Expert Guidance: Spectrum Aggregation Limits Won’t Undermine Revenue

December 19, 2013

Dr. Peter Cramton, one of the world’s foremost experts on auction design,recently asserted that the establishment of reasonable spectrum-aggregation limits in the upcoming 600 MHz “incentive” auction will not cause large revenue losses, as AT&T and Verizon (the “Big Two”) continue to claim.  As an expert in the field, Professor Cramton deserves special consideration.  He is one of the creators of the 4G spectrum auction design used in Canada, Australia, and many European countries, and has been involved in the FCC’s auctions since the very beginning.  Notably, he says thelatest study to come from the Big Two relies on faulty assumptions to reach faulty conclusions.

In particular, according to Professor Cramton, this recent study uses elaborate formulas to show that any bidder affected by a spectrum-aggregation limit will spend less at auction. That may be true, but since the study somehow forgets to calculate the increase in spending posed by the prospect of robust competition on the part of bidders not affected by the rule, the study’s conclusion about revenue loss is meaningless.

As Professor Cramton explains, spectrum-aggregation limits increase the opportunities for additional bidders – not just AT&T and Verizon – to win spectrum in the auction, and as a result, lead to increased auction participation. And, when the smaller bidders know they have a fighting chance to actually purchase spectrum, they will budget additional money for the auction. There’s no need to take solely our word for it – the Competitive Carriers Association, which represents the interests of more than 100 competitive wireless carriers, including rural, regional, and national providers, recently released its own paper demonstrating that transparent and upfront eligibility rules are needed to prevent excessive spectrum concentration and promote participation by its members.

In the past, auctions with spectrum-aggregation and other limits on dominant incumbents have generated high revenues while improving wireless competition at the same time. Professor Cramton’s analysis demonstrates that the 600 MHz auction will be no exception to this rule. Indeed, I can confirm from my own experience in running the FCC’s spectrum auctions program in the mid-1990s that reasonable limits, such a those imposed in the PCS A and B block auctions, work well to promote robust bidding.

Today, most of the scarce “beachfront” spectrum below 1 GHz is concentrated in the hands of the Big Two. If they are allowed free rein at the incentive auction to purchase what little remains, reversing the inevitable path toward duopoly will be very difficult. T-Mobile’s proposed spectrum-aggregation limits do not preclude auction participation by AT&T and Verizon, and they even contain a failsafe if the Big Two’s dire warnings of revenue loss turn out to have any merit. In this case, a few reasonable rules in advance of the auction will go a long way toward ensuring that all participants in the free market remain free to compete and innovate.