Blog Auction Revenue? No Problem

The gold standard of spectrum these days is the600 MHz block, which the Federal Communications Commission (FCC) is getting ready to auction. This low-frequency spectrum can penetrate deeper into buildings and propagate over greater distances than higher-band spectrum, making it ideal to meet the surging consumer demand for wireless broadband. This is why access to 600 MHz spectrum will be fundamental to any wireless carrier’s competitive strategy and the upcoming incentive auction will transform the wireless carrier landscape for years to come.  But these benefits can only occur if more than just the two largest carriers have a meaningful chance of acquiring some of this spectrum at auction. 

To ensure that they do, the Department of Justice (DOJ), T-Mobile, and others have endorsed spectrum-aggregation limits for the 600 MHz auction.  As DOJ explained, pro-competitive limits would prevent the two largest wireless carriers from shutting out the competition by acquiring all or nearly all of the 600 MHz block.  The two largest carriers oppose pro-competitive limits in the auction, which they say would reduce auction revenues despite the fact that proponents of spectrum-aggregation limits have replied that revenues would actually increase because smaller carriers would have an incentive to participate. 

The FCC doesn’t have to accept either argument on faith. T-Mobile’s economists have proposed a rule – the Dynamic Market Rule – that allows the market to resolve this debate.  Under the Dynamic Market Rule, the FCC would impose spectrum-aggregation limits only on those carriers already holding more than one-third of all of the most valuable low-frequency spectrum in the country and only if the incentive auctions raise sufficient revenue with the spectrum-aggregation limits in place.  In our view, spectrum-aggregation limits will not need to be relaxed because an auction with pro-competitive rules in place will generate ample revenue for public safety and other public interest purposes.  And we are confident enough to put this belief to a market test.

Under the Dynamic Market Rule, if the forward auction with spectrum-aggregation limits in place fails to raise sufficient revenue, the Commission would gradually relax the limits one license at a time.  Only those bidders restrained by the limits would be eligible to bid for additional licenses (which would prevent bidders from holding back to try to make the auction fail with a lower limit so that it could have its limit relaxed).  As the limit is relaxed or eliminated, prices would increase as usual until the revenue target is met or the spectrum-aggregation limit has been completely removed in all areas.  If the limits were completely removed and the revenue target still had not been met, the auction would restart with a lower clearing target and the spectrum limits re-introduced.

The Dynamic Market Rule can be integrated simply and seamlessly into the incentive auction structure.  The necessary calculations of which limits to relax and which parties may bid would be conducted without causing disruption or delay for the participants.  From a bidder’s perspective, bidding would simply proceed normally as the limits were slowly relaxed. 

The Dynamic Market Rule is similar to the activity rules, such as reserve pricing, that have been part of all prior FCC auctions and will be part of this auction.  Furthermore, by relying on actual bids rather than predictions of bidder behavior, the Dynamic Market Rule allows the auction and the market to determine whether there will be enough revenue rather than having a theoretical debate on the issue. 

T-Mobile believes that spectrum-aggregation limits are pro-consumer and pro-competition, and that they can increase auction revenue.   But the FCC doesn’t have to take our word for it - the agency can use auction design and allow competitive market forces to help it decide.