And what a long strange trip its been to get here! In 2004, Congress passed the Commercial Spectrum Enhancement Act (CSEA), which required government users to vacate some choice spectrum so the FCC can auction it. You can see the FCC’s official page for this auction here. You can see my recent general musings on this auction on the Public Knowledge policy blog here.
But none of this tells the whole story. After two controversial rulemakings, a pending legal challenge, and the appearance of a host of new bidders, FCC Auction 66: AWS-1 is ready to start this week on August 9. A look at the list of who has come to play signals an auction of unparalleled visciousness, determination, and probable manipulation by sophisticated bidders because the FCC wussed out and did not adopt anonymous bidding.
For those interested in my handicaping what a report from the Center for American Progress describes as a corrupt means by which incumbents keep out competitors and what I have called “a really wonky version of Worlds of Warcraft,” read on!
It all started back in 2004, when Congress ordered government users to clear some good spectrum for the FCC to auction for private use. Spectrum auctions have turned into a way to raise money without raising taxes, and many folks in the private sector have complained that we don’t have enough spectrum available for private sector use given all the services that people now want wireless– particularly broadband internet.
As regular readers know, I think auctions are a really bad way to distribute access rights to spectrum. They allow powerful incumbents to lock out competitors and don’t even maximize return to the government. But, as I have observed in the past “spectrum auctions are the crack cocaine of public policy.” Congress orders and the FCC obeys.
After an apporpriate set of proceedings, the FCC determined to auction the licenses as “flexible use” licenses, meaning that licensees could offer any service. This includes video, data, and voice, and includes both fixed and mobile services. The FCC divided up the market areas, decided on the number of licenses per market area (get the details on the FCC AWS-1 Auction page) and got ready to take bids.
Those interested in getting to the nitty gritty predictions on how the auction will go, scroll down. Those interested in some background on the more controversial aspects of the auction, read on.
CONTROVERSIAL WARM UP RULE MAKINGS
Two things made the rulemakings leading up to this auction controversial; the “designated entity” rule making and the “anonymous bidding” issue.
First, the FCC launched an investigation and proposed changes to the “designated entity credit” program. You can read my summary and thoughts on the matter here. Briefly, under the Communications Act, the FCC must make efforts to get spectrum licenses distributed by auction into the hands of small businesses (and minority owned businesses and women owned businesses, but credits based on minority ownership got dropped after Supreme Court decisions made such programs difficult to implement). The FCC does this by giving qualified bidders (known as “designated entities” or DEs) a bidding credit of 25% (they can deduct 25% from what they actually bid).
Over the years, folks have figured out two ways to manipulate this. First, you have businesses formed as “designated entities” to buy licenses at discount, then immediately sell them (a practice called “trafficking”).
On a more sophisticated level, you have DEs that partner with incumbent wireless providers, so the large wireless providers get to buy their spectrum at a 25% discount by going through a dummy organization. It also works to block would be competitors.
At the prompting of an equity firm called Council Tree, the FCC proposed to tighten the rules and prohibit DEs from having a “material relationship” (a term the order sought to define) with a large incumbent wireless provider.
FCC Chairman Martin, who is not that keen on the DE program generally, held out for much stricter rules preventing DEs from partnering with any large business (on a theory that if the DE credit is supposed to help small businesses, why let any large business partner with them; a theory resisted by the Dems and others because of concerns that DEs need to partner with bigger players to get access to capital and expertise). Since the FCC was split 2-2 at the time, the FCC punted the issue. It tightened up on the rules to prevent companies from trafficking in licenses bought with DE credits by requiring DEs to hold the licenses for ten years rather than five, but rolled over the question about whether big wireless providers or anyone else should have a material relationship with a DE.
Needless to say, Council Tree hit the roof. Not only did they not get the relief they wanted, but the new new anti-trifficking rules seriously messed with equity firm time tables. For an equity firm, holding something for ten years, rather than building a system and selling it in five years (the old rule) is like having your money stuck at the bottom of a tar pit. After an unsuccesful effort to get the FCC tochange its mind, Council Tree sued the FCC to stop the auction. The Third Circuit Court of Appeals declined to stay the auction, but will still make a decision on the merits sometime in the next year or so.
So, will worries over an eventual adverse decision to the FCC dampen the bidding? Probably not. True, in 2000, the DC Circuit refused to stay an FCC auction of licenses it had repossesed for non-payment from the bankrupt Nextwave Communications, but later required the FCC to void the auction and return the licenses to Nextwave by holding that the bakruptcy code trumped the FCC (a decision upheld by the Supreme Court).
