AWS-3 Auction Results Reviving Debate Over Incentive Auction Rules

The FCC spectrum aggregation order was approved in May over objections by Commissioners Ajit Pai and Mike O’Rielly (see 1405160030). “It seems inevitable the commission will take another look at the spectrum reserve,” said Guggenheim Partners analyst Paul Gallant. “I don’t know if they’ll actually shift it towards Sprint and T-Mobile, but they’ll be tempted to based on AT&T and Verizon’s success in AWS-3.”

The expectation all along was that AT&T and Verizon would dominate the AWS-3 auction, said Goldin Associates Managing Director Armand Musey. “Both needed additional mid-band spectrum, whereas T-Mobile was relatively well positioned and Sprint has all the Clearwire 2.6 GHz spectrum,” he said. “I think it was a welcome surprise to the FCC that Dish came in as strong as it did.” But Musey said the incentive auction, with its sub-1 GHz spectrum, is a different story and the FCC won’t want AT&T and Verizon to dominate that auction. The FCC probably won’t want to loosen the spectrum aggregation rules, he said. “Also, the fact that the AWS-3 auction raised so much money also takes some of the pressure off the FCC. They have more room to consider other priorities, such as the impact on long-term competition.”

“It all depends on what political goal the FCC wants to pursue,” said Recon Analytics analyst Roger Entner. “If it wants to punish AT&T and Verizon, it will cite that they spent the most and hence need to be restricted, while touting what a great success the auction was. If it is more amicable to Verizon and AT&T, it will highlight how much Dish actually bid, touting what a great success the auction was because it attracted a probable new entrant to spend real money.”

There’s a central irony the FCC may miss, Entner said. The agency needs “large, financially-healthy eligible bidders to ensure a wildly successful auction contrary to some rules it wants to impose,” he said.

Smaller Players Went Big Early in Auction

A review of bidding in the AWS-3 auction shows that while AT&T, Dish and Verizon ultimately dominated the auction, other players entered in early rounds, before being outbid by the auction’s major players. In Round 5, SAAS License and Bluewater Wireless were the provisionally winning bidders for two of the top prizes in the auction, the H-block and J-block licenses covering New York City. T-Mobile had six of the top 100 bids.

T-Mobile made a play for several of the top licenses in the auction in early rounds, entering the top bids for licenses in major cities including Los Angeles, Chicago and Houston before being outbid. For example, T-Mobile twice had the provisionally winning bid for the I-block license in L.A., in rounds 23 and 30, with a high bid of more than $800 million, before the license was locked down by AT&T for more than $900 million in Round 35.

But for the most part, the biggest licenses in the auction were locked in early. Most of the competition was among AT&T, Verizon and one of the Dish-controlled bidders. Of the top 100 licenses, based on level of bids, all but three were locked up in the first 100 bidding rounds, though the auction lasted 341 rounds.

Dish Surprise

Andrew Schwartzman, senior counselor at Georgetown University Law Center’s Institute for Public Representation, said he was puzzled by Dish’s strong performance in the auction and the FCC probably is, too. “Dish aside, I think the right analysis of the AWS-3 auction is that T-Mobile had a hard time,” he said. “The commission ought to be concerned with making sure that Sprint and T-Mobile are not overwhelmed in the incentive auction.”

Dish could compete with AT&T and Verizon only by using bidding credits, a tactic criticized afterward by Pai, said Public Knowledge Senior Vice President Harold Feld. Even then, Dish focused on less desirable unpaired spectrum to get most of its licenses, he said. “Despite bidding $3 billion more than Verizon, and actually spending about the same once the DE credit is deducted, Verizon and AT&T still managed to capture the lion's share of the most desirable paired licenses.”

The low numbers in last year’s H-block auction and high numbers in the AWS-3 auction show that “the less the FCC tries to rig the outcomes to particular policy goals or bidders, the more money the auctions bring in for the Treasury and FirstNet,” said Larry Downes, project director at the Georgetown Center for Business and Public Policy. “Dish’s aggressive bidding here proves that even without the kind of complex set-asides, subsidies and limits on bidders that poisoned the H-Block auction and which is now infecting the incentive auctions, mobile competitors with a coherent and viable business strategy can and will bid strongly against incumbent providers.”

“Whether right or wrong, proponents of those rules will definitely use the AWS-3 auction as an example of how T-Mobile can't compete,” said a former FCC spectrum official. “AWS-3's success has raised broadcasters' expectations that they will get more cash for their spectrum than perhaps they first estimated,” said a lawyer whose firm represents carrier and other clients. “But the reality is that someone has to write some huge checks to meet those elevated expectations. Only two carriers can do that on a nationwide basis. This practical reality may render unworkable the ideological dogma to hobble the big two carriers that motivates some policymakers."