700 MHz, Part I: How Do the Bidders Compare to AWS-1?

This is the first installment of a three-part essay on the upcoming 700 MHz auction which the FCC will be starting in January 2008. Part I looks at the aggregate data on potential bidders and compares them to bidders in the AWS-1 auction. Part II examines the new entrants and major actors in detail. Part III analyzes potential bidding strategy on the part of the most important actors in the auction.

It is difficult to understand why so much is being made of incomplete applications and the postponement of the final application and upfront payment deadline to January 4, 2008 for the FCC’s 700 MHz auction. This is FCC business as usual as far as auctions are concerned. Auction 44, the Lower 700 MHz auction, was postponed from June 2002 to January 2003, and of 153 original applicants only 125 qualified with upfront payments. The second Lower 700 MHz auction, Auction 49, was postponed to May 2003, and 56 of 60 applicants qualified. The AWS-1 auction, Auction 66, was postponed from June to August 2006 and had 171 incomplete applications (and 81 completed) as of July 2006; ultimately 168 bidders quaified and made upfront payments.

Looking at the applicant pool, the potential 700 MHz bidders differ somewhat from the AWS-1 bidders in the aggregate:

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— A lower percentage of applicants are rural telephone companies: 32.33% of 700 MHz vs. 44.64% of AWS-1 bidders;

— Roughly the same percentage of 700 MHz potential bidders as AWS-1 bidders are designated entities, i.e., small companies receiving bidding credits: 60.90% of 700 MHz vs. 60.24 of AWS-1;

— However, the percentages of small businesses and very small businesses differ significantly: 46.24% very small businesses in 700 MHz vs. 33.33% in AWS-1 and 14.66% small businesses in 700 MHz vs. 26.19% in AWS-1;

— Fewer potential bidders in the 700 MHz auction have agreements with other bidders in the auction (32.33%) than the AWS-1 bidders (42.86%);

— Minority-owned business participation is up in 700 MHz: 5.26% of potential bidders vs. 1.19% in AWS-1.

— The percentage of woman-owned businesses bidding remains near-constant between the two auctions: 1.13% of potential 700 MHz bidders vs. 1.19% of AWS-1.

However, when one looks at these numbers in terms of auction experience a sharply different picture emerges. 56.77% of potential bidders in 700 MHz are new entrants, i.e., have not previously bid in a relevant FCC spectrum auction, while 30.82% of the potential 700 MHz bidders participated in either Auction 66 (AWS-1) or 44 or 49 (both Lower 700 MHz), 9.77% participated in two of three previous auctions, and 2.64% in all three.

Of the new entrants (151 businesses) only 19.21% are rural telephone companies, while 68.21% are designated entities (57.62% very small businesses, 10.60% small businesses), only 18.54% have agreements with other bidders, 8.61% are minority-owned businesses, and 1.99% are woman-owned businesses. Of those who have bid in one previous auction (82 businesses) 45.00% are rural telephone companies, while 50.00% are designated entities (32.00% very small businesses, 18.00% small businesses), 51% have agreements with other bidders, 1.19% and none are minority-owned woman-owned businesses. Of those who have bid in two previous auctions (26 businesses) 69.23% are rural telephone companies, while 50% are designated entities (30.77% very small businesses, 19.23% small businesses), 50% have agreements with other bidders, 3.85% are minority-owned businesses, and none are woman-owned businesses. Of those who have participated in all three previous auctions (7 businesses) 28.57% are rural telephone companies, 71.43% are designated entities (28.57% very small businesses, 42.86% small businesses), 42.86% have agreements with other bidders, and none are minority- or woman-owned businesses.

In brief, there is a considerable influx of first-time bidders in the 700 MHz auction which are largely very small and small businesses, which tend to shun agreements with other bidders, and which include the bulk of minority- and woman-owned businesses in the auction. Why should this be so?

Certainly there is a feeling in the industry that this will be the last large-scale spectrum auction for some time, and the 700 MHz bandwidth up for auction is particularly valuable. However, the influx of new entrants probably has more to do with the rules changes proposed by the Public Interest Spectrum Coalition (PISC), particularly anonymous bidding, which make it impossible for bidders to retaliate against other bidders and for incumbents to target new entrants for blocking from access to spectrum. One consequence is that the bidding will more reflect the bidders’ intrinsic valuation of the spectrum itself rather than strategic considerations based on maintenance of market power and entry barriers; this makes the auction much more attractive to small businesses and other entrants who stand a better chance of competing on a more equal footing than in previous auctions (although incumbent deep pockets will still matter). This analysis is in part confirmed by who among the AWS-1 bidders have decided to participate in the 700 MHz auction.

Fourteen of the top twenty-five license acquirers in the AWS-1 auction have applied to enter the 700 MHz auction (Cricket, ATT — which acquired full ownership of Cingular since AWS-1, Cavalier, Iowa Telecommunications Services, Verizon, Cellular South, Hemingford Cooperative Telephone, KTC AWS, Cincinnati Bell, LL License Holdings, MetroPCS, Union Telephone, Fidelity Communications, and Public Service Wireless); eleven of the top twenty-five are sitting the 700 MHz auction out (AWS Wireless, SpectrumCo, T-Mobile, American Cellular, Red Rock Spectrum, Cable One, Barat Wireless, Atlantic Wireless, Daredevil Communications, Carolina West Wireless, and NTELOS). What is significant about the companies which decided to participate is that only ATT among them has a history of engaging in retaliatory bidding, while only Verizon and MetroPCS were identified as participants in blocking bidding in the AWS-1 auction. Equally significant is that fact that a majority of the companies sitting the auction out engaged in retaliatory bidding and several were the principal beneficiaries of blocking bidding in AWS-1. The anonymous bidding rules adopted for the 700 MHz auction make retaliatory bidding and blocking bidding impossible, and the principal beneficiaries of those now-forbidden strategies have chosen not to participate. This is strongly confirmatory that the rule changes which PISC advocated have made a considerable difference in leveling the field and redressing incumbent advantages in the auction process even before the auction has begun.