Reply comments were due last week for the FCC's upcoming 700 MHz auction. As many of you know, this auction will make some of the most valuable spectrum available for use in providing wireless broadband services. Many businesses and other organizations have taken a great interest in what the final auction rules will be. PK is part of a group advocating for rules, such as bidding credits, spectrum caps, and incumbent exclusion, that will facilitate the entrance of a 'third pipe' competitor to compete with current broadband service providers. Read a summary of PK's comments here. Incumbent broadband service providers, i.e. the big telephone and cable companies, are opposed to these eligibility conditions, arguing that they will stifle competition and reduce auction revenue. This argument, however, ignores history. Eligibility conditions in previous auctions did not stunt competition or lower final license prices. In fact, in the early PCS Narrowband and Broadband auctions, the eligibility conditions fostered equally, if not more, competitive bidding and produced increased auction revenue.
In the 1994 Regional Narrowband PCS Auction, the FCC offered 30 licenses of narrowband spectrum for smaller geographic areas. This is the type of spectrum used to provide such services as two-way paging, wireless email, and wireless telemetry. In this auction, the FCC instituted a 40% bidding credit for designated entities (small businesses and businesses owned by minorities and/or women) applicable to ten licenses. A study by Peter Cramton analyzing the auction structure found that 1) all ten of those licenses were won by designated entities and 2) prices paid for those licenses were 40% higher than prices paid for licenses without the credit. In other words, the demand for spectrum among small businesses was so high, and the competition at the auction so healthy, that the bidding credit was essentially bid-away. Net auction revenues were virtually unaffected by the presence of the credit.
The PCS Broadband Auctions (1994-1996) offered spectrum for the provision of various mobile and fixed radio services, including voice and advanced two-way data. The first Broadband auction consisted of six separate blocks of licenses, offered during the course of three separate auctions. The first auction offered licenses in the A and B blocks, which basically consisted of two 30 MHz blocks of spectrum. The second auction, the C-Block auction, offered a third block of 30 MHz licenses. The third auction consisted of the D, E, and F blocks, each comprised of one 10 MHz block.
In this set of auctions, the FCC took the additional step of reserving the C-block exclusively for bidding by small businesses. The C-block auction also incorporated two other eligibility conditions. The first was a spectrum cap that prohibited a single entity from obtaining more than 98 of the 986 available licenses. The second provided bidding credits for small businesses (10% credit) and very small businesses (25% credit). The Cramton study also found that, as a result of these conditions, small businesses eager to enter the market submitted aggressive bids that produced net revenues more than twice the prices in the previous A and B Block auction.
In light of these auctions, it's hard to argue that eligibility conditions are necessarily synonymous with decreased competition and auction revenue. The results of the PCS Narrowband and Broadband Auctions clearly indicate a strong market demand for small businesses and new entrants to acquire spectrum. The volume and quality of participation by small businesses and the quantity of revenue generated are solid proof that attaching eligibility conditions is not incompatible with achieving a successful auction.
Following the lessons of past spectrum auctions, the implementation of substantially less-restrictive eligibility conditions in the 700 MHz auction is likely to produce vibrant competition and generate significant revenue. In fact, if incumbents are unable to bid or are uninterested in bidding, other participating firms are more likely to bid. By limiting direct competition with deep-pocketed incumbents, smaller businesses and new entrants will recognize that they have a realistic chance of winning licenses, and will, therefore, be more likely to participate in the auction. The inclusion and encouragement of these other “non-incumbent” firms is not only critical to the auction's overall success, but it is essential to guarantee a competitive environment that is truly reflective of market demands. Simply put, if the auction rules welcome new entrants and smaller businesses, then new entrants are more likely to participate and to participate seriously. By easy logic, more participation begets more competition begets more auction revenue.