Auction Rules and Competition Policy in the 600 MHz Auction
By Peter Cramton
Consistent with countries throughout the world, the FCC is proposing a limit on the quantity of low-band spectrum that a carrier can acquire in the upcoming 600 MHz auction.2 The motivation for the limit is the same as in other countries: to prevent excessive concentration of the low-band spectrum in the hands of the dominant incumbents. It is well understood that such concentration undermines competition in mobile broadband communication. Vigorous competition brings enormous benefits to both consumers and the industry. The FCC plays an essential role in fostering this competition.
The proposed competition policy for the 600 MHz auction is to reserve a share of the spectrum for carriers with little or no low-band spectrum in a particular market once a revenue threshold has been reached. This guarantees that the restriction does not get in the way of achieving a revenue target. Further, it provides valuable information to all carriers about the money required to acquire low-band spectrum. Finally and most importantly, it helps to prevent the dominant carriers at prices above the threshold from acquiring too large a share of low-band spectrum, thereby foreclosing competition. Once the threshold is reached, the dominant carriers can bid on the unreserved spectrum in every market—the reserved spectrum must go to carriers that hold less than one-third of low-band spectrum in a market.
Here I examine the likely auction revenue implications of alternative splits of reserved and unreserved spectrum. The bottom line is that auction competition and revenues are maximized when there are an odd number of unreserved spectrum blocks. An odd number of unreserved blocks forces AT&T and Verizon to compete, and it is this competition that will be the primary determinant of revenues beyond the threshold. Furthermore, the auction yields a more competitive broadband market structure when more lots are reserved for carriers with little or no low-band spectrum holdings. These two considerations provide useful guidance on how the FCC should allocate spectrum between unreserved and reserved blocks to improve auction revenues and foster competition in mobile broadband:
- With a 72 MHz clearing target, reserve 30 MHz, leaving 30 MHz unreserved. AT&T and Verizon are then forced to fight to determine which carrier gets 20 MHz. This raises prices for the unreserved spectrum and assures the smaller carriers get more low-band spectrum.
- With an 84 MHz clearing target, reserve 40 MHz, leaving 30 MHz unreserved. Again AT&T and Verizon are forced to fight to determine which carrier gets 20 MHz.
- With a 108 MHz clearing target, reserve 40 MHz, leaving 50 MHz unreserved. AT&T and Verizon are then forced to fight to determine which carrier gets 30 MHz.