Incentive Auction Was Inefficient, Broadcasters Paying Price, Padden Says

Carriers said they had to have spectrum and didn’t show up -- “It was, like, oh, just kidding,” Padden said. Carriers are keeping up that drumbeat even now, he said, saying just this week CTIA commented on the wireless competition report saying the industry needs more low-, mid- and high-band spectrum. Why didn’t they bid in the incentive auction, he asked.

Sprint and Verizon never bid and AT&T came in during stage one and shed demand as fast as allowed, Padden said. Verizon said after the auction it didn’t need the spectrum (see 1704280064), he said. “The No. 1 takeaway from this auction is we have to find a way to never again let those claiming to need spectrum and disadvantage others, then fail to show up,” Padden said.

Broadcasters are paying the price, Padden said. A thousand TV stations are going to be moved involuntarily, he said. "Government is telling you you have to change your channel, you’ll have to get a new antenna, you’re going to have find a tower crew that can climb 2,000-foot towers. … It’s going to cost you a lot of money and you never wanted any part of this.”

The auction also failed to find buyers for “a ton of very low-value, marginal” TV stations, Padden said. “They remain on the air, complicating the repacking process,” he said. “An efficient auction would have cleared out these very low value stations.” The auction put too much power in the hands of individual forward auction bidders, he said. By putting too much focus on excess demand in the top 40 markets, “a single forward auction bidder had the capacity, the ability to end a stage by simply hiding their demand in smaller markets,” he said.

CTIA Responds

The auction made available the second largest amount of spectrum ever for an FCC auction, a CTIA spokesman responded. "Fifty forward auction participants bid $19.6 billion to free up 84 MHz of spectrum that will help meet ever-increasing consumer demand for mobile broadband," the spokesman said. "One hundred and seventy-five broadcasters earned over $10 billion, and over $7 billion went to the U.S. Treasury for deficit reduction. The focus now should be on working collaboratively to achieve a smooth and efficient post-auction transition."

“You have to really marvel at what happened here,” said Eddie Lazarus, general counsel at Tribune Media and former FCC chief of staff. “Even if maybe it took too long, even if maybe it wasn’t perfectly efficient.” The auction was also disappointing to many broadcasters, he said.

Lazarus said the auction pointed to the importance of timing. Low-band spectrum used to be “the only game in town … it was every cliché under the sun,” he said. “The run-up to the auction took a long time and technology was changing very, very fast. People became interested in other bands of spectrum.”

Congress likes spectrum auctions because they help in deficit reduction, but the main purpose was to reallocate spectrum for wireless broadband, Lazarus said. He agreed with Padden that the auction didn’t do anything positive for the broadcast industry. “That’s probably something worth thinking about,” he said. Broadcast TV has been viewed as static, with less “social utility” than broadband, he said. “One big question for the FCC coming up will be is that changing.”

The emerging ATSC 3.0 standard may be a game changer for broadcasters, Lazarus said. “If you knew more about ATSC 3.0 when the auction was being designed, would you have built in a very different component to the repack?” he asked. “Would you have thought about compensating the broadcasters who wanted to stay in business differently?”

One failure of the auction is that the FCC didn’t do a good job of communicating to broadcasters a central truism of the auction process, Lazarus said. “Auction design isn’t to get you your opening bid price or anything close to it, it’s actually to get you to your lowest price that you’ll accept.” The FCC understood that, but never communicated it to broadcasters, instead dangling “enormous” numbers in front of them, he said. Broadcasters got big numbers only if they got really lucky, he said. “Something about that just bumps up against my idea of good governance.” The government shouldn’t do a “sale job,” he said. “It still sticks in my craw.”

'Operational Success'

Gary Epstein, who ran the FCC auction and has since retired, defended the agency. “It was an operational success,” he said. “It worked and worked well. We successfully ran a two-sided auction.” Economists and academics who helped design the auction said the auction worked as well as could have been expected.

The auction was “quite successful in achieving efficient clearing” with gross revenue of more than $19 billion, said Lawrence Ausubel, a University of Maryland economics professor who helped design the auction software. “It achieved a good competitive outcome -- 95 percent of the spectrum was acquired by bidders that had been deemed to be reserve eligible everywhere.” The auction cleared seven 10 MHz blocks of spectrum returning $10 billion to broadcasters -- but based on bidding levels clearing an additional 10 MHz block would have cost another $30 billion, he said. That’s more than $10 per MHz/POP, which would have been the most expensive spectrum auction, Ausubel said.

Three factors determined auction pricing levels, Ausubel said: Verizon didn’t bid, AT&T “pulled the plug on its bidding” and Dish Network and US Cellular didn’t invest in entities eligible for bidding credits. Some compare the incentive auction to the $41.3 billion AWS-3 auction, he said. That auction also would have seen much lower revenue without AT&T and Verizon, which bid $18 billion and $10 billion, respectively, he said.

Karla Hoffman, professor of systems engineering and operations research at George Mason University, said the incentive auction was a huge success. “It couldn’t have been done without a whole revamping of TV Study and how interference was calculated,” she said. “It needed the Wireless Bureau, the Media Bureau, International, legal, who had to write up all of this mathematics.” The information technology designed by the FCC “worked” without smaller auctions to test it first, she said.

The incentive auction presented massive challenges, Hoffman said. “People said it’s impossible to actually solve these problems, but the FCC believed we could.” It occurred at a time of massive uncertainty, with AT&T working at the same time to acquire low-band spectrum through the FirstNet contract and talk of consolidation, she said. “There was the evolution of microcell technology,” so carriers were interested in other bands, she said, “There were lots of unpredictable events, but this mechanism transformed a lot of spectrum -- 70 MHz of spectrum for wireless use.”

Allan Ingraham, consultant at Economists Inc., which advised AT&T on the auction, said if the FCC had run the auction 1,000 times, it would have had the same outcome. “Revenues would be about the same, some of the distributions of licenses could be different,” he said. “Maybe T-Mobile wouldn’t have an extra 2 x 5” MHz license in Los Angeles, he said.