Incentive Auction Rules Could Pose Big Hurdle for Smaller Carriers
Parts of the rules for the TV incentive auction could make it less likely that small carriers will bid for 600 MHz spectrum once the forward auction gets underway, industry officials said. One complication for competitive carriers interested in bidding for reserve spectrum set aside for them in some markets is that they won’t know until the final stage of the auction whether a spectrum reserve will be available, officials said. A second challenge is that bidding is more complex than in past auctions, with a “no excess supply” rule that could prevent a company from exiting a market after making a bid. The FCC didn't comment.
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The FCC approved rules for the spectrum reserve after a contentious fight, providing 30 MHz for bidders who don’t have low-band holdings of 45 MHz or more in a single market. T-Mobile and other competitive carriers pushed for a larger reserve and also a different reserve trigger, but were rejected by the FCC on both accounts last August (see 1508060028).
The way the FCC set up the rules for the auction, the set-aside doesn’t trigger until the final round of the auction, until then everyone is bidding against everybody else, said a former FCC legal adviser. “If we fall from 126 [MHz] to 114 and then to 86," the prices would continue to rise but the set-aside would never be triggered, the former official said. “We’re probably losing a lot of the bidders who want the set-aside before the set-aside is actually ever in place.” The activity rule allows companies to change bids by only one block per round, which is also an issue for smaller carriers, the former official said. “Some of these small guys, if they bid too high early on, they might have a hard time getting out.”
Competitive carriers warned the FCC when the rules were being developed that “backloading the reserve in that manner would make it challenging and might lead to having no reserve available,” said a lawyer who represents smaller carriers. “We had this knock-down, drag-out fight and yet the reserve doesn’t kick in until the final stage rule has been met.” The no-excess supply rule is a “feature of the auction” but “something that savvy bidders should be able to plan around and account for in their bidding strategies,” the lawyer said.
The incentive auction is hugely complicated, the most complicated in FCC history, said Roger Entner, analyst at Recon Analytics. “This makes it difficult for the faint of heart … or those who do not have an experienced, sophisticated auction team to take full advantage of the rules,” he said. “Unfortunately, smaller rural providers who run a tight ship don't have deep pockets nor can they afford an experienced, sophisticated auction team. Ironically, but not unexpectedly, they are therefore disadvantaged by the complicated rules that were meant to protect them.”
"Let's face facts, the forward auction is a big boys' game,” said Adonis Hoffman, chairman of Business in the Public Interest. “That said, the reserve could end up being scraps at the table for small players, if at all. Even though consideration was given to them in the design, less spectrum could foreclose the opportunity originally envisioned in the statute. Not a good outcome for the public interest."
But Fred Campbell, executive director of Tech Knowledge, said serious bidders won't be scared away by the auction rules. Many smaller and rural bidders will likely pursue spectrum in smaller or rural markets "where the largest nationwide carriers are less likely to be a significant competitive threat," he said. "These types of bidders should be able to win spectrum in those types of markets even without the set-aside. The carrier most likely to benefit from the set-aside is T-Mobile, who has the resources and sophistication to win spectrum in major markets even without the set-aside. The only bidders who are likely to drop out of the auction early based on uncertainty regarding the set aside are speculators who see it as a way to game spectrum prices at the taxpayers’ expense." Campbell oversaw the FCC 700 MHz auction as chief of the FCC WIreless Bureau.
The reserve mechanism offers a good example of the "intricate balancing act" the FCC tried to perform with the design of the incentive auction, said Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. "With this higher clearing target, the reserve is harder to trigger, but it is worth keeping in mind that the reserve was not designed to be a pure windfall for smaller carriers," Brake said. "The FCC wanted to see aggressive bidding early on, but also ensure incumbents in larger markets did not run away with the spoils. The commission heard plenty of arguments on both sides of this debate. I just hope that their judgment comes from an informed balancing of policy goals and not just splitting the baby to try to keep everyone happy." CTIA and the Competitive Carriers Association declined to comment.