon estimates it would be barred from bidding in 7 of the top 10 markets.  AT&T would face similar bidding limitations, as noted in our filing.

The 700 MHz auction permitted free and open participation by all qualified bidders.  The auction attracted 214 qualified bidders and 101 bidders won licenses, including carriers of all sizes and new entrants.  Auction revenues exceeded congressional estimates by over $10 billion, generating $7 billion for deficit reduction.  Neither T-Mobile’s proposal, nor any auction restriction proposed to date, will improve on those results.

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