An Open Spectrum Auction Is Best for Consumers and Public Safety


Image copyright Pavel Ignatov

The Federal Communications Commission will soon release guidelines for an incentive auction for wireless spectrum. Spectrum is the invisible pathway that allows nearly all communications to travel to us. Television and radio broadcasters and mobile devices all use spectrum.

The incentive auction that the FCC is currently designing will be unlike any prior auction for spectrum. The current owners of the spectrum (in this case, broadcasters) will offer spectrum for sale. However, like the auction of a piece of fine art, the sellers set the minimum price they are willing to accept for it. If the bidders (in this case, wireless carriers) do not meet the broadcasters’ price, the spectrum goes unsold, and the auction fails.

If conducted properly, the Incentive Auction could bring tremendous benefits by enhancing wireless Internet and mobile phone capacity, raising billions of dollars in revenue for the U.S. Treasury, and funding a dedicated public safety and first response network, which Congress established as a priority use for the proceeds of this auction.

But T-Mobile and Sprint argue that their primary competitors, Verizon and AT&T, should be restricted in this auction. T-Mobile and Sprint claim that more small companies will participate in the auction if Verizon and AT&T aren’t allowed to bid for what they want, and that the small companies will place higher bids than what Verizon and AT&T would have bid. This flies in the face of common sense; the empirical results from other government auctions for offshore oil leases, timber and spectrum; and everything eBay has taught us. (It also begs the question of whether T-Mobile and Sprint are chiefly concerned with the welfare of their smaller competitors or whether they just want to bar Verizon and AT&T from bidding so they can buy the spectrum for less.)

The spectrum to be auctioned has been estimated to be worth as much as $36 billion to wireless companies if it is sold in a fair, transparent and inclusive auction. But in this two-sided auction, the money raised from wireless carriers needs to pay for the broadcasters to give up their spectrum. If the FCC restricts Verizon and AT&T from bidding, the auction probably won’t raise as much money. Fewer broadcasters will sell less spectrum at lower prices with less new spectrum for mobile broadband and with less cash left over for the government.

I conducted an economic analysis — commissioned by Verizon but conducted independently — simulating past auctions and asking what would have happened if Verizon and AT&T were barred from bidding in those auctions. My results: Such restrictions in a 2008 auction of 700 MHz spectrum would have led to a 45 percent decrease in revenue or almost $9 billion in lost revenue; and in a 2006 auction would have led to a 16 percent decrease in revenue.

Looking ahead to the Incentive Auction, my analysis demonstrates that imposing restrictions on Verizon and AT&T could result in billions of dollars of lost revenue. In fact, if revenue falls below a certain level, the Incentive Auction could fail because there wouldn’t be enough money to pay the broadcasters to give up a useful amount of spectrum.

The Incentive Auction’s success is important for a number of reasons. First, it will help realize the promise of our wireless world. As more people and businesses rely on more devices, the spectrum superhighway is becoming more congested. By getting more licensed spectrum into the pipeline for commercial wireless use, consumers will be able to enjoy innovative applications and technologies like intelligent cars, remote health monitoring systems and additional e-commerce.

And second, since 9/11 there has been a strong push to build a public safety communications network that would allow first responders to communicate with each other without interference or risk of downed operations. We’ve seen communications systems sputter and slow down during high-volume incidents like national emergencies.

That big companies like Sprint and T-Mobile — which are not currently experiencing spectrum-constrained networks — want an advantage in obtaining more spectrum, at a discount, by having their toughest competitors barred from the auction, is understandable. But considering the needs of consumers across the country and our nation’s interest in public safety, it makes little sense to anyone else.

Leslie Marx, PhD, is Robert A. Bandeen Professor of Economics, Duke University and former Chief Economist, Federal Communications Commission.

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