But while it may end up that the 3rd Cir. will decalre a “do over” under different rules, most folks don’t expect that result. Also, when the DC Circuit (and later the Supreme Court) voided the Nextwave auction, the bidders got their money back. So the pending Council Tree lawsuit probably won’t impact the bidding much — although a few bidders that might have played may have decided to sit this one out because of the FCC rule change and the law suit.
The Anonymous Bidding Flap
As I reported back at the end of March, the FCC considered adopting anonymous (or “blind”) bidding in spectrum auctions as a way of putting a stop to all kinds of manipulation and signalling by bidders. Also as reported, every single wireless player came in to pressure the FCC not to adopt this proposed rule.
At the time, my employer Media Access Project and our clients were the only ones to support anonymous bidding, since we were the only ones that thought a rules change designed to promote competition and make it harder for incumbents to coordinate with each other was a good thing. Happily, the Department of Justice also filed in support of blind bidding, as did the Federal Trade Commission.
That made it impossible for the wireless folks to pretend that no problem existed. So they pushed a compromise on the theory that if enough participants entered the auction to make it competitive, it reduced the risk of collusion. The wireless companies also turned on the political heat, dropping coy hints that they wouldn’t participate in the auction (as if they could afford to let all that spectrum go to competitors!) and sending rural wireless guys in with endless sob stories about how if they couldn’t avoid getting into bidding wars with big companies then they would get crushed (on other words, yes there is tacit collusion, but that’s a good thing! Well, unless you are a consumer of course . . . .)
To my considerable annoyance, the FCC agreed to the compromise. The FCC adopted a ratio of 3-1 (that is to say, if the average number of bidders works out to 3 for every license, the auction is sufficiently competitive to use standard open bidding).
168 bidders qualified, giving a ratio of 3.05 to 1. So everyone at the FCC breathes a sigh of relief they won’t have to use blind bidding and risk possible political backlash if something went wrong (which, from an agency perspective, is almost always better than the risk of something going right). And cynical me is left to wonder if some of the smaller companies got their “up fronts” paid by bigger companies that didn’t want to risk bidding blind. Ah well, guess we’ll never know.
GETTIN’ READY FOR THE BIG DAY; WHO CAME TO PLAY?
You can scan the list of folks who came to play and how much they put down from the FCC’s official release here. But for those unfamiliar with the various nom d’bids of the major players refer to this chart.
Satellite TV Partnership: Under the name “Wireless DBS LLC,” satellite TV providers DIRECTV and Echostar (with programmer Liberty Media) have teamed up to put down the biggest up front deposit. They clearly intend to walk away with terrestrial licenses.
DBS bidders desperately need a way to deliver voice and video (for the so called “tripple play”) to compete with cable and, ultimately, the telcos. AWS licenses can deliver this through the terrestrial services and eliminate the lag time and low bandwidth taht plagues the current DBS offerings. Given their existing national licenses to distribute video, DBS providers could use these licenses to provide mobile television services as well as mobile phone and mobile broadband. The presence of cable channel operator Liberty Media (Discovery Networks, Starz!) makes mobile video a very likely service if they win.
Cable Operators: Several different cable operators have shown up. “Spectrum Co.” is a partnership of Comcast and Time Warner (together again! What are the odds?) along with Sprint-Nextel (which only holds 5%) Cox Communications and Bright House (also cable cos); “Cable One,” the Washington Post’s cable company; and “Dolan Family Holdings” (Cablevision). All have paid serious advance money to play.
As a group, cable operators want to block the DBS operators from winning licenses, particularly in the important markets. If nothing else, they want to drive up the price of licenses to a point where it really hurts the DBS guys.
This is almost certainly the primary motivation for the Comcast-TW/Sprint-Nextel consortium. SpectrumCo already has plenty of spectrum through its existing celullar and other licenses. If the cable guys had shown up without Sprint-Nextel, that would signal a desire to get out of their existing partnership and provide mobile phone services directly. Showing up with Sprint-Nextel is a good indicator that this is primarily a “block/drive up the price to the competitor” play. Such a strategy would be very reminiscent of the cable consortium that controlled C-Band operator Primestar back in the early years of satellite television. As set out in this old Department of Justice press release, the cable operators used their interest in Primestar to block other companies from entering the satellite TV market and competing with cable.
Mind you, if SpectrumCo ends up winning licenses, I’m sure they’ll find stuff to do with them. If nothing else, they can sell them off in the secondary market. They will be happy to sell to anyone — who aren’t DBS providers.
Dolan Family (Cablevision) and Cable One (WashPost) are more likely to try to win licenses to use them. The Dolan Family in particular has tried to expand the footproint of their video services over the years. They bid agressively for Adelphia, and also bid for AT&T Broadband back in 2002 (both times outbid by Comcast). They even tried to make a run of it with a competing DBS service for awhile. Certainly Dolan has put in some serious money to bid. As for Cable One, it has put in only a relatively modest amount as an up front payment. As their systems are mostly in smaller markets, they may be looking for specific licenses to provide “quadrupple play” mobile services with their cable/data/voice services.
