The quiet period on Auction 97 lifted last Friday opening the period of dialogue around the most successful – and surprising – auction in the history of the FCC.  Much has already been written on the unexpected valuations and revenue raised.  I want to turn to some of the lessons to be learned from this auction, and how those lessons can and should be applied to future auctions.

Lesson No. 1 – It’s all about Capacity

This was the first FCC auction of the modern capacity era.  The last major auction took place in 2008 (Auction 73), barely one year after introduction of the iPhone and at the beginning of the now well-recognized wireless data revolution.  In the lead-up to the auction, the general thinking was that this was mid-band spectrum made even less interesting because of encumbrances in the uplink.  The FCC set a reserve price of $10B and some privately worried that that might be too high.  I know of no one who publicly predicted that the auction would exceed even $20B in revenue.

How did everyone miss it?  The mistake was in thinking that there would be only limited interest in this spectrum band. The fact is that this auction of mid-band spectrum represented an important opportunity for market participants to add depth to their spectrum portfolio and network capacity necessary to meet ever rising demands.  Indeed, 70 bidding entities were qualified to participate and 31 won licenses – hard evidence that there is significant continuing interest in licensed spectrum.  And it didn’t matter that it was mid-band spectrum. It mattered only that it was broadband spectrum.

Lesson No. 2 – Because it’s about Capacity, Auctions should Enable Those That Invest in Infrastructure

One of the biggest surprises was that Dish, working through two designated entities (DEs), won more licenses than any other bidder.  Post auction, Dish’s spectrum portfolio in the top 100 CMAs will, on average, be 81 MHz deep.  Yet none of that spectrum is currently supporting commercial wireless services.

Given the demands being placed on wireless networks today, the industry simply cannot afford to have significant spectrum resources sitting idle on the sidelines.  Auctions should be designed to ensure that licenses go to those willing to deploy networks – not speculators or stockpilers.  The FCC has continued to strengthen build requirements but perhaps more is needed to ensure that new capacity is put to use quickly for American consumers.

Lesson No. 3 – Licensed Spectrum Matters, a Lot

The third take away is that licensed spectrum still matters.  Yes, unlicensed spectrum continues to play an important role in modern wireless networking.  AT&T has an extensive WiFi footprint that it relies on heavily for traffic backhaul and management.  But unlicensed is NOT a substitute for licensed.  If it was, this auction would not have driven the valuations it did.  Licensed spectrum still matters – a lot – and the government should continue to place a high priority on allocating new licensed bands to the wireless industry.

Lesson No. 4 – In Advance of the Upcoming Incentive Auction, the FCC Should Revisit the Rules for Competitive Bidding

Initial demand in the auction appeared to exceed supply by four times and demand remained at those levels for 10 rounds, driving very early and rapid price increases.  Auction prices really didn’t begin to stabilize until after 30 rounds, but by that time we already had a $35B + auction and many if not most DEs were bid out of the auction.

That brings us back to Dish and its controlling interests in and use of two DEs to win licenses in this auction.  I’m confident much more will be discovered about these DEs as the FCC undertakes its long form review, but this is what we already know.  Dish incorporated two DEs maintaining an 85% “non-controlling” financial interest in both.  Dish then entered into a joint bidding arrangement with both DEs.  We also know that Dish and the two DEs routinely triple bid licenses (inflating demand) until Dish dropped out of the auction and then the DEs double bid them routinely thereafter.

The Dish entities acting in concert triple and double bid licenses in the auction nearly 4,000 times.  During one round of the auction, because of their triple bidding tactics, the Dish entities collectively had close to $30B in bids while their actual financial exposure was only 1/3 of that. None of this suggests independent decision making by either of the DE bidders, which ultimately won over $13B worth of licenses with a $3B “small business” discount. This conduct circumvented auction activity rules, masked actual demand and distorted the auction.  As a result, Dish the corporate entity won NO licenses.  The Dish DEs, who each enjoyed a 25% discount, won substantial allocations.

The competitive bidding rules clearly need to be revisited.  Fixes can be as simple as requiring joint bidders to participate at auction as a single entity or prohibiting joint bidders from placing competing bids on the same license.  Whatever the path, the type of coordinated strategic bidding we saw here needs to be addressed so similar conduct does not cloud the incentive auction.

Lesson No. 5:  The FCC Should Also Revisit the Rules for Designated Entities in Advance of the Incentive Auction

Designated Entities can and have in the past played a significant role in meeting the statutorily- mandated requirement that the FCC ensure diversity in spectrum ownership, including by minority/women-owned and small businesses.  But this auction shows how the legitimate purposes of the DE program can be distorted and manipulated.

The Dish DEs simply do not seem like the type of entities that the FCC had in mind when the DE framework was adopted.  The DEs were majority financed by Dish and other institutional investors and the discounts will ultimately inure to their benefit.  And, in the end, the Dish DEs ran over other participating DEs, outbidding them repeatedly, particularly in the G-block which was licensed on a CMA-basis to encourage small player participation.  In fact, the Dish DEs outbid non-Dish DEs on 398 licenses for a total of $1.85B in net winning bids.

Dish responds by alleging that everyone – including AT&T and Verizon – uses DEs.  But one has to go back 14 years, to the 2001 PCS Designated Entity auction, to find any material number of DEs related to larger carriers.  And even then, the DE relationships were far different, with smaller non-controlling interests and much more modest bidding, none of the double and triple bidding used in AWS-3, and much smaller aggregate DE discounts.  In more recent auctions – including the AWS-1 and 700 MHz auctions – bidders like AT&T, Verizon and T-Mobile had no DE relationships, participated directly and paid full price for their licenses.

AT&T does not oppose the DE rules or the purpose for which they were created. But the entire point of the DE rules is to ensure that only entities that are independent small businesses receive the small business subsidies.  The complex corporate structure and related coordinated bidding conduct of the Dish DEs merit a fuller review.  The FCC should also take a closer look at who the DE subsidies will really benefit in this auction.  Such a review is needed to get the DE rules right moving forward.

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