The FCC’s Spectrum Auctions: Challenges and Advantages

The FCC’s Spectrum Auctions: Challenges and Advantages

1. Introduction.

The use of the electromagnetic spectrum to transmit data has evolved significantly. Wireless transmission has greatly replaced wire-based telephones in telecommunications, especially for individual use. On the other hand, television broadcasting has largely adopted cable wires, transitioning away from using the spectrum for wireless transmission. Federal policymakers, viewing spectrum as a finite resource, have allocated certain frequencies of the spectrum to different uses. As technology changes, the federal government auctions frequencies to make them available for new uses. This method presents some challenges, but it also holds some advantages over the earlier methods by which spectrum was re-allocated.

2. Differences in the 2008 and 2015 Auctions.

2015’s AWS-3 auction covered 65 MHz of spectrum, divided amongst 1,614 licenses (Goldstein, 2014).

module 3 - aws freq block summary

Image from Goldstein, 2014.

 

 This auction dealt with different blocks of the spectrum than the 2008 auction. 2008’s auction involved the 700 MHz portion of the spectrum. The upper and lower portions of the 700 MHz band “had previously been occupied by UHF television channels between 52 and 69” (Nuechterlein, 2013, p. 134). This year’s AWS auction addresses blocks in the 1695-1710, 1755-1780, and 2155-2180 MHz bands. The 1755-1780 MHz band is used by a number of government agencies for purposes including activity related to national security, and weaning the government off these frequencies to free them up for private use is a process fraught with enormous technological problems and costs (ibid, p. 134). 

3. Transitional Challenges.

Because the spectrum being auctioned is still in use by government agencies who are not prepared to give them up yet, the bidders have won things they cannot yet use. “The thorniest part of the auction process will likely be relocating government users from the spectrum or having carriers share the spectrum with government users,” and this will be managed by a transition plan from the National Telecommunications & Information Administration, part of the US Department of Commerce (Goldstein, 2014). To resolve this disadvantage takes more than a plan. It takes funding. This explains the reserve prices at spectrum auctions. The reserve prices were set high enough to make sure “the FCC raised enough money to cover relocation costs for government users of the spectrum” (ibid).

4. Anti-Competitive Challenges.

One regulatory disadvantage becomes clear when looking at the big players in these auctions. The FCC is selling these spectrum bands to the very same companies whose expansions and mergers they have been monitoring and, in many cases, denying. Take Verizon as an example. In 2006, Verizon Wireless announced it would “purchase all the spectrum that various cable companies had acquired in the 2006 AWS auction but had never put to use” (Nuechterlein, 2013, p. 158). The FCC conditionally approved this deal, despite controversy, so this portion of the spectrum would not go unused (ibid). Verizon subsequently became the “only wireless operator to win a nationwide license in the 700MHz auction in 2008” (Reardon, 2015). And it continues to add spectrum now, having bid more than $10 billion in this year’s AWS-3 auction (Seifert, 2015). These bids earned Verizon 181 licenses, increasing its AWS coverage of the US from 70 percent of the U.S. population to around 95 percent, with a “combination of at least 40 MHz of AWS-1 or AWS-3 spectrum in 92 of the top 100 U.S. markets” (Goldstein, 2015). Though the increased coverage may bode well for Verizon subscribers, it is difficult to reconcile this expansion with the earlier controversy. The FCC may have reason to worry about its auctions’ effects if they expand the same companies it monitors for monopolistic practices.

The big winner of this year’s AWS auction, AT&T, illustrates the problem further. Bidding “nearly $18.2 billion for 251 licenses”, AT&T gained more licenses than the closest three competitors: Dish, Verizon, and T-Mobile (Seifert, 2015). While the FCC approved AT&T’s merger with Cingular in 2004, the FCC rejected AT&T’s merger with T-Mobile in 2011. Again, it is difficult to reconcile the FCC’s willingness to sell off large portions of the spectrum to the same companies it is trying to keep from getting so big they become anti-competitive. The philosophy that guides this balancing act seems to be that the FCC “will go to great lengths to free up more capacity for use by mobile wireless providers, but probably not at the expense of losing a major national carrier” (Nuechterlein, 2013, p.158).

 5. Economic Challenges.

 Auctions also present a problem for economies if speculative bidding drives up the cost of licenses to an unreasonable amount. For example, a European auction in 2000 pushed up bids on broadband spectrum so high that it “eventually bankrupted some of the auction winners and sent the European wireless industry into a tailspin” (ibid, p. 95). However, poor auction design was partly to blame, not just speculative zeal (ibid.). Clearly, a well-designed auction can combat this disadvantage.

