T-Mobile Has Most to Gain from Incentive Auction Restrictions, Digital Policy Institute Paper Says

Anna-Maria Kovacs, author of the paper and a visiting scholar at Georgetown University’s Center for Business and Public Policy, explained the paper in a Monday webinar. “The bottom line … is that it’s important to have auctions open to everyone, in order to maximize the amount of spectrum we'll recover, in order to maximize the amount of revenue that is available and in order to have the market value of that spectrum established so that we don’t wind up with an auction in which excluding some carriers results in a major discount, essentially a wealth transfer, from taxpayers to the included carriers,” Kovacs said.

"Auction design that excludes some potential bidders would make it impossible for the FCC to measure the value of the spectrum it auctions, the extent to which it reduces the U.S. Treasury’s proceeds, and the discounts it provides to the included bidders,” the paper said. The paper cites a June proposal by T-Mobile that would limit any carrier’s ability to bid in the auction unless the auction fails to reach a revenue target set by the FCC. The paper questions whether the FCC will be able to accurately set a price, noting that in the 700 MHz auction, Auction 73, the FCC’s revenue target was $10 billion, though the auction brought in $19 billion. “Auction 73’s results show that the FCC is likely to misestimate, a likelihood that increases with the complexity of the auction. The 600 MHz auction, which involves simultaneous forward and reverse auctions, is far more complex than Auction 73, and thus more vulnerable to miscalculation."

The paper said if T-Mobile’s proposal is adopted the primary beneficiary will be T-Mobile. “The relative spectrum positions of the carriers make it likely that AT&T and Verizon would place the highest value on the spectrum,” the paper said. “If they are excluded, the key bidders are likely to be T-Mobile and Sprint and the auction’s proceeds will depend on their bidding energetically against each other. But given Sprint’s enormous spectrum advantage over its national competitors, its willingness to pay up for spectrum is likely to be limited. Thus, T-Mobile will essentially be bidding against the FCC’s revenue target. If that target is below full market value, i.e. the value AT&T and Verizon would place on it, then auction proceeds will be below full market value."

"If you eliminated AT&T and Verizon from bidding in the auction, then, essentially you would be down to T-Mobile as the only one who really needs the spectrum in any realistic sense,” Kovacs said, saying AT&T and Verizon Wireless need spectrum more than any other carrier in the U.S. The FCC can offer bidding credits through the designated entity program to encourage participation in the auction by small carriers, she said. “The issue is not are the small guys going to be able to participate,” she said. “The issue is really a competitive issue between the four national carriers.” <?p>

Thomas Hazlett, George Mason University economist and former chief economist at the FCC, said there are still many unknowns about the auction. The “inside thinking in Washington” is now that the incentive auction won’t happen before 2015 and the spectrum won’t be available for use by carriers until “2017 or later,” he said. “Still up in the air is how much spectrum is actually going to be returned.”

There are 49 over-the-air TV channels allocated by the FCC per market and the commission proposes “in essence” to reallocate 20, leaving 29 available for broadcasters, Hazlett said. “Right now it looks like that will be a very ambitious objective, that there will be considerably less spectrum that’s actually reallocated,” he said. Broadcasters will participate in the auction, but “the question is the price,” he said. Hazlett said federal antitrust law and the FCC’s spectrum screen already place curbs on any carrier’s ability to hold anticompetitive amounts of spectrum. “If there’s no serious anti-competitive issue involved here and we have two layers of regulation already established to discern that, it seems interesting that we would need a third layer to somehow get at the problem,” Hazlett said. “I think that that’s something important to consider.”

"If you constrain the participation of those bidding then you're going to affect the price,” said Stephen Pociask, president of the American Consumer Institute Center for Citizen Research, also on the webinar. “If you affect the price then the [auction] itself can fail.” Pociask said Hazlett is right. “There already are safeguards in place to prevent market failure of this sort,” he said.