Lynch AWS Corp. Backed by financier Mario Gabelli. Gabelli backed numerous small businesses in the cellular auction in the mid-1990s that won auctions using the DE credit, then turned around and sold them for a tidy profit — usually without puting a dime in to actually buildout service. This led to accusations of fraud and a federal law suit to get back the money. After years of fighting, Gabelli settled so he could participate in the AWS auction (a fraud conviction would render him ineligable, but a settlement without admitting guilt does not).
AWS Wireless Inc. has ties to Allen Salmesi of Nextwave. Nextwave bought a ton of licenses in the cellular auction in the mid-1990s, but reneged on payments. Ultimately, the company went bankrupt and avoided having the licenses revoked by action of the Supreme Court. Salmesi made out like a bandit.
These players’ past experience make them wild card bidders and difficult to predict. They may be bargain hunting. But Salmesi has managed to scare up a huge amount of cash for his up front payment, indicating a serious bidding interest.
The major incumbent telcos — T-Mobile, Cingular, Verizon Wireless (dba Cellco)are all here. So much for the coy statements that they might sit this one out and wait for the auction of the returned analog TV spectrum. (Why do folks at the FCC believe such nonesense?) Also come to play are a number of mid-size players such as Cricket Licensee, Inc. (a partnership of Leap Wireless, VZ Wireless, Cingular, and Loral Space Communications) and MetroPCS.
These guys have come to play their usual game, get licenses while keeping out disruptive competitors and jockeying for superior positions aomng each other. Most analysts agree that T-Mobile is fairly spectrum thin and needs to get a number of licenses to fill in holes. Midsize players like MetroPCS can use this rare opportunity to significantly expand their footprint.
The vast majority of the bidders are small players focused on their own regions. Many of these are in mid-size or small markets, although a few, like Cincinati Bell and Cavalier Telephone, may put up a bigger fight in some more popular regions.
Who Will Win? And How Much Will the Auction Make?
Who wins depends in no small part on how you defining winning. I expect the DBS folks will pay high prices for a number of licenses they really want. I expect that the major wireless incumbents will do their best to keep the potentially disruptive players (Dolan, DBS) from winning licenses in major or contiguous markets (it is much more expensive if you end up scattered than if you can get your network in a contiguous geographic block).
The auction will take several weeks. You have a round of bidding in all markets on all licenses. Then the FCC closes the round, tallies the results, and posts the results for the round. There is a break while parties consider how to respond. Repeat until there are no more bids in any markets. In addition, if the FCC suspects that bidders are trying to use bids to communicate or otherwise collude, they may stop the auction to determine if a pattern is materializing.
The game is highly complex, because action in one market may impact another and hundreds of markets and thousandsof license “objects” are involved. A player giving up on one license as too expensive may suddenly appear in a market that was quiet over several rounds. Players may attack each other based on their knowledge of each other’s strength’s and weaknesses, running up the cost of “must have” licenses to draw strength away from other licenses. Alternatively, bidders may try to signal each other or warn each other off by making very agressive bids or by a pattern of bidding and withdrawing. The major bidders employ economic consultants and advisors to try to decode the information, give them advantages in the competitive auctions, or figure out how to return signals if they are trying to tacitly collude with other bidders.
As for how much will the auction make, it is hard to say. Giga Om predicts prices for spectrum will drop because the FCC has put so much spectrum on the block at once. They predict a take of $5-10 Billion over all. Other analysts have previously predicted up to $15 Billion.
I am betting on a higher end result, with $15 Billion or more possible in revenues unless there is serious collusion among the players, in which case the bidding will come in on the low end. The presence of competing interests and wild cards promises to shake things up in a way we haven’t seen since the auctions in the mid-1990s allowed players to establish “rules of the game” for the next ten years (as detailed in this Center for American Progress Report). So either the parties will use the open nature of the auction to game the system outrageously, or we will see some very fierce bidding among opponents who have brought a lot of cash to the table.
Nor do I think the fact that the FCC will auction a similar block of spectrum in 2008 when it auctions the returned TV spectrum will have any impact. Folks need spectrum now, or want to keep it out of the hands of those that do. It will likely take 2-3 years for anyone who wins to build out systems using the new spectrum anyhow. To push that back another few years (and risk that the broadcasters find a way to delay the give back again), strikes me as unlikely.
So now that you know the players and strategies, it’s time to sit back and watch the action! Pop some corn, grab a beer, and wander on over to the FCC’s AWS Auction web page. I’ll be back from vacation in a few weeks, and you can all tell me who won. Assuming, of course, the auction is actually over by then.
Stay tuned . . . .