More on Auction Limits

Posted by: Joan Marsh on April 2, 2014 at 12:04 pm

The word out of the FCC is that we can expect a 600 MHz auction framework item in the May timeframe.  This has set the auction restrictions drums beating (again).  Calls for large-carrier limitations and even strategic set asides are growing ever louder.

In all the rhetoric, some fundamental facts are getting lost.  So, let’s ground this debate.

Fact No. 1:  It will take a lot of revenue for the incentive auction to be successful.  Chairman Wheeler recently observed that a successful auction here will likely mirror prior auctions, which have generally offered somewhere between 50 and 90 MHz for sale.   Most observers believe this auction would be deemed wildly successful if it yielded 70 MHz of paired spectrum, which will require that 84 MHz (at a minimum) be cleared.

The question is then how much it will cost the Commission to attract sufficient broadcaster interest to clear 84 MHz.  I don’t purport to know much about broadcaster price expectations, but let’s use as a rough proxy the prices paid for the 700 MHz B block in Auction 73.  If you impute those prices against the type of station clearing we believe will be needed in major markets to achieve 84 MHz cleared, you quickly get to a clearing price tag well north of $20 billion – a sum that by itself exceeds the revenues obtained by the FCC in any prior auction.

When you add in $1.7 billion in relocation costs and any additional revenues needed to fully fund FirstNet and NG911, that price tag only goes up.  Some estimate that it could cost up to $30 billion to close an 84 MHz auction – an estimate that our analysis suggests could very well be correct.

Fact No. 2:  No one bidder can run a $30 billion table.  There is one possible exception – Google – but it is focused exclusively on obtaining access to 600 MHz spectrum for free.   The T-Mobile argument is that AT&T and Verizon will run the table, but that too seems highly improbable.   The Commission should instead be focused on ensuring that the wireless industry as a whole can raise the $30 billion in auction capital that may be needed to close an 84 MHz auction, especially given capital commitments that will be made for the AWS-3 auction.  And notably, as we learned with the H Block auction, there is no guarantee that all major operators will even show up.

Fact No. 3:  A set aside of any type will only exacerbate the $30 billion revenue challenge.  Looking north to the recent Canadian auction, T-Mobile is again pushing for limits or set asides that would restrict Verizon and AT&T while all other bidders would be permitted to bid freely in the auction.

To be clear, any spectrum set aside is not about restricting Verizon and AT&T so they can’t run the table – that could easily be accomplished by a non-discriminatory bidder neutral limit on how much any one bidder could acquire.  In contrast, a set aside is designed to force Verizon and AT&T to bid against each other, thus raising their costs for spectrum, while sheltering T-Mobile and others from bidding competition so they can get their allocations at a discount.  It’s easy to see why T-Mobile would like that approach; it’s less easy to defend such market distortions as legitimate public policy.

Importantly, this approach is not even consistent with the Canadian auction.  Canada’s auction limits applied to all nationwide incumbent carriers in a non-discriminatory fashion.  Only regional players/new entrants got favorable treatment.  And Canada chose to adopt certain limits to encourage a fourth nationwide carrier – a sacrifice not needed here as we already enjoy that level of competition.

By contrast, the limits sought by T-Mobile are not for the benefit of new entrants, but rather will benefit T-Mobile and Sprint – both of which already have robust nationwide spectrum footprints, and both of which are backed by large foreign multi-national conglomerates with significant financial resources.  Indeed, Sprint already holds more spectrum on average nationally than any other carrier in the United States.

There is no public policy benefit to be gained from artificially suppressing bidding competition in a way that will surely leave auction revenues on the table.  And there can be no valid basis for manipulating this auction to ensure that T-Mobile and Sprint receive spectrum at a steep discount.

Fact No. 4:  A low band cap will also exacerbate the $30 billion revenue challenge.  T-Mobile and others have also proposed that the FCC impose low band caps or limits that would permit bidders to bid freely only where they don’t exceed that cap.  While this rule may appear non-discriminatory in theory, in practice it will likely act as an exclusion.  AT&T acquired 700 MHz spectrum at auction and has moved with determination in the secondary market to rationalize that footprint and deploy an efficient 10×10 LTE network.  As we have long said, 10×10 is table stakes in a LTE world.

If the Commission were to impose a low band cap that would limit us to 5×5 or even 0×0 in major markets, it will undermine our interest in the auction and substantially lower the value we will assign to any spectrum available to us.  The promise of a 5×5 footprint only at auction – with no path to a 10×10 – will have limited value for any incumbent carrier in the LTE age and may be a non-starter for us.

And that leads us back to the question of how the FCC will raise $30 billion to close an 84 MHz auction.

There is one more fundamental truth about this auction.  For this auction to succeed, the FCC must attract wide broadcaster participation in major markets.  Period.  No exceptions.   And to do that, the FCC must be prepared to meet prevailing price expectations.  We are firmly convinced that scoring on any basis related to station value or revenue will undermine the very broadcaster participation that is essential to success.  TV stations are selling spectrum – not their broadcast businesses.  And if broadcasters don’t show up, the question of whether the auction will raise the necessary revenue on the forward side will be moot.

Comments (1)

Once again AT&T is playing fast and loose with the facts. There is no spectrum crisis first of all at least not pertaining to AT&T and Verizon. They are hoarding a great deal of valuable low frequency spectrum useful in rural areas to prevent smaller competitors from having a level playing field.

In fact while claiming a spectrum crunch to get approval for more spectrum transactions they are claiming to their investors to have more than enough airwaves. The FCC should call AT&T’s bluff. Ma Bell has never not participated in a spectrum auction even if there are limits favorable to smaller competitors it is unlikely that AT&T despite its empty threat would actually sit out the auction. Even if it does so what? That’s more spectrum available to smaller companies for sale anyway. Caps on spectrum purchases to prevent bigger carriers in the auction from getting too much spectrum is good for competition. Unlicensed airwaves have their uses and so do licensed airwaves. More of both should be made available.

maneeshpan April 20, 2014 at 11:27 am

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