600 MHz Incentive Auction Reserve
March 8, 2017 | By Rebecca Murphy Thompson and Courtney Neville .
“If you build it, [they] will come.” Anyone who loves baseball or movies or America knows that famous line from Field of Dreams, where an Iowa farmer is inspired to build a baseball field on his land. The Federal Communications Commission’s (“FCC” or “Commission”) historic, first-of-its kind, 600 MHz incentive auction proves that this quote is more than just a Kevin Costner line from a movie. An FCC spectrum auction may lack the drama associated with the first pitch of summer, but it certainly offers another type of excitement.
With $19,632,506,746 in gross bids, the 600 MHz incentive auction is already one of the highest-grossing auction the FCC has ever conducted, second only to the AWS-3 auction ($44,899,451,600 in gross bids). And bidding in the incentive auction is still not over. The assignment-round phase of bidding, which the FCC has just begun, promises to increase auction revenues even further.
Next, the 600 MHz incentive auction used market forces to determine the right balance of broadcast to broadband spectrum. Broadcasters had a unique financial opportunity to return some or all of their broadcast spectrum usage rights in exchange for payments, and broadband operators had the chance to acquire new “beachfront” spectrum that can provide better in-building and rural coverage than other higher-frequency bands. This auction design can be credited to Professor John Forbes Nash, Jr., Nobel prize recipient and the father of game theory, who provided economists, baseball fans, and spectrum auction engineers with a precise mathematical approach to analyzing human behavior. He elegantly characterized his strategic equilibriums in one simple phrase: “the best for the group comes when everyone in the group does what is best for himself, and the group.” The FCC not only applied Professor Nash’s strategic equilibrium to its incentive auction design, but it also followed his policies about the greater good when creating a spectrum reserve. Indeed, the FCC astutely designed the auction to account for a spectrum reserve, which was good for the larger group, for individual bidders, and for consumers.
Finally, the spectrum reserve worked exactly as intended. The market-based mechanism provided greater access to critical low-band resources for all, without the threat of market dominance thwarting competition. By stimulating interest and increasing participation, the spectrum reserve arguably increased auction pricing above what it might otherwise have been. But don’t take our word for it, look at the results:
- Reserve bidders, including AT&T & Verizon in most markets, are paying virtually the same as non-reserve bidders on a nationwide basis. In other words, reserve blocks sold at just a one percent price discount compared to non-reserve blocks nationally on a per block basis.
- At the close of forward-auction bidding, about 90.4% of the revenue ($17,749,517,087 of $19,632,506,746) was generated before the auction satisfied the conditions necessary to create the reserve.
- In 81 markets, including important commercial hubs such as Charlotte, North Carolina, and Jacksonville, Florida, reserve blocks sold at a premium to non-reserve blocks. Stated differently, bidders in these markets paid more for reserve-block licenses than they paid for non-reserve block licenses. 194 additional markets had no discount for reserve blocks. These no-discount markets include some of the most highly prized areas, such as Los Angeles and New York. And of the 140 markets that featured any discount at all, the vast majority of those markets – about 123 – involved a discount of 15% or less relative to reserve-block prices.
Congress directed the FCC to design spectrum auctions that incorporate “safeguards to protect the public interest in the use of the spectrum,” including the objectives to disseminate licenses “among a wide variety of applicants” and to promote deployment of new technologies, products, and services to “those residing in rural areas.” By following Congress’ mandate and creating a spectrum reserve, the FCC rightly recognized that wireless carriers, large and small, need access to low-band spectrum to deploy in rural areas and provide premium in-building coverage throughout the country. Consumers benefit when multiple carriers compete. And a failure to adopt any competitive safeguards could have allowed the two dominant service providers to raise their rivals’ costs, foreclose competition and limit consumer choice. The spectrum reserve properly balanced each of these goals and may very well have increased total auction revenues as a result. The auction is a win, win, win for consumers (and taxpayers), carriers, and competition. Learning lessons from this experience, the Commission recently noted that incentive auctions could continue to be a valuable tool for policymakers to repurpose spectrum and generate revenue for the federal budget.
Until then, increasing the number of providers with access to low-band spectrum will increase the number of competitive offerings of mobile wireless service available to consumers, especially in rural areas. The spectrum reserve worked as intended to protect competition and consumers and may have increased auction revenues in the process, for individual companies and the greater wireless ecosystem. The FCC built it, competitive carriers showed up, and now new technologies, innovative services, and economic growth will come.