Remember Alltel? A Prime Example Why Competitive Auction Rules are Necessary
By: Tim Donovan, VP of Legislative Affairs, CCA
May 14, 2014 – AT&T and Verizon frequently point to Sprint’s and T-Mobile’s decisions not to participate in Auction 73 for lower 700 MHz spectrum as justification for the FCC not to advance pro-competitive rules for future auctions. Every carrier must weigh business needs when deciding whether or not to participate in an auction, just as Sprint and T-Mobile did prior to Auction 73, and AT&T and Verizon did prior to Auction 96 (for H Block spectrum). What AT&T and Verizon conveniently dismiss are real examples of foreclosure including carriers that have actively participated in spectrum auctions, but have left empty – handed because they are unable to compete with the nation’s dominant carriers without competitive auction policies.
Rather than point fingers, it is more productive to examine how participants fared in an auction with structured rules ensuring competition versus an auction without competitive safeguards. Some of the most important lessons come from carriers who desperately needed spectrum and participated in auctions, but were unable to acquire the needed spectrum and promptly became a take-over target, unable to compete against the enormous resources of the two largest carriers. In light of the upcoming incentive auction – the next, and possibly final, auction for low-band (below 1 GHz) spectrum – policymakers should take a hard look at the consequences of carriers’ inabilities to win low-band spectrum.
For example, Alltel Corporation participated in Auction 73, the last major auction for low-band spectrum. In 2007, when the FCC was finalizing rules for Auction 73, Alltel was the fifth largest wireless carrier in the United States, serving over 12 million customers, many located in rural areas. Knowing the exceptional propagation characteristics of low-band spectrum, ideal for rural coverage and in-building penetration, Alltel expressed great interest in expanding its mobile services using the 700 MHz band, and made several recommendations to the FCC, including:
– Creating multiple spectrum blocks using smaller, Cellular Market Area (CMA) geographic license sizes;
– Rejecting blind and combinatorial or package bidding; and,
– Considering eligibility restrictions on the two largest, ILEC affiliated carriers.
While the Commission auctioned one block of the Lower 700 MHz B Block in CMAs – which not coincidentally yielded by far the greatest revenue on a MHz-pop basis – the Commission failed to heed much of Alltel’s policy guidance. Nevertheless, Alltel participated in the auction, including one bid of over $600 million for the Northeast Regional Economic Area Grouping (REAG 001) covering Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, the eastern portion of Pennsylvania, Rhode Island, and Vermont. Alltel was willing to invest significant upfront capital to win spectrum that covered its home markets because it was that important to them to win spectrum. How did things turn out? Alltel was completely shut out of the auction. Alltel was simply unable to compete with the enormous resources of the two largest carriers. Following the auction even Senator Mark Pryor from Arkansas, home to Alltel’s Little Rock headquarters, noted that, “History will show that the way the FCC structured the auction basically helped the two big wireless companies [Verizon Communications and AT&T] to the detriment of competition in this country.”
Auction 73 closed on March 18, 2008. On June 4, 2008 – 78 days later –Alltel was acquired by Verizon.
Fast forward to present day. The two largest carriers, Verizon and AT&T, have nearly doubled in size, and the fifth largest remaining carrier has approximately half the number of subscribers as Alltel had before Auction 73. As we are hours away from the FCC’s vote on the first set of rules for the next, and possibly final, auction for low-band spectrum, policymakers must remain cognizant of the competitive impact that their decisions have on the wireless market and in turn consumers’ competitive choices. They would be wise to support a competitive auction structure so that remaining competitive carriers, many of which provide robust mobile broadband services in rural areas, have meaningful opportunities to bid and a legitimate chance to win needed spectrum. The FCC should do everything in its power to prevent circumstances that Alltel experienced. As the Department of Justice today reaffirmed, “the Department believes it is essential to maintain vigilance against any lessening of the intensity of competitive forces, or reduction in the number of effective competitors, in the wireless industry.”
Fortunately, the FCC has proposed rules that can create a competitive auction, providing all carriers with an opportunity to win spectrum. The FCC’s proposed rules include:
– Auctioning spectrum in Partial Economic Area geographic license sizes, a compromise between very large and reasonably smaller license sizes; and
– Reserving a limited amount of spectrum for non-dominant carriers after threshold revenue targets are reached.
The FCC will likely decide rules regarding combinatorial and blind bidding another day, however CCA cautions policymakers not to promote these procedures at the expense of competition.
CCA supports structuring a successful auction that raises significant revenue for FirstNet and the US Treasury, while fostering competition in the wireless industry. We look forward to continuing to work with policymakers to craft a competitive auction – before the next Alltel is driven from the market at the expense of competition, rural customers, and ubiquitous mobile broadband service.
 Notably, Alltel opposed overbroad restrictions that would exclude or prevent AT&T and Verizon from participating in the auction entirely.