But, as the FCC learned with NextWave Communications in the 1990s, a bid does not guarantee the ability to pay. NextWave, in the throes of backruptcy, defaulted on its installment payments for licenses it had won in auction. The spectrum blocks it had won remained unused as the gears of litigation slowly ground, achieving the opposite of the goal of freeing up the spectrum (ibid, p. 95-6). To combat this disadvantage, bidders must be qualified prior to auctions (FCC Auctions Home). This year’s AWS auction had more than 70 qualified bidders (Goldstein, 2014). The FCC establishes and publishes this list of qualified bidders, including the range of credit extended to them (FCC, 2014, p. 1-4). Clearly the FCC wants to vet the credit of its bidders and avoid the disadvantages caused with NextWave.

 6. Advantages.

Despite these administrative and regulatory challenges, the auction method presents some clear advantages over earlier methods of spectrum re-allocation. These advantages are so compelling that since the FCC began the first of more than thirty such auctions in 1994, the US model has been emulated by many nations around the world pursuing the same spectrum usage goals (Cramton, 2001, p.1). Previously, the FCC had used either comparative hearings or lotteries (ibid, p. 2). Countries that have not followed the FCC’s continually-improving auction model “have suffered from inefficient license assignments and other flaws” (ibid). For bidders, the advantages include the ability to “build packages of complementary licenses using the information revealed” in the bidding process, and the opportunity to shift their bids in the process to a license that might “represent a better value” (ibid.).

The FCC enjoys the advantage of doing away with the comparative hearing process which was “expensive, standardless, and time-consuming,” a “beauty contest” rife with favoritism for the big incumbents and “those with political ties” (Nuechterlein, 2015, p. 92-3). The FCC also avoids the numerous disadvantages of the lottery system it experimented with beginning in 1984. Lotteries were not only random but generated so many hundreds of thousands of applicants that the paperwork partially collapsed the facility which housed them (ibid, p. 93). The lotteries also suffered from a design which allowed the winners to resell their spectrum rights, often for enormous sums which benefitted those companies but ultimately deprived the US Treasury of revenue it could have gained at an auction (ibid, p. 93-4).

7. Conclusion.

Due to the overwhelming advantages spectrum auctions have for all parties, including bidders, regulators, consumers, administrators, and the economy, they are the best method available for re-allocating spectrum for new and different uses. The academic community and the international community agree, and many nations have benefitted from adopting similar models. The disadvantages of the auction method are several, but the FCC has been improving the auction process in response to the occasional failures of the system both domestically and abroad.

References

Cramton, Peter. (February, 2001). Spectrum Auctions. In (2002) Cave, Martin, et. al., (Eds.), Handbook of Telecommunications Economics, Vol. 1: Structure, Regulation, and Competition, Chapter 14, pp. 605-639. Oxford, UK: Elsevier. Retrieved from http://www.cramton.umd.edu/papers2000-2004/01hte-spectrum-auctions.pdf

Federal Communications Commission. FCC Auctions Home. Retrieved from http://wireless.fcc.gov/auctions/default.htm?job=auctions_home

Federal Communications Commission. (30 October, 2014). FCC AWS-3 Auction, Auction ID: 97,  Qualified Bidders (Attachment A). Retrieved from http://transition.fcc.gov/Daily_Releases/Daily_Business/2014/db1030/DA-14-1564A2.pdf

Goldstein, Phil. (12 November, 2014). “AWS-3 spectrum aution primer: What you need to know before the bidding starts.” FierceWireless. Retrieved from http://www.fiercewireless.com/special-reports/aws-3-spectrum-auction-primer-what-you-need-know-bidding-starts

Goldstein, Phil. (17 February, 2015). “Verizon: With AWS-3, we have at least 40 MHz of AWS spectrum in 92 of top 100 markets.” FierceWireless. Retrieved from http://www.fiercewireless.com/story/verizon-aws-3-we-have-least-40-mhz-aws-spectrum-92-top-100-markets/2015-02-17

Nuechterlein, Jonathan E., and Weiser, Philip J. (2013). Digital Crossroads: Telecommunications Law and Policy in the Internet Age. 2nd Edition. MIT Press: Cambridge, MA.

Reardon, Marguerite. (29 January, 2015). “FCC rakes in $45 billion from wireless spectrum auction: The record-breaking auction highlights the demand for high-speed wireless service and signals strong promise for the upcoming auction of TV broadcast spectrum.” CNet. Retrieved from http://www.cnet.com/news/fcc-rakes-in-45-billion-from-wireless-spectrum-auction/

Seifert, Dan. (30 January, 2015). “AT&T emerges as big winner in FCC spectrum auction: Dish, Verizon also spent billions.” The Verge. Retrieved from http://www.theverge.com/2015/1/30/7952941/at-t-largest-bidder-fcc-aws-3-wireless-spectrum-auction

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