Restricting Bidding at Spectrum Auction Will Not Necessarily Reduce Revenue

In an effort to increase LTE deployments and extend the network, the Federal Communications Commission (FCC) is preparing to auction off airwaves that would be worth billions to wireless companies. In an attempt to be fair to all of the carriers, regardless of size, and to increase overall revenue from the sale, the FCC has set up rules that would limit the amount of spectrum that the larger carriers can bid on.

AT&T may not agree to this set of rules, however, and is seriously considering not participating in the auction. In a statement, AT&T mentioned that perhaps it would be better for the company if its efforts and—more importantly—its resources were to go in a different direction.

The basic feeling that prompted the FCC’s spectrum limit rule was that if AT&T and Verizon were to have the ability to bid for every section of spectrum that they wanted, then there would be nothing left for the smaller companies, which do not have the same resources as the two largest carriers. Specifically, the FCC wants to prohibit them from bidding on additional spectrum in the 600 MHz if a third of the low band spectrum is already in their possession.

Well, you had to have seen this coming! A new report released today puts the FCC’s beliefs in question. The bottom line of this report appears to be that large firm participation does not scare off smaller bidders and accounts for the bulk of the auction’s total proceeds.

This is in direct contradiction to what the FCC ruling claims to avoid. The report is entitled “Will Bidder Exclusion Rules Lead to Higher Auction Revenue? A Review of the Evidence.” The Phoenix Center is a not-for-profit 501 organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age. They are also the group that conducted the study.

This is where I think that points and counter points always become interesting. On the one hand, we have the FCC saying that the reason for the new rules for this auction is to allow more of the smaller companies to participate and by doing so, increase the revenue that can be realized from the auction.

On the other hand, we have the study from the Phoenix Center that basically found that just AT&T’s participation accounted for nearly half of all the previous auction proceeds. This is true despite the fact that AT&T’s winning bids were only about 10 percent of the total. The study also finds that between AT&T and Verizon, whether directly or indirectly, they brought in more than two-thirds of the auction’s revenue. The information is based on data that was analyzed from the 2006 AWS-1 spectrum auction.

It seems that the smaller companies are not afraid when it comes to bidding against the big boys. The Phoenix Center claims that it found no evidence that AT&T and Verizon reduced the number of bidders for licenses and no evidence to support the claim that lower revenues resulted from these two firms participating in the 2006 auction.

Lawrence J. Spiwak, who is the president of the Phoenix Center and co-author of the report, states "In order for the voluntary incentive auction to be a success, the FCC must structure its rules to maximize revenue in order to incent broadcasters to participate, pay for FirstNet and to provide significant funds to help pay off our national debt. Restricting the participation of bidders who provided the lion's share of total auction proceeds in the AWS-1 auction would appear to be counterproductive towards achieving these goals."

Following these sentiments the other co-author and chief economist for the Phoenix Center, Dr. George S. Ford, added "The influence of a bidder in an auction is more than what it buys, because a losing bid forces other bidders to reveal their true valuations. For example, AT&T had a very large indirect effect on auction outcomes. While its winning bids were only about 10 percent of the total proceeds, the company accounted for nearly half of the AWS-1 auction's revenues."

The idea of the spectrum auction is to give everyone an opportunity to bid on and acquire a slice of the airwaves. This is what keeps one company from becoming a monopoly and therefore being the only presence that controls the price of a product. The question that this study and the FCC ruling is considering is whether or not limiting one participant’s total will have an effect on the remaining bidders.

Obviously, AT&T and Verizon have the resources to outbid Sprint, T-Mobile and all the other smaller companies, but will that keep these companies from bidding and acquiring a portion of the spectrum? If you look at the Phoenix Center’s study, the answer to that question would be no.